ESMA proposes revisions to sustainability reporting for SMEs to reduce greenwashing

As part of the recommendations, SMEs will be obliged to disclose opportunities linked to sustainability and the positive outcomes that those ventures could produce, the end goal being to reduce risk of greenwashing.

The guidance is issued within the ESMA’s feedback to an inquiry by the European Financial Reporting Advisory Group (EFRAG) regarding its submitted European Sustainability Reporting Standards (ESRS) for SMEs under the Europe’s Corporate Sustainability Reporting Directive (CSRD).

The CSRD has been in force for large public-interest entities with over 500 employees since early 2024. It will extend to firms with more than 250 employees or €40 million in revenue in 2025 and will apply to listed SMEs the year after.

In January 2024, EFRAG released exposure drafts for new sustainability reporting standards tailored for SMEs. Mandated by the European Commission in June 2020, EFRAG developed standards for public-interest SMEs with traded securities (ESRS LSME) and voluntary standards for non-listed SMEs (VSME). A public consultation on these new standards has also been launched to gather feedback and refine the guidelines.

In its feedback, the European Securities and Markets Authority (ESMA) recognized the complexity EFRAG faced in balancing proportionality and transparency in sustainability reporting standards for smaller businesses. ESMA remarked that the proposed standards effectively balance these considerations but suggested specific adjustments.

A key recommendation from ESMA involves enhancing SMEs’ reporting on sustainability-related positive impacts and opportunities. While all entities must disclose risks and adverse impacts, ESMA noted that larger entities have more extensive requirements for reporting opportunities, whereas SMEs’ obligations are primarily focused on adverse impacts.

ESMA highlighted a significant concern: the risk of greenwashing, as reporting on positive impacts and opportunities would occur outside the CSRD framework, lacking the assurance safeguards of sustainability reporting rules.

As reported by ESG Today, ESMA responded: 

“There is, in fact, a risk that positive claims on sustainability impacts and opportunities will be presented outside of the sustainability statement and therefore they will not be subject to assurance and compliance with specific reporting requirements.”

“In our view, limiting the efforts that SMEs will have to make when explaining to international investors any divergence with international sustainability standards is one important aspect of making sure that the ESRS LSME is proportionate.”

Know the risks

Organisations worldwide face significant risk of greenwashing should they be found to fall short of complying with evolving sustainability regulations. The issues become all-the-more complex as we move forwards in the era of AI and other emerging technologies.