ESG in Belgian SMEs: an effort that will pay off

The introduction of the European Corporate Sustainability Reporting Directive (CSRD) further tightens ESG reporting requirements for a lot of companies. This directive requires European companies to identify and report on all relevant ESG topics transparently and in detail.

The scope of the CSRD will be phased in between 2025 and 2028. Initially, it will cover listed companies and financial institutions with more than 500 employees. They will first have to report in 2025 for the 2024 financial year. This will be followed by large companies and listed SMEs.

Unlisted SMEs are therefore not currently required to comply with CSRD, but it is best to take it into account in their business operations anyway. Indeed, CSRD-compliant companies are required to map the ESG impact of their entire value chain. As a result, in order to report correctly on their own sustainability performance, these companies often depend on the information they receive from their SME suppliers, SME customers or other business relations. While in theory it is only the very largest companies to whom the stricter ESG rules already apply, in practice this means that underlying SMEs are also required to report on their ESG practices.

Examples of questions an SME may receive from the value chain of a CSRD-compliant company:

• Detail your company’s CO₂
• Proof that no child labour is used by your supplier in China.
• Demonstrate your SME’s commitment to equality and inclusion.
• Give an overview of waste management efforts.
• Proof that your SME has taken all necessary measures to contain environmental risks.

Exactly how to report according to the CSRD will be laid down in reporting standards or ESRS (European Sustainability Reporting Standards). For those companies not yet subject to the CSRD, there will be adapted, voluntary reporting standards. This should help SMEs make the flow of complex and time-consuming questions they receive from larger companies more manageable.

To set up ESG reporting, a lot of different types of data need to be collected and thoroughly analysed within your SME. As an SME, you in turn need to get all your stakeholders, including employees, customers and suppliers, on board to build up the reporting. The transparency that needs to be offered in the process, including on points where the company currently scores negatively, often deters. In addition, it is a cost- and time-intensive process.

However, identifying risks and pain points can also have a positive and cost-saving effect: work processes can be aligned more efficiently and operational failures reduced, energy consumption optimised, reputational damage avoided, and so on.

Moreover, by presenting themselves as sustainable, SMEs can gain a competitive advantage and create new business opportunities. As a (potential) supplier of a CSRD-compliant company, you may have an edge if you already have certain reporting processes in place or have a sustainability charter. To attract new talent or customers, this can also play a role as a differentiating factor. Moreover, it also offers advantages in terms of access to finance. Investors and banks will increasingly ask for ESG reporting before investing or offer more favourable rates. The same applies when obtaining grants.

We note that quite a few companies are already taking voluntary action on ESG topics. A change is noticeable, which is not only prompted by (future) legal obligations.  However, including ESG in the corporate strategy and setting up reporting procedures is a step further. It is important to start with initiatives tailored to your company, where a proactive approach wins over a reactive one.

For instance, include ESG as an agenda item within your board of directors or advisory board (semi) annually, even before the sustainability debate moves to other levels such as the general meeting, or externally. Get challenged in this by external people with experience or expertise in this domain:

• What is business ethics?
• What factors influence your customers’ satisfaction?
• Are there suppliers who do not share the same standards and values as the company?
• How can the neighbourhood impact of your business activity be minimised?

Based on an initial analysis, you can focus on a number of targets and action points to improve sustainability performance, which you will then report on.

Visualise these initiatives and communicate them regularly, both internally to your employees and externally to your customers, suppliers, the neighbourhood and other stakeholders.

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Questions about ESG reporting or preparing a sustainability charter? Contact us!