Many SME owners have spent the past few years trying to determine whether EU sustainability regulation applies to their company. In most cases, the answer is simple: not directly. However, customers’ sustainability requirements can still bring the effects of regulation into the everyday operations of SMEs.
For SMEs, sustainability requirements often arise through customers, supply chains, financiers or other business partners. A company therefore does not need to have a statutory reporting obligation of its own for producing sustainability information to become important in practice.
Regulation does not stop at a company’s legal boundary
A large company may need sustainability information about its own operations and value chain and may therefore request information from its suppliers. One of those suppliers may be a small Finnish company that is not directly subject to the reporting obligation in question. From the SME’s perspective, the requirement then comes not from the EU but from the customer.
There may nevertheless be a clear chain of influence in the background: EU sustainability regulation → large company → customer’s information needs → SME. For an SME, the relevant question is therefore not only whether it falls within the scope of a particular regulation, but also what information its important customers require from it. This distinction between direct and indirect regulatory effects is also central in the research literature.
What is voluntary may be practically necessary in business
An SME may have no legal obligation to produce certain sustainability information. From a business perspective, however, the situation changes if a major customer requires the information from all its suppliers, certain sustainability information is required in a tendering process, or a financier asks about issues related to the company’s environmental impacts, employees or climate risks.
A requirement that is legally voluntary may then be linked to retaining a customer, winning new business, remaining in a supply chain or accessing finance. Therefore, alongside the question “Does this law apply to us?”, another question is needed: “How does this requirement affect our business?” An SME may therefore be formally outside the scope of regulation while experiencing the requirement as commercially mandatory in practice.
There is no reason to collect all sustainability information just in case
This does not mean, however, that an SME should start collecting every possible piece of sustainability information. Customer needs vary: one may ask about energy consumption, another about greenhouse gas emissions, a third about workforce data and a fourth about the management of sustainability in the supply chain.
Instead, the company should determine what information is actually being requested, who is requesting it and which information needs recur. This makes it possible to identify the sustainability information whose systematic collection genuinely supports the business.
A voluntary reporting standard can help build a common information base
The EU’s voluntary sustainability reporting standard for SMEs does not need to be seen solely as a means of preparing a sustainability report. It can also be used to build a foundation of sustainability information that the company can draw on when responding to information requests from customers, financiers and other stakeholders.
If the same basic information is repeatedly requested from the company in slightly different forms, collecting it systematically reduces duplicated work. Producing sustainability information can thus become part of normal information management rather than each customer questionnaire triggering a new information-gathering project.
Customer requirements also need to be interpreted
A sustainability requirement from a customer is not always unambiguous. A company may be asked to provide, for example, emissions data, ESG indicators or a sustainability policy without being told exactly what information is required, at what level of detail or for what purpose.
The SME must then determine what the customer actually needs, how extensive the information is expected to be and whether the request constitutes an actual supplier requirement or merely a preference. Accounting firms, consultants and other experts can also contribute to interpreting technical requirements and translating them into a form that is useful for the company. In the research literature, this type of transmission and interpretation of requirements through stakeholders and experts emerges as an important mechanism.
Above all, monitor your own operating environment
It is not sensible for an SME to try to follow every EU sustainability regulation and reporting requirement in detail. Instead, it should closely monitor its own operating environment: what customers are asking for, what is required in tendering processes, what financiers want to know and what larger companies expect from their suppliers.
The starting point for an SME’s sustainability work then consists of three elements: what regulation requires from the company, what important stakeholders need and what is material to the company’s own business. This helps avoid both unnecessary reporting work and a situation in which the company only becomes aware of customers’ sustainability requirements once they begin to affect business.
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