When adopting the CSRD directive, EU legislators were aware that companies would encounter difficulties in obtaining certain data from their business partners within value chains. In addition, many of the business partners from whom we should obtain information and data are small and medium-sized enterprises, which should not be burdened with excessive obligations, as they may simply not be able to cope. For this reason, the CSRD includes in Article 29b (on ESRS standards) paragraph 4, which specifies the so-called LSME information cap.
The rule is as follows: „Sustainability reporting standards do not specify disclosure requirements that would require entities to obtain information from small and medium-sized entities in their value chain that goes beyond the information disclosed in accordance with sustainability reporting standards for small and medium-sized entities referred to in Article 29c.” (Article 29c specifies these standards for small and medium-sized companies listed on a regulated market*).
Let's translate this somewhat complicated sentence: The European Commission (as the body issuing ESRS standards) and EFRAG (as the author of draft standards) are to write standards in such a way that they do not force large companies to obtain more information and data from small and medium-sized enterprises than if those small and medium-sized enterprises had to report themselves using the „simplified” standards prepared for them (i.e., the LSME standard). The provision of Article 19b(4) is therefore addressed to the creators of standards (the EC and EFRAG) and sets a ceiling on the information required to be obtained from the value chain.
It is worth remembering that the LSME information cap is not directed at companies themselves. It does not in any way stipulate that large enterprises are not allowed to ask small and medium-sized business partners for certain information and data. If I want, I can ask my business partners to provide information about the shoe sizes of their CEOs. And these business partners can either provide me with this information (because, for example, they want to maintain good relations with me) or refuse to do so (e.g., arguing that it is very difficult for them to obtain this information and that it serves no purpose at all).
The LSME information cap does not entitle SMEs to refuse to disclose any information to a large business partner. It can, of course, be used as an argument in discussions, but it does not in itself create any rights.
Finally, the LSME information cap is not a „stick” for large companies to use against their small and medium-sized business partners. You cannot approach your smaller business partners with a demand that „under the CSRD directive, you are required to provide me with all information and data covered by the LSME standard.” The directive creates reporting obligations only for a select few SMEs – those that are listed on a regulated market. The rest, i.e., the vast majority of small and medium-sized enterprises, are not subject to reporting obligations, and it is solely up to our relationship with them whether they provide us with the information and data we need for our reporting.
Collecting high-quality data from the value chain is a major challenge, which is why it is accompanied by a number of transitional provisions and facilitations in the first years of the CSRD's application. The LSME information cap is one of the mechanisms designed to facilitate this process, but it works by defining the scope of information standards rather than the obligations and rights of various types of entities. The quality and completeness of the data and information we obtain will depend primarily on the quality of the relationships we have with our business partners.
* Of course, this refers not only to small and medium-sized enterprises listed on the regulated market, but also to small and non-complex credit institutions, internal insurance companies, and internal reinsurance companies. However, repeating this long list in several places would reduce the readability of the text, which is why I am using simplified terminology.
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