On July 30, 2025, the European Commission adopted a Recommendation on the Voluntary Sustainability Reporting Standard for SMEs (“VSME”). Although the VSME is a recommendation rather than a legally binding Delegated Act, it marks a significant turning point in the EU’s sustainability policy strategy. Until now, the mandatory expansion of ESG disclosure obligations had largely centered on large companies, often imposing an excessive burden on SMEs. The VSME presents a practical alternative that takes into account the actual capacities and circumstances of smaller businesses.
The VSME is not merely a simplified version of existing sustainability reporting standards. Rather, it has been designed as a practical solution that reflects the realities faced by SMEs while still enabling them to provide key information efficiently in response to demands arising within global value chains.
1. Background to the Adoption of the VSME
The European Financial Reporting Advisory Group (“EFRAG”) had been preparing, as part of the detailed framework under the 1st Set ESRS and 2nd Set ESRS of the European Sustainability Reporting Standards (“ESRS”), three categories of standards: (i) SME-focused standards, including the VSME and the Sustainability Reporting Standard for Listed SMEs (“LSME”); (ii) sector-specific standards; and (iii) standards for non-EU companies (“NESRS”).
However, Omnibus I, announced on February 26, 2025, substantially altered EFRAG’s plans relating to the 2nd Set ESRS. The project to establish sector-specific standards was discontinued, while the standards for non-EU companies had already been postponed by two years, from 2024 to 2026. In addition, the scope of the CSRD was significantly narrowed to companies with more than 1,000 employees, thereby excluding approximately 80% of companies from mandatory reporting obligations.
Against this backdrop of regulatory change, the role of the VSME has become even more important. Following the implementation of Omnibus I, the CSRD’s application was narrowed to companies with more than 1,000 employees, which means that most listed SMEs were also excluded from mandatory reporting. As a result, the scope of the LSME was drastically reduced, and the VSME has effectively emerged as the core sustainability reporting tool for all SMEs.
In particular, Omnibus I introduced a “Value Chain Cap,” which sets a ceiling on the sustainability information that large companies may request from suppliers for the purpose of preparing CSRD reports. This mechanism is intended to protect SMEs from excessive data demands while also creating a standardized framework for information provision. The VSME is designed to serve precisely this function.
2. Future Outlook and Significance
Although the VSME currently exists only as a Recommendation, the European Commission has made it clear that, as part of Omnibus I, it intends to elevate the VSME into a Delegated Act. The final Delegated Act is expected to be adopted in 2026, and the current phase is focused on practical testing and stakeholder consultation. The Commission has expressly stated that “the content of any future voluntary reporting standard may differ from the current VSME Recommendation,” indicating that feedback gathered during this process is likely to be reflected in the final Delegated Act. Once the Value Chain Cap is formally enacted together with the final approval of Omnibus I, the VSME may function as a standardized reporting framework.
At the global level, the VSME is also likely to influence sustainability reporting approaches for SMEs outside the EU. At present, most countries are adopting either a phased application of ISSB standards or expanded support programs. In this context, a simplified SME-specific framework such as the VSME presents a new alternative model. Accordingly, the VSME has the potential to become not merely an internal EU standard, but also a leading global model for SME sustainability reporting.
Ultimately, the success of the VSME will depend on market acceptance. The VSME ecosystem can only be fully established if large companies actually adopt it as the benchmark for requesting supplier information, if financial institutions use VSME reports in assessing SME loans, and if SMEs voluntarily participate. To help build this virtuous cycle, the EU is preparing a range of support measures.
