In the wake of the recent elections, Europe has an ambitious agenda ahead of it. The next five years will be shaped by its drive towards transitioning to a sustainable economy, going digital, and revamping Europe’s competitiveness. Europe has set legally binding targets for reducing greenhouse gas emissions by 55% by 2030 and becoming the first climate-neutral continent by 2050. There is rising concern that the world is not on track to meet its crucial 1.5°C target nor its 17 Sustainable Development Goals, with only 15% on track to be achieved by 2030. This is a stark reminder of the increased urgency for sustainability action across all organisations, big and small.
Surinder Sond, EVP of Sustainability and Society, Sage
SMEs are crucial to the green transition. Europe’s 25 million SMEs account for just over 50% of the EU’s GDP and represent 99% of its businesses. They are pivotal in job creation and economic growth, but also contribute significantly to global carbon emissions – with the OECD estimating between 40-50%. Yet despite their economic significance and environmental impact, SMEs face substantial hurdles in implementing sustainability actions.
And most SMEs want to be more sustainable! Sage research shows that over 80% of EU SMEs recognise the importance of sustainability to their business, with just over half already making sustainability commitments. Yet, only 7.7% are engaged in sustainability reporting.
This disparity highlights a critical gap that – if addressed – could unlock substantial environmental and economic benefits. We find that if we could triple the number of SMEs reporting on their sustainability performance globally (from 7.7% to 23.1%), it would represent 51 million more SMEs engaging in sustainability reporting and unlock more than €700 billion in green finance opportunities for these SMEs. Tackling this challenge requires a nuanced approach to sustainability reporting – one that leverages innovative technologies in a simple and accessible way to support SMEs on their sustainability journey.
Growing pressure on SMEs
With new upcoming sustainability reporting obligations stemming from regulations such as the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), the pressure on SMEs for sharing information on their impacts is only going to grow. SMEs are already facing increasing information requests for sustainability data from their financial and value chain partners, but they frequently lack the resources necessary to measure, understand and mitigate their environmental impact.
Sustainability reporting can be complex and difficult to understand for SMEs. The research shows that almost 6 in 10 SMEs are already making statements and commitments to their key stakeholders about their sustainability performance, and SMEs are also navigating a range of inconsistent and technically challenging stakeholder data requests. Simultaneously, their lack of time, expertise, and budget means that many SMEs cannot measure and track their sustainability performance adequately.
To support SMEs in their sustainability transition, the European Commission has tasked expert group EFRAG to develop mandatory and voluntary SME sustainability reporting standards for SMEs. While reporting will lead to more transparency and accountability, the challenge will be to strike a balance between enabling SMEs’ access to sustainable finance by developing appropriate reporting standards, whilst also ensuring that this does not evolve into a major regulatory burden. Tailored standards must be simple, proportionate, and promote the use of technological tools to enable a streamlined reporting process for SMEs and embed sustainable practices across the value chain.
Enabling simplification and proportionality
The proposed use of technical terms is currently too complex for an SME audience, as are niche disclosure requirements. Having clear, consistent terminology will be pivotal for engaging SMEs in sustainability reporting: this – accompanied by practical examples – would ensure that SMEs can quickly and effectively grasp the key sustainability reporting concepts and requirements. It is important that the standards be proportionate and appropriate for SMEs’ size and complexity. By focusing on proportionality, simplification and clarity, more SMEs will be able to engage in sustainability reporting without diverting critical resources from their core business activities, thus unlocking the potential of SMEs to drive sustainable practices.
The key role of technology
Any standard – even if voluntary – imposes additional costs and efforts on preparers, especially for SMEs. Digital technologies are earmarked to play a key role in helping SMEs to report on their sustainability performance, with the research finding that 70% of SMEs identify them as having the potential to simplify reporting. These tools can automate the data collection and reporting process, making it easier and less time-consuming for SMEs to produce reports.
Automating specific reporting requirements will enable SMEs to embrace voluntary standards by making the reporting process more efficient and less work-intensive. By embedding sustainability reporting functionalities within existing systems – such as accounting or HR software – SMEs can increase the automation of the collection and generation of reports. This integration will not only ensure compliance, but also minimise the need for manual intervention, saving time and reducing errors. Digital tools and automation would enable a more seamless and efficient reporting process, empowering companies to embed sustainability as strategic objectives rather than administrative tasks.
Common data standards and a dedicated data infrastructure will underpin the use of digital technologies to support SMEs with sustainability reporting. Given SMEs’ limited data-gathering capacities, data infrastructure at a systemic level is needed to enable SMEs’ access to accurate and consistent data. Last but not least, it would also contribute to SMEs’ digitalisation targets put forward by the European Commission in its Digital Decade programme. Building these standards and infrastructure would not only enable SMEs to meet sustainability reporting demands but also aid in de-risking businesses by providing more accurate decision-making information. Achieving this will require public-private collaboration to support the development of robust and trusted data, and could include developing shared tools and datasets, and establishing common and accessible data models.
SMEs are the centrepiece of Europe achieving its net zero goals by 2050 – there will be no green transition without them. Industry and governments must come together to standardise, simplify, automate, and enable sustainability reporting to leverage SMEs’ potential to lead on the EU’s green agenda – not only for their future, but for everyone’s future.