Demystifying ESRS SME Standards (Small and medium Enterprises)

Make sense of ESRS for SME standards: what you have to report and when you have to start ESRS reporting

What is ESRS Reporting?

ESRS Reporting refers to the practice of documenting and disclosing a company’s environmental, social, and governance (ESG) activities and impacts. It aims to provide transparency and accountability, ensuring businesses operate responsibly while contributing positively to society and the environment. Companies will need to report ESRS information in a section of their management reports referred to as “sustainability statements”, allowing investors, customers, and regulators to assess the sustainability and ethical practices of a business.

The Evolution of ESRS Reporting

The journey of ESRS reporting has evolved significantly over the years. Initially, it was primarily a voluntary practice adopted by larger corporations to showcase their corporate social responsibility (CSR). However, with increasing awareness and regulatory pressures, ESRS reporting has extended its scope to small and medium-sized enterprises (SMEs).

Essential Components of an ESRS Report

An effective ESRS report comprises several key components:

• Environmental Impact: Data on energy usage, waste management, emissions, and resource conservation. 
• Social Responsibility: Information on labor practices, community engagement, and social initiatives.
• Governance: Details on corporate governance structures, ethical practices, and compliance mechanisms.

Each section is segmented further as issues are grouped relating to each pillar. For example, ESRS E1 covers Climate Change. 

More information on ESRS Reporting can be found here: including Information on how to get started with a materiality assessment. 

Key Benefits of ESRS Reporting for Small Businesses

1. Enhanced Reputation: Demonstrating commitment to ESG principles can enhance a business's reputation among consumers and investors.
2. Risk Management: Identifying and addressing environmental and social risks can mitigate potential future liabilities.
3. Operational Efficiency: Sustainable practices often lead to cost savings and improved operational efficiency.
4. Access to Capital: ESG-conscious investors are more likely to invest in companies with robust ESRS reports.

The Importance of the Phase-In Period for SMEs

The phase-in period for ESRS reporting is vital for several reasons:

1. Operational Continuity: It ensures that SMEs can maintain their regular business operations while gradually integrating new reporting practices.
2. Resource Allocation: SMEs often have limited resources; the phase-in period allows them to allocate these resources efficiently over time.
3. Capacity Building: This period provides SMEs with the opportunity to build internal capacity, including training staff and establishing robust data collection systems.
4. Risk Mitigation: By phasing in compliance requirements, SMEs can identify and address potential risks early, avoiding significant disruptions or penalties.

Key Phases of the ESRS Reporting Transition

The implementation of ESRS requirements typically follows a phased approach, allowing SMEs to gradually adapt to the new standards. Below is a general outline of the expected timelines for ESRS reporting compliance:

1. Initial Awareness and Planning:
   • Understand the ESRS requirements and timelines.
   • Conduct an internal assessment to identify gaps in current reporting practices.
   • Develop a comprehensive implementation plan.
2. Partial Compliance:
   • Start by reporting on key environmental and social metrics.
   • Implement initial data collection and reporting systems.
   • Engage with stakeholders to gather feedback and refine processes.
3. Intermediate Compliance:
   • Expand reporting to cover additional ESG dimensions.
   • Enhance data accuracy and validation processes.
   • Provide training for staff on ESRS reporting standards and tools.
4. Full Compliance:
   • Achieve comprehensive ESRS reporting across all required areas.
   • Ensure ongoing monitoring and continuous improvement of reporting practices.
   • Communicate transparently with stakeholders about your ESG performance.

Develop Your ESRS SME Standards Timelines

The implementation of ESRS requirements typically follows a phased approach, allowing SMEs to gradually adapt to the new standards. Below is a general outline of the expected timelines for ESRS reporting compliance:

Year 1: Initial Awareness and Preparation

Q1: Awareness and Education:

• Understand the ESRS requirements and their implications for your business.
• Conduct internal training sessions to educate staff about ESG reporting standards.

Q2: Preliminary Assessment:

• Perform a gap analysis to identify areas that need improvement.
• Develop a preliminary implementation plan outlining key milestones and responsibilities.

Q3: Stakeholder Engagement:

• Engage with stakeholders, including employees, customers, and investors, to gather input and expectations regarding ESG reporting.
• Begin initial data collection efforts in key areas, such as GHG emissions and labor practices.

Q4: Infrastructure Setup:

• Invest in necessary tools and software for data collection, analysis, and reporting.
• Establish a dedicated ESG reporting team or designate responsible individuals.

Year 2: Partial Compliance

Q1: Pilot Reporting:

• Start reporting on select environmental and social metrics.
• Test data collection and reporting systems for accuracy and reliability.

Q2: Feedback and Improvement:

• Gather feedback from stakeholders and external auditors on the initial reports.
• Identify areas for improvement and make necessary adjustments to data collection and reporting processes.

Q3: Expanded Reporting:

• Expand reporting to include additional ESG metrics and areas, such as water management and community engagement.
• Enhance data accuracy and validation procedures.

Q4: Interim Reporting:

• Prepare and publish an interim ESRS report covering key ESG metrics and initiatives.
• Communicate progress and challenges to stakeholders transparently.

Year 3: Full Compliance

Q1: Comprehensive Reporting:

• Ensure comprehensive coverage of all ESRS requirements across environmental, social, and governance dimensions.
• Implement robust data validation and verification processes.

Q2: External Audit and Review:

• Engage third-party auditors to review and validate the ESRS report.
• Address any discrepancies or gaps identified during the audit process.

Q3: Final Adjustments:

• Make final adjustments to reporting processes based on audit feedback.
• Ensure all data is accurate, complete, and aligned with ESRS standards.

Q4: Full Report Publication:

• Publish the full ESRS report, providing detailed disclosures on all ESG metrics.
• Communicate the report's findings and insights to stakeholders through various channels, including the company website, investor presentations, and community meetings.

Data Collection Strategies for ESRS Reporting

A lack of resources is a key concern for any SME when a new regulation is released. Leveraging technology to streamline your ESRS reporting process can reduce the pressure on your organisation. By utilising software tools designed specifically for ESG reporting - you can automate accurate data collection, analysis, and report generation. These tools enhance efficiency alongside improving the accuracy and reliability of your reports.

Conclusion

Navigating the realm of ESRS reporting can seem daunting for small businesses, but with the right approach and tools, it becomes a manageable and rewarding endeavour. By understanding its significance, adopting best practices, and leveraging technology, small businesses can not only achieve compliance but also drive sustainable growth and build a resilient future.