Understanding Materiality Under the VSME

Small and medium-sized enterprises (SMEs) are increasingly asked to demonstrate their sustainability credentials—not only from regulators, but also from customers, investors, and large corporate partners. Recognising the unique challenges smaller companies face, the European Financial Reporting Advisory Group (EFRAG) has introduced the Voluntary Sustainability Reporting Standard for SMEs (VSME) to provide a streamlined framework for ESG reporting.

Materiality has been one of the focal points in the debate on sustainability reporting, with the CSRD introducing strict 'double materiality' requirements. However, in the VSME, this obligation has been removed and replaced with a more flexible—and arguably vague—'if applicable' principle, reflecting the diverse capacities and contexts of SMEs.

Should SMEs conduct a materiality analysis under the VSME? And how does the VSME approach differ from more rigorous frameworks like the Corporate Sustainability Reporting Directive (CSRD)? We unpack the key considerations and practical steps for SMEs looking to align with the VSME.

A materiality analysis is a structured process used to determine which sustainability topics are most relevant or "material" to a business and its stakeholders. These topics often include environmental, social, and governance (ESG) issues such as emissions, labor practices, diversity, and supply chain ethics.

Rather than attempting to report on every ESG issue, a materiality analysis helps companies focus only on the topics that could significantly impact their operations, performance, or stakeholder relationships. For SMEs with limited resources, this is not only a best practice—it’s a necessity for producing a focused and credible report.

One of the most notable differences between the VSME and the CSRD lies in their respective materiality requirements.

Under the CSRD, companies are required to conduct a double materiality assessment. This means they must evaluate both:

• Financial materiality (how ESG issues affect the company), and

• Impact materiality (how the company affects society and the environment).

This comprehensive approach is designed for large enterprises and publicly listed companies, but it can be resource-intensive and complex—often requiring expert input and stakeholder consultations.

The VSME, on the other hand, has removed the strict requirement for double materiality. Instead, it introduces an “if applicable” principle. This means SMEs are not required to conduct a materiality assessment, but should only apply a simplified approach if and when relevant to their business context.

This approach gives SMEs more flexibility and recognises the diversity in size, complexity, and sustainability maturity levels across the SME sector. It enables smaller companies to ease into sustainability reporting without facing the same level of technical and administrative burden imposed by the CSRD.

While the materiality analysis in the VSME is voluntary, there are several compelling reasons for SMEs to conduct a simplified materiality exercise:

• Reporting Beyond the Basics: Materiality helps SMEs decide which additional topics to report on in the comprehensive module, ensuring relevance without overextending resources.

• Strategic Insight: Identifying material ESG risks and opportunities can inform long-term planning and innovation.

• Stakeholder Trust: Customers, investors, and lenders increasingly expect transparency, even from smaller companies.

• Market Access: Many large companies require ESG disclosures from their suppliers. Having a materiality-informed report helps SMEs remain competitive.

To support SMEs in conducting a focused materiality assessment, the VSME provides a core list of material topics that are generally relevant across industries. These include:

• Environmental topics like energy use, emissions, and waste

• Social issues such as working conditions, diversity, and human rights

• Governance areas like anti-corruption, data protection, and business ethics

Here’s how SMEs can use the VSME list to guide their reporting:

1. Start with the List: Review the core material topics provided in the VSME. This list serves as a solid starting point and covers the most common ESG concerns for SMEs.

2. Apply the “If Applicable” Principle: For each topic, ask whether it is genuinely relevant to your operations, stakeholders, or context. If a topic is clearly not applicable, it may be excluded from reporting, with an explanation.

3. Engage Stakeholders: Even a basic level of stakeholder engagement—through informal surveys, conversations, or customer feedback—can provide valuable insights into which topics matter most.

4. Prioritize and Report: Select the most material topics for your sustainability report. Use the VSME’s simplified templates and guidance to communicate your approach clearly and consistently.

The VSME offers SMEs a practical, proportional pathway to sustainability reporting—one that aligns with market expectations but avoids the heavy compliance burden of the CSRD. While it does not mandate a full double materiality assessment, it encourages SMEs to apply materiality principles “if applicable,” giving them the autonomy to tailor their reports to what truly matters.

By conducting a thoughtful, right-sized materiality analysis and using the VSME’s list of core topics, SMEs can create focused, relevant, and credible sustainability disclosures. These not only support compliance and transparency, but also help SMEs build stronger relationships, access green finance, and drive long-term business resilience.