In the updated version of the EU's voluntary sustainability reporting standard (VSME), which is specifically tailored to non-listed small and medium-sized enterprises (SMEs), the double materiality analysis (DMA) has been removed. The VSME was revised following a public consultation in order to simplify the reporting process for SMEs and make it more accessible. The double materiality approach was removed from the framework due to its complexity and the high requirements for smaller companies.

Despite this decision, however, we see the DMA as an essential first step in working strategically with sustainability. In this article, we would like to explain why we believe it is worthwhile for SMEs to carry out a DMA and how it can be designed in a simple and practicable way.

Voluntary reporting framework for SMEs

The VSME is a simplified reporting framework designed specifically for small and medium-sized companies that are not listed on the stock exchange. The aim is to provide these companies with a practicable tool for reporting on their sustainability activities without overburdening them with extensive and expensive processes.

Double materiality removed from the VSME

The requirement to assess and report on sustainability issues from a dual materiality perspective was recently removed from the VSME following a public consultation on the topic. Opinions on dual materiality differed, but critical voices emphasized that a DMA for SMEs is too complex, difficult and costly. This prompted EFRAG - the body responsible for developing the EU's sustainability reporting standards - to remove dual materiality from the voluntary standard. However, this might not be the last time we hear about double materiality in the VSME. In future versions of the VSME, EFRAG is considering introducing a list of sustainability topics tailored for SMEs, against which SMEs must disclose their material topics.

For those unfamiliar with the concept of dual materiality: It essentially involves companies looking at both how their activities impact people and the planet and how sustainability issues can affect their financial stability. The result of a dual materiality assessment is a list of sustainability issues that are material to the company as they either have a negative/positive impact on sustainability (impact materiality) or represent financial risks/opportunities (financial materiality).

Four reasons why dual materiality makes sense for SMEs

At Five Glaciers Consulting, we specialize in dual materiality assessments and clearly see that it is a valuable process for companies of all sizes. Are you an SME and not yet convinced of the benefits of a DMA? Here are four good reasons:

1. understanding the impact of sustainability

The double materiality assessment is an instructive process. It promotes a solid and holistic understanding of a company's material impact on the environment, people and society, while highlighting important financial risks that should be considered. It challenges existing assumptions and helps companies to better recognize their true impact.

2. sets a clear direction for sustainability efforts

SMEs often have fewer resources and a DMA helps them to focus their efforts. When a company knows and agrees on its material sustainability issues, it becomes easier to develop a targeted sustainability strategy and implement the right measures. At the same time, it makes sustainability reporting meaningful: instead of reporting for the sake of reporting, the company reports on metrics and topics that are truly relevant to its current and future business activities.

3. can be carried out in a simplified manner

A double materiality assessment does not have to be highly complex. We admit that it is not a piece of cake, but it can be done in a simplified and time-saving way. One way is to reduce the number of topics assessed from over 90 CSRD-compliant topics to around 15 topics by covering overarching areas such as climate change, pollution, biodiversity, workers' rights and business practices. Feedback from the public consultation has shown that a clear step-by-step guide to materiality analysis can reduce complexity and save time for SMEs - we agree.

4. identifies financial risks and new opportunities

Finally, a dual materiality assessment uncovers financial risks and opportunities associated with a company's negative impacts. For example, the analysis could reveal the use of a scarce raw material that could be more expensive to procure in the future. It could also show that the water bill is likely to increase significantly in five years' time because one of the production sites is located in a region where water is scarce. By identifying such risks, SMEs can plan ahead and take action to future-proof their business. At the same time, the analysis can also highlight financial opportunities that SMEs can take advantage of by developing more sustainable products and services that will be in demand in the future.

Our conclusion

Overall, we strongly encourage SMEs to use dual materiality to take a focused, strategic and effective approach to sustainability that strengthens business resilience. Unfortunately, it has not been included in the current version of the VSME, but we await its possible return in future updates.

If you have any questions about dual materiality assessments and would like to know how they can be usefully tailored to SMEs, we at Five Glaciers Consulting will be happy to help.