Bridging the ESG data gap: Unleashing sustainable finance with the VSME standard

The EU’s Omnibus Package aims to simplify sustainability reporting but has also created a new challenge: a widening ESG data gap. Financial institutions still need reliable ESG information to guide investment and lending decisions, yet fewer companies are now required to report. For small and mid-sized enterprises (SMEs), the stakes are even higher: access to finance increasingly hinges on the ability to provide credible ESG data, as financial players require this information to assess risks and meet regulatory expectations. Despite concerns about feasibility, market expectations have not eased: investors, lenders and regulators still demand transparency. 

The Voluntary Sustainability Reporting Standard for SMEs (VSME) could become a bridge to meet these expectations. Officially adopted by the European Commission on 30 July 2025, VSME can be a proportionate, flexible framework to help smaller companies report ESG data in a way that is credible, comparable and capital-ready.

The Post-Omnibus Reality

In February 2025, the European Commission announced the Omnibus Simplification Package, a sweeping reform aimed at reducing the administrative burden of sustainability measurement and reporting. Among its most consequential changes: significantly raising the CSRD (Corporate Sustainability Reporting Directive) thresholds. While discussions on the thresholds are ongoing, the adjustment is expected to exempt at least 40,000 companies from mandatory ESG disclosure, shrinking the scope of CSRD by an estimated 80%.¹

Although many businesses welcome regulatory relief, the implications for financial institutions are far more complex. Banks, asset managers and insurers now face a growing ESG data gap. With fewer companies required to report, the volume of publicly available sustainability indicators is set to decline sharply just as demand for such data is accelerating.

This is not a theoretical concern

As Luxembourg is a major sustainable finance center, where financial market participants rely heavily on ESG data, the reduction in mandatory reporting is already raising red flags. At the same time, this data gap poses an additional hurdle for small and mid-sized companies, which already face significant challenges in accessing financing. Without the means to demonstrate strong ESG performance, these businesses may find it even harder to attract the investment and lending they need to grow and compete.

The problem is compounded by the fact that small and mid-sized enterprises, often embedding environmental and social protection as a core element of their business strategy, do not publicly report on their sustainability performance, focusing on operational efficiency and business results as priority.  This has long challenged financial institutions - even before Omnibus. 

A 2024 report on ESG Data by the Luxembourg Sustainable Finance Initiative² concluded that “the lack of uniformity in measurement methodologies hinders the accessibility of comparable ESG data,” especially for data sourced from SMEs. Without a standardized framework, financial institutions are left chasing fragmented questionnaires, unverifiable estimates, or costly third-party proxies.

And yet, the need for ESG transparency has become more urgent. Financial institutions must still assess their exposure to climate risk and demonstrate sustainability performance to regulators, shareholders and larger stakeholders. Investors continue to demand clarity on emissions, governance and social impact, regardless of whether a company is legally obliged to report. And it is precisely this gap that the VSME could help to fill.

VSME: Turning Voluntary Standard into Strategic Advantage

The VSME arrives at the right time. Developed by EFRAG at the request of the European Commission and officially adopted on 30 July 2025, VSME offers a practical, proportionate framework for small and mid-sized companies to disclose ESG data, even when doing so is not legally required. Intended as a strategic enabler, the framework goes beyond a pure reporting tool.

VSME is structured around two modules:

Basic Module: A minimum set of 11 disclosures covering governance, environmental impact (e.g., energy use, emissions) and workforce metrics (e.g., employee gender breakdown, health and safety, wage standards). It is designed to be accessible even for micro-enterprises.

Comprehensive Module: Additional nine disclosures for companies ready to go further, covering ESG strategy, climate targets, human rights policies, board diversity and sector-specific risks.

What are the benefits? 

For small and mid-sized companies, the benefits are tangible. VSME reduces the time and cost of ESG reporting by replacing ad hoc questionnaires received from various stakeholders with a single, standardized format. It helps companies present a credible sustainability profile to banks, investors and corporate clients, covering major sustainability indicators such as emissions, energy, health & safety, diversity, and cases of ethical conduct violations. This has the potential for opening doors to green loans, investment opportunities and long-term partnerships. 

In a market where ESG credentials increasingly influence access to capital, VSME can become a differentiator. Since VSME is designed to be conceptually aligned with the ESRS used by large companies, it enables like-for-like comparisons across portfolios. Financial market participants can benchmark emissions, safety performance, or governance indicators across SME clients, improving transparency and reducing reliance on costly third-party estimates.

VSME also strengthens supply chain visibility. Large companies subject to CSRD often rely on small and mid-sized companies for key inputs. With VSME, suppliers can provide structured ESG data that supports key initiatives such as Scope 3 emissions tracking and value-chain human rights due diligence. This not only helps the SME but also enhances the ESG profile of the larger company, creating a ripple effect of transparency.

To support adoption, EFRAG has released a digital template to help companies with the practical implementation of the Standard. The template guides reporting companies through the disclosures with auto-calculations and consistency checks. Going beyond this, a digital tool allows companies to export its data in a machine-readable XBRL format that will enable financial institutions to ingest VSME reports directly into their systems, enabling automation and scalability.

As VSME opens the door to greater transparency and opportunity, the next challenge lies in putting these principles into practice. The real measure of success will be how companies and financial institutions translate the promise of the Standard into effective, actionable processes, including digitalized ways for data collection, smart interpretation of the obtained results and potential controversies, engagement for sustainability performance improvement, upskilling and rising awareness on sustainability risks and opportunities.

Start Small, Build Smart

With the VSME Standard now available, the focus shifts from design to implementation. The question is no longer whether small and mid-sized companies should report ESG data, but how they can do so in a way that is proportionate and aligned with market expectations. As the European Commission itself has acknowledged, reduced reporting requirements do not reduce stakeholder expectations. 

For small and mid-sized companies, the message is clear: start with what is feasible. The modular approach of VSME gives adopters the flexibility to start small and scale up, improving data quality and governance year by year. The Basic Module covers the minimum information every company should be tracking, for instance topics like energy use, workforce composition and governance practices. The Comprehensive Module would require more technical expertise and knowledge of sustainability dependencies, for example mapping of climate hazards and transition risks that the company can be subject to, or inventory of Scope 3 emissions across the company’s value chain. 

The VSME implementation should be approached in a structured way: identify the existing gaps vs. requirements, focus on “quick wins” and set a roadmap for improvement in policies, targets, action plans, data quality and automation. 

For financial institutions, now is the time to act as enablers. By encouraging clients and suppliers to adopt VSME, financial institutions can play a significant role in supporting the emergence of this common reporting language. Some banks are already mapping ESG readiness across their portfolios - VSME has the potential to be a cornerstone of that engagement. 

The real value of VSME will be achieved through commitment by companies that see sustainability as a lever for innovation, trust and long-term growth. In today’s world, transparency is essential, and VSME empowers companies to invest in their credibility, resilience and competitiveness. Starting small does not mean thinking small: it means building smart, laying the groundwork for future ESG maturity, one disclosure at a time.