The Challenges SMEs Face with CSRD Reporting

The Corporate Sustainability Reporting Directive (CSRD), adopted by the European Union, marks a significant shift in how businesses, including small and medium-sized enterprises (SMEs), approach sustainability reporting. While large corporations have been accustomed to environmental, social, and governance (ESG) disclosures, the inclusion of SMEs under the CSRD framework presents both opportunities and challenges.

For SMEs, the CSRD represents a chance to engage with sustainability in a structured manner, improving transparency and aligning with stakeholder expectations. However, it also brings unique hurdles that must be carefully navigated. Here are the key challenges SMEs face when it comes to CSRD reporting.

1. Resource Constraints

One of the most significant challenges for SMEs is the lack of resources—both financial and human—to dedicate to CSRD compliance. Unlike large corporations with dedicated sustainability teams, SMEs typically operate with limited staff. The added burden of gathering, analysing, and reporting data related to sustainability metrics can stretch their already constrained teams.

The costs associated with hiring external consultants, purchasing software tools for data management, and training employees on sustainability frameworks are often prohibitive for smaller firms. SMEs may find themselves at a competitive disadvantage if they cannot meet the requirements without substantial investment.

2. Lack of Expertise

Sustainability reporting, particularly under the CSRD, involves a thorough understanding of various ESG metrics, such as carbon emissions, energy efficiency, waste management, social impact, and governance practices. Many SMEs lack internal expertise in these areas, as sustainability might not have been a historical focus. Understanding what data needs to be collected, how to quantify it, and how to ensure it aligns with the standards set by the CSRD is a complex task that requires specialist knowledge.

Moreover, sustainability encompasses not only environmental impacts but also social and governance factors. Balancing these aspects and ensuring comprehensive, high-quality reporting can be overwhelming for businesses unfamiliar with these concepts.

3. Data Collection and Management

Collecting and managing data for sustainability carbon reporting is a formidable task for SMEs. The CSRD requires a detailed account of both qualitative and quantitative metrics. For example, companies must track their environmental impact across supply chains, which often involves collecting data from external partners who may not be fully cooperative or compliant with similar standards.

Many SMEs also lack robust data management systems. Without automated tools or specialised carbon reporting software, tracking sustainability-related data becomes a manual, time-consuming process prone to errors. Additionally, many SMEs may not have the digital infrastructure in place to manage the complexity of the reporting requirements.

4. Navigating Regulatory Complexity

The CSRD builds upon previous sustainability regulations, such as the Non-Financial Reporting Directive (NFRD), and introduces more stringent requirements. Navigating this evolving regulatory landscape can be a challenge for SMEs, which often do not have access to legal teams or regulatory experts.

Understanding how the CSRD applies to their business, especially in terms of materiality (determining what sustainability aspects are most relevant to their operations), requires a careful reading of the legislation. Misinterpretation or incomplete reporting can lead to non-compliance, which may result in financial penalties or reputational damage.

For more on materiality, visit this EU overview on CSRD materiality.

5. Cultural Shift and Stakeholder Expectations

For many SMEs, sustainability reporting requires a cultural shift. Traditionally, these businesses may have focused primarily on profitability and short-term goals. The CSRD mandates a more long-term, holistic view of business performance, incorporating environmental and social impact into the equation.

Shifting the company’s mindset from a purely financial focus to one that integrates ESG considerations requires strong leadership and a willingness to embrace change. Additionally, stakeholders—including customers, investors, and employees—are increasingly expecting businesses to demonstrate their commitment to sustainability. Meeting these expectations while managing day-to-day operations can be a difficult balancing act.

For more on aligning sustainability with stakeholder expectations, see this CSRD guide for SMEs.

6. Time Constraints and Phased Implementation

While larger companies are accustomed to annual reporting cycles, the frequency and rigor of CSRD reporting may be a new challenge for SMEs. Sustainability initiatives often take time to implement, especially for businesses that are just beginning to develop ESG strategies. The CSRD places pressure on these companies to act quickly to avoid falling behind in compliance.

Moreover, the phased implementation of the CSRD means that while some SMEs may have more time to adapt, others, particularly those with over 250 employees or significant turnover, will need to comply sooner. This staggered timeline can create uncertainty, as SMEs must determine when and how to allocate resources to meet the new requirements.

7. Comparability and Benchmarking

A key goal of the CSRD is to improve the comparability of sustainability reports across different sectors and companies. However, for SMEs, ensuring their reports stand up to comparison with larger organisations can be daunting. The resources available to large companies allow for more detailed and polished reports, while SMEs may struggle to meet the same level of sophistication in their reporting. This discrepancy can lead to unfavourable comparisons, even if the SME is making genuine sustainability efforts.

Additionally, industry-specific benchmarks may not be as readily available for smaller businesses, making it difficult for SMEs to gauge their performance relative to peers.

For a deeper dive into sector-specific benchmarks, refer to this ESG sector report.

Conclusion: Turning Challenges into Opportunities

Despite these challenges, the CSRD presents a valuable opportunity for SMEs to position themselves as forward-thinking, responsible businesses. By investing in sustainability reporting now, SMEs can gain a competitive edge, enhance their brand reputation, and meet the growing demands of customers and investors for transparency and accountability.

To overcome the hurdles of CSRD compliance, SMEs should consider:

• Collaborating with industry associations to share resources and best practices.
• Leveraging digital tools for data collection and reporting.
• Seeking external expertise through consultants or third-party verification services.
• Embedding sustainability into corporate strategy, aligning it with long-term business goals.

By addressing these challenges proactively, SMEs can not only comply with CSRD requirements but also build more resilient, sustainable business models for the future.

For further reading on CSRD implementation, visit CSRD FAQs.