Eurosif response to EFRAG’s consultation on Sustainability Reporting Standards for listed SMEs (LSME)
Eurosif welcomes the goals ERFAG pursues with the Exposure Draft of the European Sustainability reporting Standards for listed small and medium-size enterprises (LSME). While we agree that SMEs in principle should be subject to a simplified standard given their more limited resources compared to large companies, we would like to highlight an important difference between SMEs with securities listed on EU Regulated Markets and real, “corner-shop” SMEs which will be subject to a voluntary standard.
Companies that decide to list their securities on Regulated Markets should be subject to the highest, gold-standard of excellence. Differentiating requirements and standards for companies within the same stock exchange category can lead to problems with comparability between companies and investor protection issues. Therefore, in the case of the listed SME standard, we call for as much alignment as possible with the sector-agnostic standards.
Why do high-quality disclosures matter to investors?
Comparable and reliable sustainability-related disclosures are essential for investors to make informed investment decisions, ensure adequate risk management, and allocate capital in line with their clients’ sustainability preferences. Investors also need ESG data for their own reporting requirements under EU legislation, such as the Sustainable Finance Disclosure Regulation (SFDR), Pillar 3 and Solvency II.
Why do high-quality disclosures matter to SMEs?
Disclosures are an opportunity for SMEs to show their efforts, successes and progress regarding sustainability matters, improve their reputation and attract further capital. Currently, listed SMEs often receive numerous questionnaires from investors and other business partners to fill in. This work can be significantly reduced by introducing a single standard, but only if the disclosures resulting from this standard contain all the information their business partners require.
Main recommendations for improvements:
- Maximum alignment between LSME standard and the standard for large companies is essential for investors and other information users to ensure comparability and usability of information.
- We disagree with the restructuring and proposed simplifications especially of some sections (Governance -GOV, environmental disclosures, especially on transition plans and targets, and business conduct) which reduce of lot of useful information for the reporting companies and would result in disclosures which are inconsistent and not comparable for the information users. While major simplifications, including a changed structure, can be justified for VSME, LSME should be as close as possible to ESRS Set 1. Also, some of the simplifications consist of merging certain disclosures and data points which will not result in any simplification but will reduce the (machine) readability and usability of information for users.
- We are strongly concerned about sustainability-related governance disclosures, in particular GOV 1, and the elimination of GOV 2, GOV 3 and GOV 5. Governance is the basis of any performance and understanding to what extent sustainability matters are discussed, decided and overseen by a company's governance bodies is key to understanding its resilience to climate change and other sustainability challenges and its mid- to long-term performance. We call on EFRAG to remedy that and retain GOV 1, GOV 2, GOV 3 and GOV 5 as in ESRS Set 1.
Read our full response here: LSME Consultation Response
Read our VSME consultation response here.