The European CSRD is a particular challenge for small and mid caps

The European CSRD is a particular challenge for small and mid caps


The vast majority of all companies have formulated their ESG-relevant objectives as part of the EU taxonomy and have set themselves a timeframe for their implementation. The major challenge over the next few years will be to shape this process in line with the stricter regulatory framework. Specifically, it is about the Corporate Sustainability Reporting Directive, or CSRD for short, which was adopted on January 5, 2023 and came into force at the beginning of 2024.




This EU directive on sustainability reporting requires companies to account for and track the impact of their activities on the environment and society.


The content of the report is specified in the European Sustainability Reporting Standards (ESRS). They oblige managers to analyze sustainability issues such as climate change, loss of biodiversity and human rights, to make their self-imposed targets transparent and to measure the achievement of these targets. In detail, up to 1144 quantitative and qualitative data points must be taken into account. Independent verification is required for all information. The entire management team at Management Board level is affected in its day-to-day business.The Supervisory Board and the Audit Committee must monitor the company’s sustainability reporting. Last but not least, all sustainability information must be submitted to the auditor or an independent service provider in order to obtain “limited assurance”.


This affects not only international corporations, but also all small and medium-sized companies regardless of their capital market orientation, which meet two of the three following criteria: more than 250 employees, a balance sheet total of more than 20 million euros and net sales of more than 40 million euros. In addition, the regulation covers all companies listed on an EU regulated market. This does not apply to micro-enterprises that do not exceed two of these three criteria: Ten employees, 350,000 euros balance sheet total and 700,000 euros net turnover.


All companies that are already subject to the previously applicable EU Non-Financial Reporting Directive (NFRD) will start with a phased model in their annual report for 2024. 2026 will be followed by all companies that meet two of the three criteria: a balance sheet total of at least 25 million euros, net sales of at least 50 million euros and at least 250 employees. Listed small and mid caps that do not meet these parameters will be required to report for the first time in 2027 in their annual report for 2026, unless they make use of the deferral option and are thus exempted from the application of the Directive until 2028.


According to a recent survey by the investment bank Fidelity, the majority of companies are not yet sufficiently familiar with the multitude of reporting requirements. The results are the outcome of a survey conducted by the company’s own analyst team among all companies from its coverage universe in the individual sectors. According to the survey, 52% of the companies surveyed are not prepared for the large number of new ESG-relevant reporting requirements. The percentage is highest in Europe at 60% and lowest in China at 27%. North America and Japan are in the middle of the field with 48% and 45% respectively. The biggest problem identified by the interviewees was how to concentrate on the various requirements at the same time with the available personnel resources.


At the same time, however, the positive trend is that an increasing number of companies are already reporting a high level of implementation. Almost a third of the analysts surveyed say that the implementation of ESG guidelines in their companies has improved from the previously low level. A further 28% report improvements that are based on an already high level, and 27% say that ESG implementation is already at a high level. Conversely, these companies see little scope for noticeable improvements in 2024.


Despite these positive trends among blue chips, it is clear that small caps in particular need to pool their personnel and specialist resources even more skillfully in order to efficiently incorporate the requirements arising in the course of CSRD. Multidisciplinary teams of specialists in finance, sustainability, investor relations and strategy have proven their worth in practice.