The Corporate Sustainability Reporting Directive (CSRD) is a European Union regulation that requires companies to disclose detailed information about their sustainability efforts, including their environmental, social and governance (ESG) performance. For small and medium-sized enterprises (SMEs), this can be a significant challenge, but compliance is essential. Here are the key steps that SMEs can take to align with CSRD requirements:

1. Understands CSRD requirements

• Familiarise your company with the scope of the CSRD and determine whether your business falls within its requirements. CSRD applies to large companies and listed SMEs, but non-listed SMEs may be indirectly affected by value chain pressures.
• Find out about the European Sustainability Reporting Standards (ESRS) that will guide your sustainability reporting.

2. Assess your current sustainability practices

• Conduct an internal audit of your company's current sustainability initiatives and ESG data. Identify gaps in current reporting processes as well as areas where your company is performing well.
• Determine which environmental, social and governance issues are important to your business and your stakeholders. This helps you focus your sustainability efforts on the most relevant areas.

3. Build a sustainability team

• Set up a dedicated team or designate individuals responsible for sustainability reporting.
• Small and medium-sized companies may need external consultants or experts to navigate compliance, especially in complex areas such as greenhouse gas emissions or human rights impacts.

4. Implementation of data collection and management systems

• Make sure you have systems in place to collect accurate data on ESG factors such as energy use, emissions, diversity, labour practices and governance.
• Establish protocols to verify the accuracy and completeness of the data collected.

5. Developing a sustainability reporting framework

• Base your sustainability report on ESRS to ensure compliance with CSRD. The standards define what and how to report on material sustainability issues.
• Make sure your reports include both qualitative (e.g., policies, targets) and quantitative (e.g., carbon footprint, diversity standards) disclosures.

6. Preparing for external audits

• CSRD requires that sustainability reports be externally audited to ensure accuracy and compliance. SMEs should prepare for these audits by maintaining robust documentation and verifiable data.

7. Continuous improvement

• Sustainability reporting is not a one-off task, but an ongoing process. Regularly review and improve your sustainability strategies and ESG performance.
• Stay up-to-date with evolving regulations and best practices in sustainability reporting to maintain compliance.

Challenges for small and medium-sized enterprises in building a good ESG framework

Building a strong environmental, social and governance (ESG) framework can be challenging for small and medium-sized businesses because of several unique constraints. These challenges often differ from those faced by large organisations, mainly due to limited resources and expertise. Here are the main challenges SMEs face in creating a robust ESG framework:

• Limited financial resources: Compliance with regulations such as CSRD or other ESG reporting requirements may require capital that SMEs may have difficulty allocating without affecting other operational areas.
• Lack of expertise and knowledge: SMEs often lack dedicated ESG professionals or sustainability experts within their teams. Many SMEs are not familiar with ESG reporting best practices, frameworks such as the Global Reporting Initiative (GRI) or how to integrate ESG into corporate strategies.
• Difficulties in data collection and management: Collecting accurate, reliable and consistent ESG data can be challenging, especially if the SME does not have systems in place to track indicators such as carbon emissions, waste management or diversity statistics. Manual data collection processes often lead to errors and inefficiencies.
• The complexity of regulation and compliance: Navigating the ever-changing landscape of ESG regulations, such as CSRD, can be complicated for SMEs, which lack the legal or regulatory expertise of larger companies. Keeping up with the changes and understanding their impact can be overwhelming.
• Stakeholder communication and involvement: Convincing stakeholders, employees and management of the value of integrating ESG principles into company strategy can be difficult, especially if there is limited understanding of the long-term benefits. Customers, investors and other stakeholders increasingly demand transparency on ESG issues, even from small companies. SMEs may struggle to meet these expectations without dedicated resources or clear communication strategies.
• Cultural and organisational challenges: Building an ESG framework often requires a cultural shift towards sustainability and ethical governance. For SMEs, promoting this change in an organisation focused on traditional business models or short-term objectives can take time.
• Access to capital: While large companies may benefit from ESG-driven investments, small and medium-sized companies may face increased scrutiny from investors and lenders, especially if they are unable to demonstrate measurable ESG improvements. This may limit access to sustainable finance or investment.

By addressing these challenges in a thoughtful way, small and medium-sized enterprises can develop a strong ESG framework that not only aligns with regulatory requirements, but also builds long-term resilience and enhances their competitive advantage.

What are the key steps to overcome these challenges?

Overcoming the challenges in building a robust ESG framework for small and medium-sized enterprises requires a strategic, step-by-step approach tailored to their specific needs and capabilities.

1. Start with a materiality assessment

• Identify key ESG issues: Conduct a materiality assessment to identify the most relevant environmental, social and governance factors for your business. Focus on where your company has the greatest impact and what is most important to your stakeholders.
• Prioritise resources: Once material issues are identified, prioritise ESG initiatives according to business relevance and available resources.

2. Build internal awareness and support

• Management Commitment: Ensure that leadership is fully committed to integrating ESG into company strategy. Top-level support is crucial to drive change throughout the organisation.
• Educate employees on the importance of ESG and how they can contribute.

3. Leverage external expertise

• Consult ESG specialists: If in-house expertise is limited, SMEs can hire external consultants or ESG specialists to guide the process, set up systems and train staff.
• Join industry initiatives: Participate in industry associations or sustainability networks where businesses can collaborate, share best practices and learn from the experiences of other companies facing similar challenges.

4. Incremental improvements

• Set realistic goals: Start with small, manageable initiatives that align with your business capabilities.
• Expand gradually: As you gain experience and see the benefits, gradually expand ESG initiatives.

5. Involve suppliers and partners

• Collaborate on ESG goals: Engage your supply chain and key partners to set common ESG goals. This can improve transparency and performance across the value chain while reducing the burden on your own resources.

6. Focus on cost-effective sustainability initiatives

• Energy and resource efficiency: Start by adopting practices that not only align with ESG goals but also reduce operational costs, such as energy efficiency, water conservation and waste reduction initiatives.
• Government incentives: Explore government grants, tax credits or subsidies available for implementing sustainable practices. These incentives can help reduce the financial burdens of ESG investments.

7. Promote a strong ESG culture

• Create accountability: Establish roles or a small internal team responsible for ESG initiatives, ensuring accountability throughout the organisation.
• Reward ESG performance: Encourage employee participation in ESG goals by linking success to rewards or recognition. Promote a culture where sustainability and ethical practices are part of the company's core values.

8. Share your success with stakeholders

• Share the milestones: Publicise ESG achievements to your stakeholders to build trust and strengthen your company's reputation. Transparent communication can also attract customers, partners and investors who value sustainability.
• Engage your customers: emphasise your commitment to ESG in your customer communications and marketing. More and more consumers are looking to support businesses with strong sustainability and ethical practices.

By following these steps, small and medium-sized companies can systematically address the challenges of building an ESG framework, enabling them to fulfil regulatory requirements, improve their competitive positioning and drive long-term sustainability. The key is to start small, prioritise material issues and build capacity over time.