Increasing ESG requirements have long been affecting small and medium-sized enterprises (SMEs), even without formal reporting obligations. As already discussed in the first part of our report, the respective requirements are frequently being passed on along the value chains. Moreover, companies that do not directly fall within the scope of the CSRD requirements will likewise be confronted with specific requests from customers and banks. Consequently, the first companies are using the VSME to process and combine these requests in a structured way. In this issue of the PKF magazine we specify the contents that are included in a report according to the VSME and how it can be structured in practice.
1. Modular structure and reporting logic of the VSME
The VSME is based on a two-tier reporting system that consists of the Basic Module and the Comprehensive Module. Both modules address the same topics (environmental, social, and governance) but they differ in scope and content depth. The figure below shows the subject matter of the reporting requirements (20 in total) and indicates whether they fall under the basic module or the comprehensive module.
The Basic Module constitutes the mandatory minimum requirement for all companies that apply the VSME; this module covers the minimum reporting requirements. The Basic Module comprises eleven disclosure requirements (B1–B11, see figure) with simplified narrative disclosures and ESG-specific metrics.
The Comprehensive Module has been designed to selectively expand the contents. For companies that exceed certain size criteria (in particular, more than €25m of total assets, €50m of revenues or 250 employees), in practice, this expansion frequently makes sense, or is indeed expected by various stakeholders. The Comprehensive Module requires the full application of the Basic Module and supplements this basic structure with further datapoints with nine additional disclosure requirements (C1–C9, see figure).
However, the characteristic feature of the VSME is not just the reduced scope, but also the clear distinction between the disclosure requirements in both modules. Besides the mandatory disclosures (‘shall’), the modules also include optional elements (‘may’). Furthermore, in certain places, thresholds or conditions of use apply so that information is only disclosed if it is actually relevant to the company.
The reporting logic is recognisably geared towards the typical requirements of business partners and capital providers. Consequently, this enables reporting that is needs-based and scalable.
2. Contents in accordance with the Basic Module
The minimum scope comprises four topics:
1 General disclosures:
These primarily concern the reporting framework as well as existing guidelines, measures and targets related to specific sustainability aspects, such as, climate, pollution, workforce, or corporate policy.
2 Environmental metrics:
Particular emphasis is given to these because demand for them is especially high and can be easily quantified. The focus here is mainly on the Scope 1 and Scope 2 emissions. Topics such as pollution, biodiversity, water, resource use and the circular economy are also included. Here, it is frequently possible to draw on existing information or external reports and this can significantly reduce the time and effort required to collect the data.
3 Social metrics:
These focus on a company’s own workforce and enable a basic assessment of working conditions as well as the health and safety aspects.
4 Governance metrics:
The Basic Module is limited to the key features of legal and ethical behaviour and here, in particular, to cases of corruption and where fines were imposed.
3. Expanded focus in accordance with the Comprehensive Module
The Comprehensive Module builds on the content of the Basic Module and widens the focus. As a result, instead of simply taking stock, special emphasis is placed on the classification, management and further development of sustainability initiatives.
1 General disclosures:
In the Comprehensive Module these consist of, in particular, the linking of the business model with sustainability. Companies explain how sustainability considerations are factored into strategic decisions and into the targets and measures that are pursued.
2 Environmental metrics:
Here, the reporting is expanded by forward-looking information, in particular, on emission reduction targets and the related measures. Where relevant, Scope 3 emissions as well as climate-related risks and their impact on the business model and value chain may also be included.
3 Social metrics:
In the Comprehensive Module these go beyond a company’s own workforce and increasingly also cover aspects along the supply chain, for example, in respect of human rights or severe negative incidents.
4 Governance metrics:
These supplement the existing disclosures with additional transparency requirements, such as, those regarding the composition of governance bodies or activities in sensitive or regulated business areas.
4. Initial reports from practice and the range of use
The earliest examples of application show that companies use the VSME in different ways and, in particular, this is determined by the aims as well as the stakeholder requirements.
1 Focus on the Basic Module:
Companies that use only the Basic Module concentrate on satisfying the minimum requirements. The reporting is largely qualitative in nature and presents key topics in a narrative form. Quantitative metrics are selectively complemented, especially in the environmental area.
2 Selective expansion:
In practice, an approach is becoming apparent whereby companies use the Basic Module as a foundation and selectively supplement it with disclosures chosen from the Comprehensive Module. In doing so, the contents from the Comprehensive Module are addressed, however, they are not consistently and explicitly assigned to the individual disclosure requirements or organised across all the datapoints that are provided. In many instances, the selection of this data is based on a materiality analysis or specific information requests from stakeholders. In this way, the reporting is selectively expanded whereby the contents from the Comprehensive Module are integrated without there being full and systematic coverage of all disclosures provided there.
3 Full application of both modules:
Reports that fully reflect both modules are consistently based on the VSME classification system. The contents are clearly structured across the disclosure requirements, which ensures a high degree of comparability and formal consistency. Here, sustainability is closely linked to the business model and is managed strategically. This is particularly evident in the comprehensive presentation of key metrics (including Scope 1 - 3), the integration of the value chain, as well as the specific time-bound targets and measures.
4 Needs-based design:
While some reports are primarily intended to respond to specific requests for information, others make greater use of reporting as a strategic management and communication tool. Accordingly, there are likewise variations in the structure and presentation. Besides a pure focus on VSME datapoints, there are also supplementary elements, such as, materiality analyses, strategic guidelines, or more detailed contextual information. The differences are also manifested in the scope and elaboration of the individual datapoints. The reports that were inspected ranged from a compact version of about 20 pages right through to reports of almost 50 pages. At the same time, there were variations in the depth of detail with which the individual datapoints in the disclosure requirements were elaborated.
- In some cases, compact reports presented information that was summarised to a greater extent, such as, in the case of metrics related to emissions, water, land use, or personnel.
- More extensive reports worked through the datapoints in greater detail and frequently referred to specific tables, calculation results and sources. In some cases, it was also made transparent that specific requirements under the VSME are not applicable or that certain elements of the report have not been disclosed for demonstrable reasons.
