This article is a review, editing and adaptation by Sustentia, based on the original written by Frank Bold, in the framework of the Alliance for corporate transparency (ACT), for publication in Spain. It is the fifth in a series of articles to be published with the aim of spreading the word about the importance of sustainability reporting., and the regulatory changes underway in the European Union in this regard for 2021. First outlined the political developments planned for 2021, included 10 key changes envisaged in the proposed reform of the EU Non-Financial Reporting Directive. The second focused on governance information (G of ESG). The third highlighted the role of EU standards in ensuring comparable and meaningful data, fill current gaps in legislation and ease the administrative burden on businesses. Fourth collected the key issues to be addressed by the EU climate reporting standard, reflecting on critical information regarding the climate transition: transition plan and governance, climate-related risks and opportunities.

The opinions included in this article do not necessarily represent the opinions of other members of the Alliance..

Article Summary:

• The case of SMEs regarding transparency
• The cost of excluding SMEs
• How can the European Union standardization of companies' sustainability reports help reduce the burden?
• Conclusions
• Interview with Spanish SME A&B Innovative Solutions

 

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Small businesses are the lifeblood of our economy. They are the greatest source of innovation and employment, and represent key players in the opportunity towards growth based on a sustainable and low-carbon economy. The transition is already underway. It is essential that SMEs are not left behind, and that they are adequately taken into account in discussions.

Until now, SMEs have stayed, to a large degree, aside from the growing trend in the preparation of corporate sustainability reports. Just as an example, according to data provided by Global Compact, in a show of over 1950 companies globally, only the 31% of small and medium-sized companies integrate corporate social responsibility within the relevant functions of the company and only the 25% include metrics in their sustainability reports (Data of 2017). According to published data for Grant Thorton in Spain in May 2021 (about a sample of 400 companies between 50 and 500 employees), the 42,6% does not know the existence of the Law 11/2018 Non-Financial Information.

However, this is going to change radically. European banks and investors, as well as companies at the top of the value chains, are rapidly readjusting their strategies to avoid the risks posed by the climate transition. SMEs make up the majority of its customers and suppliers, and therefore much of the information that these financial companies and large companies must consider must be provided by SMEs.. This is why it is important for small businesses to understand the implications of these regulatory and market changes., and the role they can play in this debate, to ensure a positive contribution.

The European Commission is already proposing a new framework to simplify and better focus the dissemination of information and data on sustainability of companies with the presentation of the Directive on Corporate Sustainability Reports (CSRD). The reform should be adopted by law at the beginning of 2022 and enter into force in 2023.

* Schedule expected adoption of the CSRD and the EU Sustainability Information Standards.

In the meantime, the EU taxonomy, which will provide a framework for realigning investments and loans to support sustainable activities, will be applicable already in 2022 (it is estimated that they are needed 500.000 million additional euros per year to achieve the objectives of the “Green Deal”). Public Covid recovery programs will also focus on the sustainable transformation set by these tools. It is evident that both initiatives both promoting a sustainable investment scheme, such as those related to recovery, require that information on risks and impacts, flow between the actors that make up the value chains of the various businesses and sectors, where SMEs have a key presence in almost all.

EU initiatives aim to reduce costs and other obstacles faced by companies, and thus guarantee the availability of meaningful information and data for banks and investors. However, continues to be a concern that smaller companies (a 99,84% in Spain, and responsible for 65,49% of employment according to Ministry of Industry) may be left out of the system.

“From the point of view of the banks, it is important to have sustainability data for SMEs. Especially in sectors sensitive to climate risks. It is necessary to support your transition, and also for our propia risk assessment and compliance with regulatory disclosure requirements. The Directive on corporate sustainability reporting is already a big step forward, but we hope that the upcoming interinstitutional negotiations will bring even greater ambition in the future Directive to include SMEs in these sectors”, describes Antoni Ballabriga, Global Business Director Responsible for BBVA, President of the Sustainable Finance Working Group of the European Banking Federation.

This article explains what is now at stake for SMEs, how they can participate in upcoming legislative changes and developments, and how policy makers can help them.

The case of SMEs regarding transparency

The transformation of the economy brings with it unprecedented market opportunities, and it is vital that SMEs are able to take advantage of them. The Business Commission for Sustainable Development reported that compliance with the Sustainable Development Goals (ODS) de la ON would create market opportunities worth 10 billion euros a year from here to 2030. In the same way, as a study of CDP of 2020, the value of opportunities in reducing carbon emissions, as a higher demand for electric vehicles and green infrastructures identified by 882 European companies, reached the 1,22 billion euros, which was more than six times higher than the 192.000 million euros of investment costs. In Spain, regarding the scenario without plan, the updated Draft of the National Integrated Energy and Climate Plan 2021-2030 speaks an increase from between 19.500 and 25.700 million EUR per year of GDP in the decade (1,8% in 2030), and from between 253.000 and 348.000 net jobs (1,7% in 2030), with a total planned investment of 241 mil M EUR (80% from the private sector and 20% from the public sector).

The ability of SMEs to deal with the necessary sustainability information and data will be key to: attract new customers, embrace the technological changes necessary to succeed in this rapidly evolving environment, as well as to avoid problems and barriers when complying with legislative changes.

Many SMEs are already taking advantage of the opportunities that the commitment to sustainability brings. These pioneering sustainable companies have a huge advantage that allows them to better take advantage of the opportunities presented by transformation, and thus advance your business models to the next phase. They also benefit, among other advantages, having a cost reduction through the optimization of the use of energy and resources, attracting and retaining talent as employers, or being better placed in terms of searching for loans or investments. Jesus Lopez Ceballos, President of the European Federation of Financial Analysts Associations (Effas), representing the Spanish Institute of Financial Analysts (Ieaf), argues that from the experience of Ieaf they have been able to check "The importance of the ESG for any company with financing needs and the almost total absence of this type of analysis for small and medium-sized companies".

An example of a small company that has sustainability deeply embedded in its business model is the French footwear and accessories brand. Look. They work directly with the communities they source from, They use cotton grown with regenerative practices, and they also recycle and repair sports shoes. “When Veja considers the next steps to improve its social and environmental footprint, think first about impacts and then about the economy and profitability”, says its co-founder Sébastien Kopp. The company is profitable, and has been since its launch in 2004. He now has a team of 200 people, what in 2020 billed 120 million dollars annually, in front of 78,5 millions of 2019. Also “they believe the only way to overcome blind spots is to calculate everything, and publicize everything”, so they are publishing data on the footprint of its emissions, including scope 3. In this sense, they are very transparent about raw materials and the rights of employees in their supply chains..

You can see the resume by Frank Bold on Veja Sustainability Reports here.

SMEs in the EU: green business opportunities and access to finance

On the whole, SMEs represent more than 99% of all EU companies. They represent more than two thirds of total employment, and contribute around the 56% of total EU turnover.

Only the 3% of EU Start-ups grow exponentially, but nevertheless they are the champions in job creation in Europe. Although exponentially growing young SMEs represent only a small minority of all startups, these offer a source of key radical and disruptive innovations, and create jobs in the market disproportionately. For example, although on average only the 4% of Start-ups that are micro-businesses grow in this way, These contribute to the creation of 22% (Netherlands) and the 53% (Francia) of jobs in your category. In Spain SMEs are responsible the 89% of job creation in the agricultural sector, and in the construction sector of the 29% (SMEs) and 33% (micro-businesses).

It is clear that the lack of access to adequate external financing can act as a barrier to growth and innovation in SMEs. Even more so in the case of green business opportunities, more than a quarter of SMEs that have undertaken activities related to the circular economy reported difficulties to access financing in the Eurobarometer survey.

Fuente: Eco-innovation in SMEs, Future Brief 22, European Commission, DG of Environment

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The cost of excluding SMEs

Recent proposals in Europe aim to involve small businesses for the first time. Before, the EU Non-Financial Information Directive only applied to large listed companies, banks and insurers with more than 500 employees, what limited its impact to 2.000 companies across the EU [1]. With the new project on the table, Information obligations will involve listed SMEs, in addition to all the big companies (quoted, as unlisted), as it already happens in some way in Denmark, Greece, Iceland, Spain and Sweden (an analysis of the main changes proposed in the reform presented in April 2021 can be found here).

But, Is this enough to properly engage small businesses within our economy??

Although the change in scope appears to be significant, continues to affect less than 1% of EU companies. It is outside the scope of the new project other 6%, that are considered private SMEs (and then him 93% of micro-enterprises that are too small to be subject to information legislation). Investors, accounting organizations and NGOs raised two concerns obvious in this area.

• The significant impacts of companies on the environment and society do not depend on their size or legal status..
• Reorienting investments to support the transition to a low-carbon economy is not limited to listed assets.

If this situation is not addressed, SMEs that are not within the scope of the legislation will be at a disadvantage compared to larger competitors, and against listed SMEs, which, on the other hand, will be covered by the new regulations. It goes without saying that looking to the future of sustainable investing, and the sustainable economy, it is important that there is a level playing field for all SMEs across Europe, whether they are listed or not.

In the meantime, many SMEs operate in sectors facing significant technological and regulatory changes, and they need to secure funding for their transformation, like energy, the construction, metallurgy and agriculture. To be competitive and secure future funding, SMEs understand that they will have to invest in their own transformation. The EU plans to mobilize 1.000 million euros of public investment a year for this purpose. However, Taking advantage of these opportunities will also depend on the ability of SMEs to provide adequate information and data on the sustainability of their business model., and how it manages its risks and impacts.

In this regard, the General Council of Economists advocates that the obligation of companies to publish non-financial information is also extended to SMEs. In the words of its President, Valentine Pitch, collected by The Economist, “The market is increasingly demanding in terms of sustainability and SMEs cannot abstract from this reality, but, to help them in this regard, the rules on non-financial information must necessarily be standardized and be clear and reliable ".

Any divergence of rules between listed and unlisted companies also runs the risk of adding another barrier to small businesses looking to expand. – companies that consider raising capital by listing their shares or obligations on the stock exchanges. It is important to avoid introducing such disincentives, both for SMEs themselves and for the functioning of our capital markets.

In this context, and hand in hand with an offer of products and services that benefit those companies that manage their sustainability, Mª José Gálvez, Director of Sustainability of Bankia, think that “It is essential that we channel the capital, but that we are also capable of giving advice, since the SME does not have a very large infrastructure ", So what “It is very important to show the SME what alternatives it has, how you can finance taking advantage of these grants (european)”.

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How can the European Union standardization of companies' sustainability reports help reduce the burden?

The data of the Global Reporting Initiative (the most widely used among the many voluntary sustainability reporting standards) show that only the 10-15% of the companies that use its standards are SMEs. This is understandable, given the complexity of the existing information frameworks - which combined propose more than 5.000 KPI- and competing data demands from customers and financial institutions. All of this makes collecting sustainability data extremely difficult and expensive for SMEs., who have limited financial and human resources for such expenses. Daniela Pavlova, Manager True Triple Balance (community that welcomes 132 SMEs from different sectors and 8 collaborating entities that have been committed to sustainability for decades, and promoting responsible consumer markets) highlights that "Know and show what our social purpose is, what we contribute to the country's economy and how we impact the environment, It is in our philosophy and it is our commitment made concrete in a manifesto that we signed. Regulations on sustainability information and standards for SMEs are a lever for our greater visibility and consolidation, and support to continue improving. So far we do it with our own model, because there are no tools for the little ones. In addition to this lever, and also to be able to be more effective in this and in our contribution, A new regulation is also necessary to give us that recognition and specific support, market access, financing, etc., from a space that for us is natural in this global commitment to sustainability set by the European Green Deal and the SDGs of the 2030 Agenda ".

The EU initiative aims to, justly, solve this problem by providing clear rules that identify what information and data, on Sustainability, are the ones that companies should focus on measuring and providing, and therefore what should banks and investors require and expect. In more general terms, the standards will provide a map and compass that will enable companies to understand and navigate through the storm of technological development, market demand and regulatory changes on the horizon. Small businesses would benefit the most from this regulatory clarity, but it would be an advantage for all economic actors who make decisions with sustainability criteria. Also, “It is a space for innovation and opportunities to distinguish ourselves in the market through these strategies based on sustainability objectives.. For any analyst, the more specific the information on environmental risks, social and human rights, greater confidence gives that report and the management behind it ", according to Carlos Cordero, Managing Partner of Sustentia Social Innovation.

As Sara Foršek points out, responsible for sustainability of Raiffeisenbank Austria d.d.: “SMEs and companies that are not supported by international matrices do not have a clear understanding of what is expected of them in relation to sustainability data. A common resulting problem is that the information disclosed is often not standardized and, therefore, not comparable”.

For his part, Isabel acevedo, Production Director of TO&B Innovative Solutions in an interview for Frank Bold (can be read in full at the end of this article), Maintains that “Reporting standards are often difficult for small businesses to comply with due to the complexity of the structure and lack of resources that we often have. Any simplification and clear guidance is always welcome, and it makes us more competitive against the largest companies ".

Proposals for the development of simplified standards for SMEs:

The European Commission proposed the development of a simplified standard for SMEs. Such a standard will make it easier for SMEs to report on sustainability and reduce administrative costs..

To achieve this goal, The standards should specify the essential sustainability indicators that SMEs can reasonably report on and, what is more important, the methodologies and support tools that allow its calculation in an easy way. This refers in particular to:

• greenhouse gas emissions,
• energy intensity,
• information regarding the activities and use of resources linked to an increased risk of impact on the climate, biodiversity and deforestation
• clear guidance to inform climate transition plans and sustainable activities
• due diligence on human rights
• significant labor force indicators (large companies often require their suppliers a plethora of social data and confirmations on the fulfillment of fundamental labor rights, but the information requested is usually of very limited and even questionable value).

Rules for SMEs are essential to ensure the proportionality of information requirements, to contain the risk that companies at the top of supply chains simply pass on costs and data collection requirements for the deeper level of the supply chain to their suppliers down the line of the chain. This is a concern pickup by Gerardo Cuerva, President of the Confederation of Small and Medium Enterprises (CEPYME). If the corporate sustainability reporting standard ends up becoming a formal checklist that is requested from suppliers and subcontractors, it will not be useful to identify and manage risks and impacts on people and the planet, and therefore it will end up being only a burden for SMEs, without adding value to large client companies, to investors, to financial entities, nor ultimately to the EU sustainability goals.

In this sense, due to its non-binding nature, Standards alone will not be sufficient to provide safeguards against outsourcing of information costs by large companies. These safeguards can only be achieved if the standards are backed by a legislative mandate for SMEs., to clarify your reporting obligations with respect to the obligations of large companies. Certainly clarify the requirements of Information on sustainability for SMEs will generate legal certainty and predictability in their relationship with large client companies in their value chain.

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Conclusions

A tipping point has been reached from an old approach that simply exempted small businesses from sustainability reporting standards, to another that today recognizes the positive benefits of ensuring that SMEs are not left behind. Small businesses cannot avoid the major forces transforming our economies toward a low-carbon future, due diligence on human rights, among other market and legislative requirements, and therefore they must adapt and adopt them, or risk disappearing completely in many areas of your market. The cost of sustainability reports is considered to be amortized up to six times for the company. Sustainability data is already essential for companies to benefit from a growing share of all mutual funds, including Covid recovery funding worldwide. No sustainability reports with relevant information, small businesses are at a competitive disadvantage, lose new market opportunities, and they are prevented from accessing resources for the development of new technological solutions. Only if they become part of the transition to sustainability, SMEs will be the source of sustainable growth for the future.

The new European Union Directive on corporate sustainability reporting has recognized these arguments, involving small businesses for the first time, but ensuring that simplified rules will only apply to SMEs. Following the reasons stated in this article, it is correct to argue that the interests of small businesses would be better served if the scope of the Directive were broadened, and they will be provided security against the relationship with the largest companies, establishing safeguards, and clear simplified rules.

For all small business owners across Europe, it is important to know how many of your SME colleagues are adopting these practices, and they are succeeding in doing so. You have won the argument that the new EU requirements should be commensurate with the ability to meet them, but it is time to add the voices of SMEs to ensure that all small businesses can be included, to secure your own place in a sustainable future.

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Interview with Isabel Acebedo, Production Director of the Spanish SME A&B Innovative Solutions

To complement this 5th article, we interview Isabel Acevedo, Production Director of TO&B Innovative Solutions, a Spanish SME that supplies biotechnological products for cleaning and maintenance. With little more than 30 employees, the company welcomes the proposal for new simplified EU sustainability rules for small businesses, highlighting its importance to compete more effectively with large companies. Read the article to find out how to A&B Innovative Solutions publishes information related to sustainability.

Is sustainability an important issue for you and your company?, and how?

For us, sustainability is the only way to understand business. TO&B was born in 2001 to offer solutions based on product management, biotechnology and green chemistry to replace dangerous traditional products. Since then, the chemical sector has changed profoundly with new regulations such as REACH, CLP, Biocides.

The application of these regulations has led to a better understanding of the toxicological and ecotoxicological behavior of chemical substances., and the transfer of this information throughout the supply chain. Also, due to these changes, high risk chemicals have been detected and replaced. From 2001 we strive to find new alternatives for our raw materials in our formulas and products. We take into account environmental and safety factors in the design phase of our products, in addition to other economic or technical factors.

We integrate the requirements of the eco-label and the study of the environmental and safety impact in the life cycle of our products in our management system according to the guidelines of the eco-label and the ISO standard. 14006.

And there is no turning back. In 2020 the Commission published the Chemical Products Sustainability Strategy towards a toxic free environment in accordance with the European Green Deal, with which the EU set off to become a sustainable economy, climate neutral and circular for the year 2050. This is the great and exciting challenge that we must face.

Has your company taken any steps to be more sustainable, and what has been?

We are always thinking about how we can reduce our environmental impact. For example, in 2021 we have installed a photovoltaic system to take steps towards greater energy independence using renewable energy.

Do you publicly commit to sustainability on your website, in your reports or in other ways, and how do they do it?

Our declaration of intent is contained in a document called Sustainable Development Commitment Policy. Different environmental issues are integrated in this document, quality, social and security. We also report on how our activity contributes to achieving the SDGs. Also, we report on our environmental behavior in our sustainability report.

We understand communication as part of our responsibility. We try to report safety and environmental data throughout our supply chain to ensure our products are transported, use and dispose of in the way they were designed.

Also, we participate in meetings and conferences with different stakeholders, as clients, vendors, competitors and society in general, to share our good practices and try to inspire others.

Are you concerned about your ability to meet the sustainability requirements of banks?, the investors or large companies you supply and why?

To date we have not been concerned because our standards have been most of the time higher than what was required of us. We have complied with the Ecolabel and Ecodesign standards, and we have been certified by third parties in these requirements. We have always considered these additional requirements from other customers as an advantage to improve our system.

What would allow them to undertake more sustainability actions in the company in the future?

Being a small company, we need a broader framework that allows us to have a greater impact on our stakeholders. We work in different working groups with other public and private agents such as Alianza Alavesa de Desarrollo Sostenible, Come on, Ihobe, Euskalit, etc.. This allows us to advance and raise our level in the actions we take to be more sustainable.

We believe that Public Administrations have a lot of responsibility in this. They can lead sustainability policies in areas such as Green Public Procurement, tax benefits, new regulations with different strategies for sustainability. All this would allow us to undertake more sustainability actions.

Are you satisfied that the European Union has said that sustainability reporting requirements will be simplified for small businesses??

Reporting standards are often difficult for small businesses to comply with due to the complexity of the structure and lack of resources that we often have.. Any simplification and clear guidance is always welcome and makes us more competitive against larger companies..

Do you see yourself and your company capable of operating in ten years from now in an economy based on a low-carbon model?? How can you do?

Yes, see you in ten years in a world with a low carbon model. We have laid the foundations to achieve this during the last 20 years and we always seek to create products that meet the requirements of a new greener model of business and economy and with the strictest regulations and customer requirements, as low VOC products, biocides or the substitution of dangerous chemicals. We believe that the key factor to achieve our sustainability goals is to integrate them into the highest policies and strategies of organizations.

The Spanish SME A&B Innovative Solutions focuses on biotechnology and green chemistry with two trademarks, TO&B for professional users and Befree home for home users. The company employs 34 people and invoiced 6 million euros in 2020. Aitor Pérez Acero, responsible for product management, also collaborated in the interview.

[1] In the practice, and taking into account how the NFRD has been transposed in the different Member States, approximately 11.700 companies were subject to the information requirements of the NFRD in the EU-28. This figure takes into account the way in which the Member States have transposed the Directive. Without taking into account the national transposition, nails 2 000 companies are subject to the scope of the NFRD.