Voluntary Reporting Standard for SMEs – VSME in a nutshell 

Sustainability is no longer just a buzzword as small and medium-sized enterprises (SMEs) are increasingly expected to demonstrate transparency in their operations. The Voluntary Reporting Standard for SMEs (VSME), developed by the European Financial Reporting Advisory Group (EFRAG), provides a comprehensive framework for non-listed SMEs to report on their sustainability practices. This article explores the VSME, its objectives, and the benefits it offers to SMEs. 

Definitions of SMEs

Small and medium-sized enterprises (SMEs) are categorized based on their balance sheet total, net turnover, and the average number of employees. According to the VSME ED January 2024, SMEs are divided into three categories: 

• Micro-Enterprises: Balance sheet total ≤ €350,000, net turnover ≤ €700,000, and up to 10 employees. 

• Small Enterprises: Balance sheet total ≤ €4 million, net turnover ≤ €8 million, and up to 50 employees. 

• Medium Enterprises: Balance sheet total ≤ €20 million, net turnover ≤ €40 million, and up to 250 employees. 

Objective and Scope of the VSME 

The VSME is a voluntary standard aimed at helping SMEs contribute to a more sustainable economy by improving the management of environmental and social challenges. The key objectives of VSME include: 

• Supporting SMEs in making informed decisions that enhance their competitive growth and resilience. 

• Providing information that satisfies the data demands of lenders, investors, and larger companies, thus improving SMEs’ access to finance. 

• Offering a consistent reporting framework that aligns with the European Sustainability Reporting Standards (ESRS) but is scaled to the capabilities of SMEs. 

Key Components of the VSME 

The VSME is structured into three main modules, each addressing different aspects of sustainability reporting: 

1. Basic Module 

The Basic Module is the foundational element of the VSME, intended primarily for micro-enterprises but also serving as a minimum requirement for other SMEs. It covers key disclosures without the need for a materiality analysis: 

• Environmental Metrics: Includes energy usage, greenhouse gas emissions (scopes 1&2), pollution, biodiversity impact, water use, and waste management. 

• Social Metrics: Encompasses workforce characteristics, health and safety, remuneration, and community impact. 

• Business Conduct Metrics: Covers issues like corruption, bribery, and compliance with legal standards. 

2. Narrative-Policies, Actions, and Targets (PAT) Module 

This module is recommended for SMEs that have established formal policies and targets related to sustainability. It requires a materiality analysis and focuses on: 

• Strategic Disclosures: Business model and sustainability initiatives. 

• Management of Sustainability Matters: Policies and actions addressing material sustainability issues. 

• Governance and Stakeholder Engagement: Roles and responsibilities in managing sustainability, and the engagement with key stakeholders. 

3. Business Partners Module 

The Business Partners Module adds data points relevant to the information needs of lenders, investors, and corporate clients. It covers topics like: 

• Sector-Specific Revenues: Disclosures related to controversial industries. 

• Gender Diversity and GHG Emissions: Targets and performance in gender diversity and emissions reduction. 

• Alignment with International Standards: Compliance with frameworks like the UN Guiding Principles on Business and Human Rights. 

Benefits of Implementing VSME 

Implementing the VSME offers several advantages for SMEs: 

Improved Transparency and Credibility 

Adopting VSME helps SMEs demonstrate their commitment to transparency, building trust with stakeholders, including investors, customers, and regulators. 

Enhanced Access to Finance 

By providing standardized and reliable sustainability data, SMEs can improve their attractiveness to lenders and investors, facilitating better access to finance. 

Better Decision-Making 

With a structured reporting framework, SMEs can gain deeper insights into their operations, leading to more informed decision-making and strategic planning. 

Competitive Advantage 

In a marketplace where sustainability is increasingly valued, SMEs that adopt VSME can differentiate themselves, potentially leading to a stronger market position and customer loyalty.

Challenges in Adopting VSME 

While the VSME offers significant benefits, SMEs may encounter challenges in its adoption: 

Cost of Implementation 

The financial and resource implications of adopting VSME can be significant, particularly for smaller businesses with limited budgets. 

Lack of Expertise 

Many SMEs may lack the internal expertise to implement the VSME effectively, necessitating external support or training. 

Resistance to Change 

As with any new initiative, there may be resistance within the organization, particularly if the benefits of VSME are not immediately apparent.

How to Implement VSME in Your SME 

To implement the VSME, SMEs should follow a systematic approach: 

1. Evaluate Current Practices: Assess existing reporting practices and identify gaps. 

2. Choose the Appropriate Modules: Decide whether to implement the Basic Module alone or in combination with the Narrative-PAT and/or Business Partners Modules. 

3. Train Your Team: Ensure that staff are equipped with the knowledge and tools necessary for successful implementation. 

4. Regular Review and Update: Continuously review and improve reporting practices to keep them aligned with business goals and stakeholder expectations. 

Case Studies 

Several SMEs across various sectors have successfully implemented VSME, enhancing their sustainability credentials and improving stakeholder relations. These case studies highlight the practical benefits and lessons learned from adopting the standard. 

The Future of VSME 

During the spring of 2024, the drafted VSME version gathered comments, and the final version is expected to be published in the fall of 2024. 

The VSME is poised to become a critical tool for SMEs globally, particularly as sustainability reporting becomes more integral to business operations. With ongoing developments and potential alignment with international standards, the VSME could eventually become a widely recognized benchmark for SME sustainability reporting. 

Conclusion

The Voluntary Reporting Standard for SMEs (VSME) offers a comprehensive and scalable framework for non-listed SMEs to improve their sustainability practices and reporting. By adopting VSME, SMEs can not only enhance their transparency and access to finance but also position themselves as responsible and forward-thinking businesses in a competitive market.