European Commission Implements Sustainability Reporting Regulation for Smaller Firms
The European Commission's Omnibus initiative and the potential revision of the European Sustainability Reporting Standards (ESRS) are set to bring significant changes to the Voluntary Sustainability Reporting Standard for Small and Medium-Sized Enterprises (VSME).
The VSME, initially developed for smaller businesses not covered by the EU's Corporate Sustainability Reporting Directive (CSRD), is designed for micro-, small- and medium-sized companies. It currently contains two modules: the Basic module with 11 disclosures and the Comprehensive module with 9 additional disclosures.
The Commission's Omnibus I package, released in late February 2025, aims to reduce the sustainability reporting and regulatory burden on companies. One of the key proposals is to include only companies with more than 1,000 employees in the scope of the CSRD, removing an estimated 80% of companies from the regulation's sustainability reporting requirements.
As a result, the VSME is being critically simplified to better suit small and medium-sized enterprises. The European Financial Reporting Advisory Group (EFRAG) has been mandated to develop new, more simplified ESRS, with the proposed update potentially reducing sustainability reporting datapoints by nearly two-thirds.
The revisions are intended to align SME reporting more directly with the streamlined ESRS framework. This will enable SMEs to adopt sustainability reporting with a proportionate and feasible approach while maintaining core EU sustainability objectives like double materiality and impact prioritization.
The Basic module of the VSME focuses on key sustainability indicators such as Scope 1 and 2 emissions and anti-corruption information. The Comprehensive module includes disclosures often requested by banks, investors, and value chain partners, such as GHG reduction targets and transition plans.
Under the proposal, the VSME standards will also be used as a "value-chain cap" establishing a limit for the detail of sustainability information that banks or larger companies can request from smaller companies in their value chains.
In a Q&A, the Commission refrained from saying if the future voluntary standard for companies not covered by the CSRD post-Omnibus would differ from the VSME, stating only that "certain changes may be necessary" depending on the final agreement on the scope of the CSRD and on the final revision to the ESRS.
The key objectives of the VSME, according to EFRAG, include enabling SMEs to satisfy data requests from large companies, providing information to banks and investors, and helping SMEs manage their own sustainability issues. The VSME may be relevant to a broader set of companies due to the Commission's Omnibus initiative to reduce the number of companies within the scope of the CSRD.
The Commission has emphasized that these changes are part of a broader effort to support SMEs in participating effectively in sustainability reporting, minimizing regulatory burden while preserving the strategic value of sustainability disclosures. The aim is to contribute to a more sustainable, inclusive economy.
Some lawmakers have proposed raising the threshold even higher, removing all but the largest companies from the CSRD. This could further expand the relevance of the VSME to a broader range of companies.
In conclusion, the expected changes for the VSME standard after the Omnibus initiative and ESRS revision include simplification of reporting requirements, reduction of complexity, and alignment with the updated ESRS framework to facilitate feasible, meaningful sustainability disclosures by SMEs. The VSME continues to play a crucial role in promoting sustainability reporting among small and medium-sized enterprises.
- The European Financial Reporting Advisory Group (EFRAG) has been tasked to develop new, more simplified European Sustainability Reporting Standards (ESRS), with the proposed update potentially reducing climate-change-related data points by nearly two-thirds, particularly for the Basic module of the Voluntary Sustainability Reporting Standard for Small and Medium-Sized Enterprises (VSME), which focuses on key sustainability indicators such as Scope 1 and 2 emissions and anti-corruption information.
- The Commission's Omnibus initiative and the potential revision of the ESRS aim to realign corporate sustainability with the science of climate-change, environmental-science, and finance, by enabling Small and Medium-Sized Enterprises (SMEs) to adopt sustainability reporting in a proportionate and feasible manner while retaining core EU sustainability objectives like double materiality and impact prioritization.
- Under the proposal, the simplified VSME standards will also serve as a "value-chain cap" for the detail of sustainability information that larger businesses or financial institutions can request from smaller companies, thus encouraging environmental-consciousness and climate-change awareness in business practices within the scope of corporate sustainability.
