European Commission adopts Recommendation on voluntary sustainability reporting for SMEs

On 30 July 2025, the European Commission adopted a Recommendation on voluntary sustainability reporting for non-listed small and medium-sized companies (SMEs). The voluntary standard for SMEs (VSME) is intended to make it easier for non-listed SMEs, as well as micro-undertakings, to respond to requests for sustainability information from large companies and financial institutions that are subject to the Corporate Sustainability Reporting Directive (CSRD) and which have such SMEs in their value chains. The Recommendation is accompanied by a Q&A document.

The VSME Standard was developed by EFRAG, the Commission’s technical advisory body for sustainability reporting. EFRAG conducted a public consultation on the VSME Exposure Draft from 22 January 2024 to 21 May 2024. On 17 December 2024 EFRAG delivered its technical advice to the Commission – see EFRAG VSME page. In its press release, EFRAG announced that it will mark the launch of the Standard and discuss next steps at a public event in September 2025.  

It is important to distinguish this Standard from the voluntary standard for undertakings not subject to mandatory sustainability reporting requirements proposed by the Commission as part of the Omnibus I proposal, which is discussed in more detail below. 

Key features of the VSME Standard

• Proportionality: The Standard covers the same sustainability topics as the European Sustainability Reporting Standards (ESRS), but on a proportionate basis that takes into account the characteristics of micro, small, and medium-sized undertakings. Micro-enterprises are expected to use only specific parts of the standard. 

According to the VSME Basis for Conclusions, the VSME and ESRS 1 address the same list of sustainability matters. However, the VSME differs in the volume of disclosure, number of data points, and specific requirements compared to ESRS 1. Definitions are generally aligned with ESRS 1, though some additional definitions have been introduced. The VSME Basis for Conclusions includes a table indicating which definitions are fully aligned with ESRS 1 and which deviate.

• Based on market acceptance: The VSME is not envisaged by the CSRD and is intended for use only if it is accepted by the market, both from the user side (i.e., business partners replacing their multiple questionnaires with the VSME) and the preparer side (i.e., SMEs accepting the VSME as a reporting tool). The Commission’s Recommendation encourages large companies and financial institutions seeking sustainability information from SMEs to base their requests on the voluntary standard as much as possible. It also recommends that Member States take appropriate measures at national level to foster the implementation and acceptance of the VSME Standard.
• No materiality analysis: In the VSME, the materiality analysis is replaced with the ‘if applicable’ principle following the public consultation since it was considered too complex by SME preparers while users (particularly banks and investors) questioned the reliability of the possible results of such materiality analysis. As a result of the public consultation EFRAG has also simplified ‘if applicable’ principle so that the wording ‘if applicable’ at the beginning of a datapoint has been replaced by disclosing the specific criteria for the applicability, i.e. explanations for when this disclosure requirement is ‘applicable’ for the reporting undertaking. The Standard states that when one of the disclosures is omitted, it is assumed not applicable.
• Modularity: the Standard is designed for undertakings of varying sizes – from micro-undertakings (fewer than 10 employees) to small and medium-sized ones with up to 250 employees. The VSME Standard includes two modules: 
  1. Basic module covers General Information and Basic Metrics (Environment, Social and Governance). This module is designed for micro-undertakings and constitutes a minimum requirement for other undertakings. Micro-undertakings may use only selected parts. Reporting against the basic module is a prerequisite for reporting against the comprehensive module.
  2. Comprehensive module: includes datapoints which are likely to be requested by banks, investors and corporate clients, in addition to those in the Basic module.

EFRAG has also developed complementary practical guidance to help SMEs implement the provisions of the Standard. The basic and comprehensive modules are included in Annex I to the Recommendation; the practical guidance is included in Annex II.

• “De facto” value chain cap: While the VSME does not have a legal role in setting a cap under the CSRD, it is expected to form the basis for requests for sustainability data by lenders, investors, and corporate clients of non-listed SMEs. As such, it is anticipated to set a “de facto” limit to the multiple environmental, social and governance (ESG) data requests that SMEs currently face. The Commission’s Recommendation requests that companies in need of sustainability information from SMEs in their value chains limit those requests, as much as possible, to the information provided under the VSME Standard.
• No obligation to publish a report: SMEs may choose to report sustainability information voluntarily to improve access to sustainable finance and better understand and monitor their sustainability performance. During the public consultation, some SME associations raised confidentiality concerns over publication of the VSME report. EFRAG clarified that the primary function is to inform business counterparties. Undertakings may decide to make their sustainability report public. If so, it can be included in a separate section of the management report or presented as a separate document.
• Flexibility in timing of reporting: If a sustainability report is prepared to meet the needs of large undertakings or banks requiring annual updates, reports should be prepared annually. If the undertaking prepares financial statements, the sustainability report should be prepared on a timeline consistent with the financial statements. Where specific data points have not changed from the previous reporting year, the undertaking can indicate that no changes have occurred and refer to the previous year’s disclosure.

Omnibus proposal

On 26 February 2025, the Commission submitted its Omnibus I proposal. The key change envisaged for European Union undertakings and non-European Union issuers (whether on an individual or consolidated basis) is that to be in scope, they would need to exceed, at their balance sheet date, an average of 1,000 employees during the financial year (the existing balance sheet and turnover tests remain unchanged).

The Omnibus I proposal also includes a value chain cap, proposing that companies in scope of the CSRD should not seek sustainability information beyond that set out in a voluntary reporting standard from companies in their value chains with fewer than 1,000 employees. This standard will be developed by the Commission and adopted as a delegated act after amendments to the CSRD are finalised.

EFRAG has stated in its April 2025 meetings that the VSME Standard has been developed for non-listed SMEs, including micro-enterprises with fewer than 250 employees, and has not been tested for use by larger or more complex companies. EFRAG considers that if the Standard is used for a different group, its content may need to differ and be less simplified.

According to the Q&A, the VSME Standards will serve as the basis for the future voluntary standard proposed in the Omnibus I package. However, the Commission cannot exclude the possibility that certain changes may be required. This will also depend on the final agreement of co-legislators regarding the scope of application for sustainability reporting requirements and on the revision of the first set of ESRS.

For further details of the first Omnibus package and ESRS, see our CSRD demystified materials.