Voluntary Sustainability Reporting Standard for Non-listed Small and Medium-sized Enterprises (VSME) - Part 1: Fundamentals and basic principles
The amendments to the Corporate Sustainability Reporting Directive (CSRD) resulted in a significant reduction in the scope of the entities that are directly subject to the reporting obligation. Yet, the perception that small and medium-sized enterprises (SMEs) as a whole are no longer affected by the respective reporting obligations is misleading. This is because, in practice, capital providers and large companies will pass on environmental, social and governance (ESG) requirements across their value chains. In this respect, the barriers provided for by the legislator will likewise have only a limited effect. That is why, in this issue of the PKF magazine, we discuss the main features of reporting under the VSME - which provides a clearly structured framework for voluntary reporting - so that requests from customers and banks can be fulfilled with a reasonable effort. In the next edition of our magazine, there will be a follow-up with guidance on how, in practice, reporting under the VSME can be specifically structured.
Downsizing of classic ESG reporting
The original aim of the EU’s Corporate Sustainability Reporting Directive was to significantly expand sustainability reporting and make it more comparable. As of 2025, in addition to the capital market-oriented companies that were already subject to the reporting obligation, all large businesses were likewise supposed to be covered by the obligation if they fulfilled at least two of the following three criteria: more than €25m of total assets, €50m of revenues or 250 employees. However, in light of the growing criticism of the bureaucratic burdens - and particularly in the context of economic uncertainties - the CSRD was then thoroughly reworked. With the now expected transposition of CSRD 2.0 into national (German) law, the following picture emerges:
- a reporting obligation now only for entities with more than 1,000 employees and revenues above €450m,
- the first-time application postponed by two years,
- a simplification of processes, and
- a reduction in the content of the report.
For SMEs this must initially have seemed as if all the pressure had lifted. In practice, this effect is however limited. The need for ESG information across the value chains has remained unchanged. Entities that are subject to the reporting obligation are still required to obtain the relevant data from their suppliers and business partners. Banks (particularly due to their own regulatory obligations), investors, and other stakeholders are likewise increasingly asking for ESG information. Consequently, the requirements are being systematically passed on and they can indirectly affect even companies that are not subject to the reporting obligation - this is the so-called trickle-down effect.
Reporting under the VSME as a reaction to the “trickle-down effect“
In anticipation of the trickle-down effect, the current regulatory efforts are now aimed at limiting this development. A key instrument here is the introduction of an upper limit for ESG data requirements, which is referred to as the “value-chain cap”. This is intended to ensure that entities that are subject to the reporting obligation may only ask for a clearly defined scope of sustainability information.
Against this backdrop, reporting under the VSME is becoming increasingly important. The VSME is a voluntary reporting standard for SMEs that makes it possible to provide ESG information in a structured and standardised way.
The two-tier reporting under the VSME is based on a basic module with a reasonable amount of key sustainability information. This basic module covers the essential ESG requirements. An additional module can be added if needed. Such an expansion would be particularly suitable when customers, banks, or other stakeholders request further information.
Principles for reporting under the VSME
Reporting under the VSME is intended to facilitate sustainability reporting that is structured but, at the same time, is in a form that is manageable for the entities. The focus here is on five key principles.
1. Waiver of the formal materiality assessment - Unlike the European Sustainability Reporting Standards (ESRS), there is no mandatory requirement to perform a comprehensive double materiality assessment. Instead, both perspectives are taken into account in a simplified form.
2. Use of the “if applicable” principle - It is only necessary to provide details if they actually apply to the specific entity. Topics that are not relevant can be omitted.
3. Simplification and comprehensibility - The PAT (Policies, Actions, Targets) module, which was originally planned, was eliminated or highly simplified because it was considered to be too complex and insufficiently comparable for SMEs. Instead, the focus is on limited specific details rather than extensive statements on strategy.
4. Clear distinction in the disclosure requirement - The reporting requirements are clearly structured into mandatory disclosures, information that must be provided in certain cases and discretionary additions.
5. Company-specific information - Companies may include additional information that goes beyond the standardised contents if this is relevant for understanding their sustainability status or addresses specific stakeholder requirements.
Fundamentals of reporting under the VSME
Based on these principles, reporting under the VSME follows a logic that is considerably simpler than that of the ESRS. At the heart of the standard is the distinction between the two aforementioned report variants, namely, the basic module and the additional module. The basic module implements the minimum requirements; it comprises a total of approximately eleven clearly defined disclosure requirements with a limited number of standardised datapoints. These cover, in particular, basic information on the ESG factors
- environmental (e.g., energy, emissions, water),
- social aspects (e.g., employees, working conditions) and
- governance structures.
The focus here is on metrics that are easy to track as well as basic descriptions. The additional module has been designed to selectively expand the reporting. Forward-looking information (for example, on measures or developments) can also be included here.
The reduction in reporting requirements becomes particularly obvious in a comparison with the ESRS. While the ESRS include several hundred disclosure requirements and a great depth of detail, by contrast, reporting under VSME is limited to a clearly structured selection with significantly fewer datapoints and without complex reporting systems. The main emphasis is on the standardised provision of information that has been specifically requested.
