ESG Reporting from 2026: What SMEs Need to Know Now

Sustainability Becomes Mandatory

The European Corporate Sustainability Reporting Directive (CSRD) marks a paradigm shift in corporate reporting. What previously applied only to large capital market-oriented companies will be gradually extended to large parts of the SME sector. From the 2026 financial year onwards, many medium-sized companies will also be required to produce a comprehensive sustainability report in accordance with the European Sustainability Reporting Standards (ESRS).

For German SMEs -- the backbone of the economy -- this represents a significant challenge. But those who start early can not only meet the new requirements but also leverage them as a strategic advantage. This article provides a comprehensive overview of the regulatory requirements and shows practical steps for preparation.

Who Is Affected and When?

The CSRD Phase-In Plan

The CSRD is being introduced in several stages:

• From financial year 2024 (report 2025): Large public interest entities with more than 500 employees that were already subject to the Non-Financial Reporting Directive (NFRD).
• From financial year 2025 (report 2026): All large companies meeting at least two of three criteria: more than 250 employees, more than 50 million euros in revenue, more than 25 million euros in total assets.
• From financial year 2026 (report 2027): Capital market-oriented SMEs, small and non-complex credit institutions and captive insurance undertakings. An opt-out option is available for this group until 2028.
• From financial year 2028 (report 2029): Non-EU companies with significant activities in the EU.

Do Not Underestimate Indirect Impact

Even if your company is not directly subject to reporting obligations, you will feel the effects. Large companies are required to report on their entire value chain. As a supplier or service provider, you will therefore increasingly face data requests from your business partners. Banks are already taking ESG criteria into account in their lending decisions.

The European Sustainability Reporting Standards (ESRS)

Structure of the Standards

The ESRS are divided into three areas:

Cross-cutting standards:

• ESRS 1: General requirements, fundamental principles and reporting architecture
• ESRS 2: General disclosures that are mandatory for all companies, including governance, strategy, risk management and metrics

Topical standards -- Environment (E):

• ESRS E1: Climate change (Scope 1, 2 and 3 emissions, climate targets, transition plan)
• ESRS E2: Pollution
• ESRS E3: Water and marine resources
• ESRS E4: Biodiversity and ecosystems
• ESRS E5: Resource use and circular economy

Topical standards -- Social (S):

• ESRS S1: Own workforce
• ESRS S2: Workers in the value chain
• ESRS S3: Affected communities
• ESRS S4: Consumers and end-users

Topical standards -- Governance (G):

• ESRS G1: Business conduct (business ethics, anti-corruption, political engagement)

The Materiality Principle as the Key

Not every standard must be fully reported by every company. The ESRS follow the double materiality approach. A sustainability topic must be reported if it is either:

• financially material: The topic has or may have material financial effects on the company (outside-in perspective), or
• impact material: The company has or may have material impacts on people or the environment (inside-out perspective).

The materiality assessment is the decisive first step and determines the scope of your reporting.

Conducting the Double Materiality Assessment

A Step-by-Step Approach

Conducting a double materiality assessment requires a structured approach:

1. Identify stakeholders: Determine your relevant stakeholder groups, including employees, customers, suppliers, investors, local communities and regulators.
2. Screen topics: Systematically review all ESRS topics and assess their potential relevance for your company.
3. Assess impacts: Analyse the actual and potential impacts of your company on the environment and society for each topic.
4. Assess financial materiality: Evaluate the risks and opportunities arising from sustainability topics for your financial position.
5. Set thresholds and document: Transparently set out which topics you classify as material and why.

Stakeholder Engagement

The ESRS expect appropriate engagement with your stakeholders. This can be achieved through surveys, workshops, interviews or the evaluation of existing communication channels. Document the process carefully, as supervisory authorities and auditors will assess the traceability.

Collecting and Managing ESG Data

The Data Challenge

For many SMEs, collecting ESG data is the greatest operational challenge. While financial data has been systematically captured for decades, established processes are frequently lacking for sustainability metrics:

• Environmental data: CO2 emissions (particularly Scope 3), energy consumption, water usage, waste volumes and recycling rates must be systematically recorded.
• Social data: Information on working conditions, diversity, training, occupational health and safety and supply chain standards must be documented.
• Governance data: Disclosures on remuneration policy, anti-corruption measures and sustainability competencies in governing bodies are required.

Software Solutions for ESG Reporting

The market for ESG reporting software is growing dynamically. Established solutions in the German market include:

• Lucanet ESG: Integrates seamlessly into existing financial reporting and is particularly suitable for companies already using Lucanet for consolidation.
• SAP Sustainability Control Tower: A natural choice for companies with an SAP environment.
• Sphera, Ecovadis, Watershed: Specialised platforms with varying focuses.

For smaller SMEs, structured Excel solutions may serve as an entry point, to be gradually replaced by specialised software.

Integration with Existing Reporting

Connecting ESRS and HGB/IFRS

The sustainability report will in future form part of the management report and thus be integrated into the annual report. This requires close alignment between financial and sustainability reporting:

• Ensure consistency: Financial disclosures in the sustainability report must be consistent with the annual financial statements.
• Synchronise processes: The preparation of the sustainability report must be integrated into the existing financial close process.
• XBRL tagging: Sustainability reporting must be prepared in the European Single Electronic Format (ESEF) and tagged with XBRL.

Connection to the EU Taxonomy

The EU Taxonomy Regulation complements the CSRD and defines which economic activities qualify as environmentally sustainable. Reporting companies must disclose the proportion of their revenues, capital expenditure (CapEx) and operating expenditure (OpEx) that is taxonomy-aligned.

Assurance Obligation

From Limited to Reasonable Assurance

The CSRD introduces a mandatory assurance requirement for sustainability reports. Initially, limited assurance is required, comparable to a review engagement. From approximately 2028, the standard is expected to be raised to reasonable assurance, equivalent to a full audit.

For your company, this means:

• Audit-proof documentation: All ESG data must be traceable and verifiable.
• Internal controls: Establish internal control processes for ESG data, analogous to your financial processes.
• Early coordination: Speak with your auditor in good time about the requirements and expectations.

Practical Steps for Preparation

Your Roadmap for the Next 12 Months

1. Clarify applicability: Determine whether and from when your company is directly or indirectly subject to reporting obligations.
2. Assemble a project team: Appoint a responsible person and assemble a cross-functional team spanning finance, controlling, HR, procurement and production.
3. Conduct a materiality assessment: This is the most important first step and determines the scope of your reporting.
4. Prepare a gap analysis: Identify the gaps between your current data inventory and the ESRS requirements.
5. Build data processes: Implement systematic collection processes for the identified ESG metrics.
6. Prepare a pilot report: Produce a voluntary trial report to identify gaps and test processes.

Conclusion: Start Early, Think Strategically

The CSRD requirements are extensive but manageable if you proceed in a structured manner. View sustainability reporting not merely as a regulatory obligation but as an opportunity to sharpen your sustainability strategy and position yourself as a responsible company vis-a-vis customers, investors and employees.

At compleneo, we provide comprehensive support to SMEs in preparing for the CSRD reporting obligations. From the materiality assessment through the implementation of data processes to the preparation of your first sustainability report, we stand by your side as an experienced partner.