Exploring the sustainability reporting practices: An Evaluation of Listed SME Companies' Readiness for ESRS-compliant Materiality Analyses

Abstract

The European Financial Reporting Advisory Group (EFRAG) must consider the proportionality principle before drafting the European Sustainability Reporting Standards for Listed Small and Medium Sized Enterprises (LSME). That is, whether once the standards are adhered by SMEs, the SMEs will be able to provide information to large companies of sufficient relevance for these latter to report on SMEs when these form part of the larger company's value chain. Research on sustainability reporting has often focused on large companies, whereas there is a lack of knowledge regarding disclosure practices in SMEs, in particular their value chain. This paper addresses this gap, aiming to identify the current voluntary sustainability reporting practices of Spanish LSMEs, to cluster them and analyse their determinants. This paper contributes to a better understanding of the extent to which SMEs are ready for the adoption of the new European regulations and to what degree they require institutional support and engagement from stakeholders. Based on hand-collected data, a voluntary sustainability disclosure index (VSDI) was created, and a cluster analysis was done. The results reveal diverse categories of sustainability reporting depending on the customer business model, the accounting rules adopted for financial reporting, size and profitability, among other factors. The paper offers meaningful insights on how essential the involvement of preparers, stakeholders and standard-setters is in supporting LSMEs in the adoption of mandatory standards in the future.