There are increasing demands on business in terms of sustainability, corporate social responsibility (CSR) and ESG (Environmental, Social, Governance). One of the most significant developments was the publication of the Corporate Sustainability Reporting Directive (CSRD) earlier last year. Under that directive, which has yet to be implemented in the Netherlands, thousands of companies in the Netherlands are expected to prepare and publish a sustainability report. This will be done using binding sustainability reporting standards, the ESRS. These standards, which will take effect after publication in the Official Journal of the EU, outline the appearance of the sustainability report. But it is already clear that the impact on Dutch companies will be significant. The non-binding approach to sustainability reporting is truly a thing of the past. Or, in the words of regulator the AFM: ‘CSRD: no time to lose!’
Compliance is meeting expectations. In the article we published last month, we took a closer look at a large B.V. (‘LBV’) that still needs to take considerable steps to achieve a sustainability report that complies with CSRD and ESRS in all respects. This month, we cover a small B.V. that is not itself subject to reporting requirements, but is part of the value chains of several companies subject to reporting requirements. Those companies have to request certain sustainability information from the direct and indirect business relationships within their value chain. These are often smaller companies that do not themselves fall within the scope of the CSRD. In this article, we discuss the small B.V., (hereinafter referred to as ‘SBV’) using a fictitious example case study.
SBV does not have a stock exchange listing and thus falls outside the scope of the CSRD. It is therefore not required to publish its own sustainability report. However, SBV is in the value chains of several companies that are required to do so. It therefore regularly faces requests for information on its own sustainability performance. SBV can only meet these requests if it has started to gain insights, measure, steer and monitor that performance itself in time. If you are a small company doing business and want to continue doing business with large companies, or if you have this ambition, it is wise to prepare well in time for the implementation of the CSRD and ESRS in the Netherlands.
Why prepare a sustainability report if it is not mandatory?
Although many companies state that sustainability is a priority, it remains difficult for their stakeholders to determine whether they are actually taking steps and making progress. This makes it complicated for their customers, investors, financiers and insurers, among others, to assess and compare their sustainability performance. Over time, as mandatory sustainability reporting becomes more ‘mature’, and more people become familiar with it, stakeholders will also want to see and be able to request this information from other (smaller) companies. It is therefore advisable for SBV to think about its sustainability targets and performance and collect information on this. It can then share this information with reporting companies if requested. SBV can thus differentiate itself from other smaller companies. By complying timely and adequately with the information requests of those companies, SBV provides its position as a preferred business partner. And it mitigates the risk that existing business relationships may come under pressure and new business relationships may not be established. Besides meeting the growing information needs of customers and stakeholders, SBV thus also gains a good understanding itself of the ESG impact, risks and opportunities of its own business activities. This facilitates the identification of sustainability themes where there is still room for improvement and the optimisation of its own longer-term sustainability strategy.
CSRD: tool for positive change
It takes a lot of time and effort to properly report on sustainability. But SBV is ambitious and proactive and thus started on time. Sound sustainability accountability contributes to the creation and exploitation of opportunities for its business, including:
The European Financial Reporting Advisory Group (EFRAG) is developing simplified sustainability reporting standards for voluntary use by small and medium-sized enterprises (SMEs), which includes SBV. These voluntary standards:
In short, the VSME ESRS is a kind of ‘CSRD light‘ regime, enabling SMEs to already (i) anticipate information requests from reporting companies and (ii) meet the increased expectations of their stakeholders. Once EFRAG has drafted the final version of the VSME ESRS, it will publish it on its website (www.efrag.org).
SBV is the first to ensure that its management possesses the necessary knowledge about corporate social responsibility and comprehends the importance of being accountable for it. In that context, it is also important to outline the legal context: what expectations must companies meet?
Below are the practical steps SBV has taken as an organisation towards sustainability reporting:
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