Encouraged by the responses to last week's newsletter, we have prepared another example of a VSME-compliant report. This time, it concerns the fictional Duża Grupa S.A. and uses both the basic and comprehensive modules. However, I am not including it in today's newsletter. Both sample reports are available on the website. omnibus.materiality.com, and directly below this address.
Important note: please do not follow the example of these fictional reports. They do not represent good practices that are worth recommending. On the contrary, they are minimalist reports containing very little information. These are reports that would be prepared by someone who feels compelled to use the voluntary VSME.„I have no reporting obligation, but everyone (the bank, corporate clients, some stakeholders) is pestering me for this report. Okay, fine, give me the VSME, I'll do the report for you, but it will only contain what is really necessary.”
The report prepared using both modules is only twice as long as the one based solely on the basic module (3,500 characters compared to 1,700). It also took twice as long to prepare, but still well under one working day. And most importantly, it does not provide any truly relevant information about the company's impact on the environment and society, or how it manages that impact.
This example encapsulates the essence of the problem that the European Commission has created for us by proposing in the Omnibus to limit the information cap (value chain cap) to the content of a simplified standard for voluntary reporting. It simply cannot work.
But first things first:
- The Commission has proposed that companies subject to reporting requirements should not be allowed to obtain information from their smaller business partners (in simple terms: companies and groups with up to 1,000 employees) that goes beyond the scope of sustainability reporting standards for voluntary use.
- These „voluntary standards” will be issued by the Commission in a delegated regulation. We do not know what they will look like, but the Commission has announced that they will be based on the VSME draft.
- As can be seen in the examples, VSME-compliant reports can be minimalistic. In such reports, a large business partner will not find the information they need. Of course, in accordance with VSME, it is possible to prepare a rich, detailed report that comprehensively and reliably presents all important information on sustainable development. It is possible, but not necessary, because VSME, or rather the „voluntary standards” that will replace it in the future, will be just that—voluntary. And the minimum required by VSME is very modest. Large companies required to report will therefore be at the mercy of chance: some of their smaller business partners will report properly, but others will unfortunately report minimally.
- The scope of information requirements does not depend on the content of reports, but on the standard itself. A large business partner may therefore require smaller contractors to comply with VSME. Unfortunately, VSME requires very few elements. Almost all data points are voluntary or dependent on the circumstances in which the reporting company operates.
- The Commission has also proposed a lifeline for reporting companies. They will be able to require smaller business partners to provide information that goes beyond „voluntary standards” that are „commonly exchanged between entities in a given sector.” This wording contains two vague concepts. It is unclear what „commonly” exchanged information means and which sector is meant—the industry of the large partner asking for the information or the smaller partner being asked for it. Moreover, customs regarding what information is „commonly” exchanged will change over time. I believe that in practice, large companies required to report will be able to interpret this provision quite freely and request the information they need. Unfortunately, they will not find it in VSME-compliant reports, or at least many reports will lack this information.
- The Commission has given large reporting companies another lifeline. The entire value chain cap mechanism concerns the collection of information for reporting purposes. So if we want to obtain information for another purpose, no restrictions apply. And we may want to obtain information in order to determine how we are doing in achieving one or another goal of our strategy. Information may be obtained for management purposes, but not for reporting purposes.
- Finally, the Commission added a provision to the draft stating that the information limit does not apply to EU requirements concerning the due diligence process carried out by entities. If we need information from a smaller business partner because we are conducting due diligence (e.g., we are trying to minimize some negative impact or monitor the effectiveness of previously taken actions), we can ask about basically anything.
Are these simple rules? Oh no, they are extremely confusing. As a side note, I would like to add that previously, the value chain cap was so simple that companies did not have to deal with it at all; it was the task of the ESRS standard setters to write them in such a way that the information limit rules were already included in them.
Above all, the information limit will not work. It is based on „voluntary standards” (i.e., in practice, VSME), which require the disclosure of very little information. The completeness and usefulness of voluntary reports will not depend on the content of VSME, but on the goodwill and willingness of the companies using it. Realizing this, the Commission has surrounded the value chain cap with a series of exceptions so broad that, in practice, it has allowed the collection of any information from all smaller business partners.
Unfortunately, these are the effects of attempting to base the regime of obligations contained in legal regulations on sources of information that are voluntary in nature. We still have many months of negotiations between Parliament and the Council ahead of us. I hope that as a result, this legislative monstrosity proposed by the Commission in the Omnibus will be amended 😊
P.S. Despite the pessimistic tone of today's newsletter, I would like to make it clear that I am a big supporter of VSME. But VSME used for the purpose for which it was created. VSME was created as a tool for micro, small, and medium-sized companies that want to voluntarily familiarize themselves with selected, very basic elements of reporting certain information on sustainable development. With the help of VSME, you can create a decent report for a small business. But to do so, you need to go beyond what is required and enrich it with additional information.
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