Very large companies in Ireland and around Europe have been investing hundreds of millions of euro to prepare for the Corporate Sustainability Reporting Directive (CSRD), writes Nick Mulcahy.
This massive extra layer of accounting bureaucracy applies to 2024 accounts being published this year, and the trickle-down effect is washing up on SME shores.
CSRD is just one example of Brussels-imposed over-regulation that is hampering the competitiveness of the European Union economy.
Such is the over-reach that in reviewing Europe’s regulatory burden recently, European Central Bank president Mario Draghi proposed a new European Commission vice president for simplification.
Draghi’s report added that the EU should fully implement a promise to slash reporting obligations by 25% and commit to achieving a further reduction for SMEs up to 50%, upholding proportionality for SMEs in EU law and extending it to small mid-caps.
Ahead of the general election in Germany on February 23, Olaf Scholz, the country’s chancellor, has demanded that the CSRD should be delayed by two years, and that its scope be reduced.
This view is shared by the CDU, which is well ahead in the German election polls, as well as the European People’s Party, the largest bloc in the European Parliament.
Even as it emerges from the starting blocks, CSRD looks set to be shackled.
However, it’s likely that many corporations that have embarked on the CSRD journey will persevere with the standards, obligatory or not.
Huge investments in new reporting systems have been made, and granular CSRD reporting suits the finance providers further up the feeding chain.
CSRD is way too complicated and onerous for micro-enterprises and SMEs.
Instead, they are being pointed to the Voluntary Sustainability Reporting Standard for non-listed SMEs (VSME).
Finalised in December 2024, VSME is billed as voluntary, but for thousands of Irish SMEs it may be de rigeur in the years ahead.
That’s because sustainability credentials are demanded by multiple counterparties, including public bodies for tenders, customers aligned to CSRD criteria and banks.
A cost-burden analysis of VSME prepared by Italian consultants Syntesia estimated that one in five of Europe’s 32 million SMEs are currently subject to an ESG information request when applying for bank credit.
In addition, suppliers of large corporations — an estimated one in eight of the SME population — are also subject to the same ESG requests.
Syntesia’s best guess is that the number of ESG data requests imposed on SMEs will grow significantly, due to CSRD and Pillar 3 reporting obligations for banks.
Syntesia expects that by 2028 one in four SMEs will receive an ESG request, and one in seven will receive more than one.
The VSME is supposed to alleviate this burden. As the standard has been devised by the semi-official European Financial Reporting Advisory Group, the hope is SMEs who meet the criteria will pass muster with banks and buyers.
The VSME format is confusing, with two modules, Basic and Comprehensive.
For firms with under 20 staff, initial costs of completing the standard range from €3,500 to €9,500, and from €7,500 to €22,800 for firms with over 20 staff.
The annual recurring charge for keeping VSME up to date is estimated at about half these figures.
The main shortcoming with the Voluntary Sustainability Reporting Standard is that, unlike the CSRD, it is not mandated by EU rules.
Banks and other counterparties can shun it as inadequate if they wish. Clarity is urgently required from Irish banks and buyers at the end of the supply chain.
