The debate about the role of companies and financial institutions in the transformation process towards a more sustainable economy includes the discussion of sustainability reporting standards for small and medium-sized enterprises (SMEs). The various sustainability information needs of different business partners and stakeholders of SMEs need to be taken into account here (the DRSC/RNE pilot group recently published an overview of the information needs of different stakeholders with regard to sustainability of SMEs).
The Principal Adverse Impact Indicators (PAIs) are of central importance in this debate on sustainability reporting standards for SMEs. According to the EU Sustainable Finance Disclosure Regulation, PAIs are the basis for information provided by financial market participants on their investments in order to highlight potential adverse impacts on sustainability. The indicators are intended to provide information on potential adverse impacts of business activities on, for example, biodiversity, gender diversity and equality, respect for human rights and energy consumption. According to the recently published proposals by the European standard setter EFRAG (Exposure Draft ESRS LSME and Exposure Draft ESRS VSME) SMEs should also provide more information on these PAIs.
By publishing this heat map, the DRSC/RNE pilot group aims to contribute to the discussion on the development of sustainability reporting standards for SMEs with regard to the PAI. The pilot group assessed the feasibility (difficulty of implementation) of the indicators as well as the demand and relevance for SMEs. The heat map illustrates this assessment and points out particular challenges for SMEs. The need for support for SMEs and the possible need to adapt indicators can be derived from this. The pilot group identified a need for action in particular with regard to the measurement of impacts on biodiversity, Scope 3 GHG emissions and the structures for monitoring compliance with the UNGC principles and OECD guidelines. To assess the indicators, the DRSC/RNE pilot group held expert discussions with representatives of other SMEs, financial institutions and large companies.
Prof Dr Alexander Bassen (University of Hamburg), chair of the DRSC/RNE pilot group, puts the work into perspective: “We were once again able to have insightful discussions with experts in this field for the preparation of the heat map. We are pleased to show where there is a specific need for action and to contribute to the debate on the development of sustainability reporting by SMEs”.
Georg Lanfermann, President of the DRSC, adds: “The EFRAG proposals for mandatory and voluntary SME sustainability reporting extensively refer to the PAIs. The heat map is therefore not only highly topical, but also of central importance for the success of EFRAG’s work.”
Assessment of the Principal Adverse Impact Indicators by the DRSC/RNE pilot group “SME Reporting”
The paper presented is based on the Pilot Group “SME Reporting” initiated as part of the cooperation agreement between the DRSC and the RNE. This group is made up of experienced representatives from SMEs and various stakeholder groups in SME sustainability reporting. This paper is in line with previous publications on the development of sustainability reporting standards. In December 2022, for example, a paper on key elements for SME sustainability reporting standards was published; in August 2023, the pilot group presented an overview of various information demands for sustainability reporting. An overview of the composition as well as past and future activities of the DRSC/RNE pilot group can be found here. As part of the cooperation, companies are to be supported in the implementation of new legal reporting requirements.