SMEs in the supply chains of large companies are indirectly affected by the CSRD

Véronique Kesseler

Junior Advisor

The corporate sustainability reporting directive (CSRD) was adopted by the European Commission as part of a package of measures that should drive the flow of finances and money towards more sustainable activities. Those measures are essential for the European Union to reach climate neutrality by 2050. In November 2022 the CSRD was officially adopted by the European Commission.


The CSRD focuses on all non-financial activities and replaces the Non-Financial Reporting Directive (NFRD). The CSRD is more extensive compared to the NFRD:

  • More companies are included in the mandatory reporting, and almost 50,000 European-listed companies will have to comply.
  • The reporting requirements are more detailed focusing on environmental impacts, human rights, and social standards.
  • Companies are required to gather and disclose data from their suppliers as information transparency along the value chain is essential.
  • A double materiality analysis is at the core of the report. The findings of the analysis identify the material and relevant impacts, risks, and opportunities a company needs to report on. On one hand, this analysis looks at the impact of the company on sustainability factors and on the other hand, at the financial risks of sustainability issues on companies.
  • Independent auditing of the sustainability report, the inclusion in the yearly financial report, and digital access and tags of the information are necessary.[1]


The CSRD is very focused on information of the value chain to create a holistic reporting, therefore SMEs and suppliers are not spared from reporting scope:

  • Larger companies need to disclose accurate data on social and environmental factors along their entire supply chain.
  • Some data has to be provided by the suppliers; others can be estimated by the company when there is reasonable cause that it cannot be provided.
  • Small SMEs might not have the most basic required data (e.g. carbon footprint) at their disposal. Therefore, listed-SME should start with their double materiality assessment early to be able to develop their processes to gather the required quantitative data and define the managerial strategies on relevant topics.
    • We recommend an early interaction with customers to coordinate the necessary data requests. 


What is the reporting timeline, and when do you have to comply?

The first companies required to comply with the new CSRD are the ones already complying with the NFRD. They must prepare a report for the financial year 2024. Following each year, more companies are required to report according to the European Sustainability Reporting Standards (ESRS) (the reporting framework under the CSRD). Listed SMEs have to start reporting on the financial year 2026. In some cases, where data and reporting information are not yet available, SMEs can exempt themselves from reporting until 2028.

How to prepare for information disclosure along the supply chain?

Essential factors to include in the sustainability report are the double materiality assessment, the inclusion of prospective information, and information about the upstream and downstream value chain. Continuously, two main stakeholder groups are considered in the CSRD report, the stakeholders along the supply chain and the users of the report.


Supplier-Customer Coordination

Every SME with large companies as clients might be indirectly affected by the CSRD since they are part of the supply chain and will be demanded by their clients to disclose relevant information. Data on GHG emissions is a mandatory topic that will affect all suppliers.

For other reporting topics, companies might be allowed to use estimations and sector-average data depending on the availability of information, if they can reasonably explain the inability to receive information from their supply chain. Following, it shall be very individual whether and what kind of information is required of a supplier. Therefore, we suggest getting in contact with the larger clients to verify if and what data is required from a supplier in order to avoid a surprising request for data on the environmental and social impacts of the operations.


Preliminary reporting work for listed SMEs

For listed SMEs, it makes sense to conduct the double materiality analysis early on to determine the focus areas for future sustainability strategies, actions, and reports. When the impacts, risks, and opportunities are determined, the status quo and gap analysis can be conducted for the material and relevant sustainability topics. Especially, since many SMEs lack the quantitative data requested in the CSRD, the processes to gather those need to be established. Based on those new actions, a roadmap can be developed to close the gaps in the relevant topics and help with the disclosure requirements of the report. New management processes, strategies, policies, and actions can be applied.

This allows on one hand the improvement of sustainability actions and the company’s footprint. On the other hand, it prepares the needed documentation and information for disclosure in the sustainability report.


What is the setup of the ESRS?

The setup behind ESRS is complex, considers a series of topics, and integrates a selection process. Here we will go into a bit more in detail.

The CSRD is based on the double materiality assessment. The assessment considers the environmental and social impacts of a company as well as the financial impacts each ESG topic has on a company. The outside-in and inside-out perspectives of the double materiality assessment allow the reliable determination of the most relevant ESG topics to report on.

The CSRD is divided into 12 European Sustainability Reporting Standards (ESRS) which each focus on different topics. They are divided into cross-cutting standards which require the disclosure of general information on the company’s sustainability-related impacts, risks, and opportunities. The second part entails the topical sector-agnostic standards divided into environmental, social, and governance (ESG) which include 10 standards (see figure below). Some topics are mandatory, but not every company is required to report on each topic. The double materiality assessment determines the topics a company needs to report on. Therefore, the starting point of sustainability reporting is a materiality analysis, to identify the material impacts, risks, and opportunities to be reported on.  Each topic is then divided into a series of disclosure requirements that have to be included.

CSRD is not yet completed. Sector-specific and SME propitiate standards are planned to be added at a later stage.

When you need support as a supplier or as an SME to establish data-gathering processes or measures, actions, and policies for material sustainability topics, don’t hesitate to reach out to Taival. We are specialised in strategy and operation management and can help you to prepare a structured approach to facilitate CSRD reporting.

Leave a Reply

Your email address will not be published. Required fields are marked *