The European Union’s New Sustainability Regulations for Small and Medium Businesses: Challenges and Opportunities

Small and medium businesses (SMBs) are “the backbone of Europe’s economy,” according to the European Commission, accounting for fully 99% of all EU businesses and half the GDP. And because of their track record of innovation and adaptability, a lot of focus is being placed on SMBs to help meet environmental goals.

A new law is coming into effect that requires thousands of companies in the European Union to disclose their environmental, social, and governance (ESG) data. Part of the EU’s drive to meet Paris Agreement thresholds by 2050, the law is called the Corporate Sustainability Reporting Directive (CSRD). Previously, only businesses with more than 500 employees had to report on ESG. Starting in fiscal year 2023, however, the new directive will be phased in and ultimately extend to companies with more than 250 employees, or a balance sheet total of €20M and/or a net turnover of €40M. This will add about 49,000 SMBs to the list of those that must report on their environmental impact, according to a report by the Brookings Institute.

When I speak with Amazon Web Services customers, these rules often come as a shock. In a recent speech, European Commissioner McGuinness said the CSRD aims to put “sustainability reporting on an equal footing with financial reporting.” The result could be heavier workloads for SMBs as they navigate regulations throughout the value chain. But this emphasis on transparency also opens up exciting opportunities for SMBs to gain market share in a rapidly growing green economy.

Meeting the challenges of new sustainability reporting standards

SMBs often lack the staffing and executive positions—such as a chief sustainability officer— that larger companies have to meet reporting standards. Meanwhile, the new regulations are complex. SMBs need to know their reporting obligations for various parts of the supply chain, for example. They must disclose their sustainability impact on people and the environment and also how sustainability issues affect their business. While the CSRD aims to clarify which kinds of data companies must disclose, more work needs to be done to standardize and simplify the regulations for SMBs. The current reporting frameworks involve more than 5,000 key performance indicators, according to ESG Investor. The Global Reporting Initiative’s universal standards are a starting point for all companies, followed by industry-specific standards for oil and gas and fisheries, for example. SMBs will also need to report on high-risk environmental impact “most relevant to an organization’s activities,” such as climate change, emissions, or water usage. Given the competing demands of reporting data and running a business, SMBs could struggle with sustainability disclosure.

Finding opportunities in ESG

On the other hand, being able to demonstrate favorable environmental impact data gives SMBs access to emerging market opportunities driven by the transition away from a carbon-intensive economy. The value of these emerging market opportunities has been projected to reach €10T per year by 2030. And European companies have another, powerful incentive to embrace sustainability reporting. For SMBs that disclose the required sustainability data, the EU is promising about €1B in funding annually to help SMBs develop reporting infrastructure. Nimble SMBs could outpace their larger, less mobile—and more carbon-intensive—competitors, gaining a first-mover advantage in the rapidly changing ESG landscape. Green infrastructure, government programs, and investor and consumer sentiment will reward them for their sustainability efforts.

Working with AWS to address sustainability goals

Just moving workloads to the AWS Cloud could be part of your action plan. Instead of running your own servers, you’d work with ours. Amazon is on track for net zero by 2040. We prioritize sustainability, as shown by the Amazon Sustainability Data Initiative, Climate Pledge Fund, Right Now Climate Fund, and renewable energy use, for example. Last year, AWS built a Sustainability Pillar into the Well-Architected Framework. Because they can tap into shared resources and optimize usage and efficiency, cloud providers such as AWS can be more energy efficient than on-premises alternatives. In fact, in 2021, AWS saw savings of up to 80 percent of customers’ associated energy usage. This creates immediate sustainability benefits for your company. Technologies already in use, such as traceable data, business analytics, and AI, can help you expand your business while adapting to the new world of sustainability regulation.

One tangible business opportunity has already emerged. The CSRD allows companies other than the usual auditors to meet due diligence requirements for reported sustainability data. Moreover, companies will exchange standardized sustainability-linked data throughout their supply chain. This creates a market for independent sustainability data service providers. AWS Partner Network (APN) consultants such as BTC Business Technology Consulting AG are ready to take on this important task. An IT service provider for the public and private sectors, the BTC Group maintains strong sustainability practices. Learning these best practices could help SMBs set themselves apart from the competition. As BTC Chief Sustainability Officer Heinrich Tschochohei puts it, “This will allow SMB customers to expose their environmental and social impact to attract and retain customers. It also assists in maintaining healthy business profitability and growth.”

Next steps

As the world confronts sustainability issues, SMBs could play a crucial role, based on their adaptability and openness to innovation. Burdensome as CSRD annual reports may seem, SMBs have been allotted some time to phase it in. Through cloud-based services, tools, and innovations, AWS will be helping SMBs assess and report on ESG throughout the value chain. Meanwhile, APN consultants such as BTC are modeling successful approaches for others. As you map out your company’s steps forward through the complex new regulations, AWS and its experienced business partners could make the journey more manageable. Contact us to speak with an SMB expert or continue to learn more about the value of cloud.