Political polarisation, reporting fatigue and economic pressures – whatever the reason, the recent anti-ESG backlash is undeniable. For SMEs in particular, the pushback on corporate sustainability has muddied the waters in terms of their sustainability reporting obligations, amid a raft of legislative changes.

But the business rationale for sustainability reporting has never been stronger, says Paul Gisby, Senior Director at Accountancy Europe. Gisby oversees the organisation’s work on tax policy and SMEs, using his extensive 20 years of experience working with small businesses as the former partner in a small Manchester-based accountancy firm.

Shifting EU requirements for SMEs

The direction of travel had suggested that SMEs would face increasing responsibility to report on their emissions due to obligations under the EU’s Corporate Sustainability Reporting Directive (CSRD) introduced in January 2023.

“There was very little in the original CSRD that protected SMEs from being subject to value chain requests from all sides,” Gisby explains. Meanwhile, the EU Taxonomy Regulation, a framework to facilitate sustainable investment, originally was to force banks to include loans to SMEs in their “green asset ratio”.

Since the start of the new European Commission in 2024, a shift in political will and push for deregulation has seen a change in direction on sustainability. In February 2025, the Commission launched the Omnibus sustainability rules simplification package, the first step of an ambitious plan to enhance European economic competitiveness and reduce administrative and reporting burdens on companies.

In July 2026, the European Commission finalised the delegated act that sets out the revised European Sustainability Reporting Standards (ESRSs). It also published:

• changes to the full ESRSs to make them easier to use,
• a mandatory value-chain cap – a legal limit to what information companies that report under full CSRD can ask from SMEs down their smaller value chain, and
• a voluntary standard requesting fewer data points for smaller entities, and even fewer for micro entities. 

“We see this as being potentially quite useful for standardising sustainability information requests,” Gisby says. The value-chain cap applies to companies with fewer than 1,000 employees and up to €450m in net annual turnover that supply goods or services to EU-based large companies. In practical terms, it means that such businesses now have a legal basis to push back on requests that go beyond the scope of the voluntary standard.

Gisby says large companies can still ask more information if it's sector specific, for instance. There’s also the commercial pressure to toe the line. Nonetheless, Gisby predicts that the change will result in a reduced amount of sustainability requests made to SMEs.

Although this is a big step in terms of reducing the burden of mandatory sustainability reporting on smaller businesses, Gisby says that the forward thrust of sustainability reporting has taken a considerable knock. “Certainly, many investors are unhappy with the exclusions for SMEs partly because it means that Scope 3 information for larger businesses is likely to be less accurate and less prevalent.”

But the impetus for sustainability reporting among SMEs remains, Gisby says. “Larger businesses will continue to make these value chain requests, which will still be passed down to SMEs.”

Meanwhile, an omnibus on the Carbon Border Adjustment Mechanism (CBAM) effective since the start of this year has taken many SMEs out of scope. However, for importers into the EU or exporters to the EU, it is planned that the CBAM will also apply to a greater range of goods.

“If you're sourcing certain key goods from countries with highly polluting energy chains, the extra costs on this are horrific. There's also an increasing number of countries that are introducing CBAMs themselves,” Gisby says.

At the same time, there are strong commercial reasons why sustainability reporting should still be a priority for SMEs

Access to sustainable finance

At a time when access to funding remains a huge preoccupation for SMEs, sustainable finance remains a fast-growing segment of the global financial market. It follows that sustainability reporting is a strict prerequisite for accessing green finance and sustainability-linked loans.

Accountancy Europe is hoping that the easing of taxonomy rules will allow SMEs to apply for sustainability finance on a green project basis, rather than the SME having to demonstrate that it's a green company.

Gisby explains that feedback from banks suggests that if a small business isn't looking at its sustainability, the bank's systems will flag that as a higher risk business, which means that it could potentially find it hard to access any sort of finance.

He asks: “If an SME doesn't know its own climate risks, is it the kind of business a bank wants to be lending money to?”

Sustainability impacts business models

Sustainability is not only about compliance or emissions data. SMEs increasingly need to understand how climate risks such as flooding, overheating, drought and supply chain disruption could affect their operations, costs and customers. Companies should identify vulnerabilities and improve business resilience to improve competitiveness.

While many SMEs view sustainability reporting as an administrative burden, but it can also be a competitive advantage. Businesses that understand and communicate their sustainability performance may be better placed to win contracts, retain customers and respond to growing expectations from larger businesses and consumers.

Gisby also highlights that risks to business models don’t just come from the impact of sustainability legislation on operations, but also recruitment and exit strategy. If sustainability isn’t a priority for a business, will people want to work for it?

Gisby accepts that risk assessment and management probably present the biggest challenges for SMEs. Data systems too are a source of consternation, although use of technology and automation is helping to streamline access to some data points already. Business should explore how to integrate sustainability data collection into existing processes, which will reduce duplication and improve decision-making.

The European Commission’s movement towards structured, standardised e-invoicing and real-time reporting paves the way to embed sustainability information into invoices.

“Look at your current business model, look at your risks, and ask yourself which ones are going to stop you growing. Which ones may cause your business to decline? It’s about judging whether your business model is fit for the future,” Gisby says.

SMEs can take small steps on sustainability

When it comes to embedding sustainability into your business model a proportionate approach is essential. SMEs should focus first on the sustainability issues most relevant to their business, customers and stakeholders, rather than attempting to address every possible environmental or social topic.

Gisby’s advice for SMEs is to start small. “Highlight the one or two most important area and work on those first. Build up the internal structures and knowledge base,” he says.

“Get staff on board because sustainability reporting can't just be the job of one or two people. The whole organisation needs to be empowered. Once you've had a success, pick the next most important area or some low hanging fruit.”

Despite retrenchment on sustainability reporting, Gisby remains optimistic about progress. “The last 10 years has seen huge impetus worldwide for sustainability. There was always going to be a counterattack, but it will become popular again. The heatwaves we’ve been experiencing this summer are helping to focus minds.”