Business and Family Observatory

Green standards

Domino effect, the sustainability challenge is for 200,000 companies

The European reporting obligation esg will involve 50,000 companies in Europe, but could affect four times as many Italian family SMEs

by Anna Migliorati

17 December 2024

3' min read

Key points

- Exg reporting obligation starts from the 2024 financial statements for large listed companies
- Value chain tracking will involve many more companies
- For small family businesses the alarm: rules and help are needed to untangle the new regulations

3' min read

(Il Sole 24 Ore Radiocor) - ESG is summed up in three letters, an acronym for Environmental, Social, Governance, the challenge of the coming years for European companies. Also in the balance sheets. A challenge that for the fabric of Italian family businesses, the majority of which are small and very small, will become a real test bench with effects that are still difficult to foresee, but that risk making the system go haywire without adequate support.

From the European Reporting Directive the effects on the supply chain

This is the alarm that comes from looking at the numbers and scenarios outlined by studies that try to outline the next steps. The European directive on sustainability reporting envisages, in fact, that annual reports will include not only traditional economic-financial information, but also information on ESG issues, as early as the 2024 financial statements for large listed companies. Then it will be the turn of listed SMEs and large unlisted companies to follow. It is estimated that around 50,000 companies in Europe will have to comply with the new disclosure parameters.

"But the obligation to provide information also on the value chain implies that in fact many more companies are involved in the reporting, directly or indirectly, than those strictly subject to the obligation," warns Annalisa Prencipe, who has been dealing with sustainability issues at Sda Bocconi for years. A sort of domino effect, in essence, since the largest companies will also have to 'guarantee' for their partners and suppliers. It is easy to understand that among these are the vast majority of Italian family businesses, even the smallest, linked by supply chain relationships with companies that will be called upon to fulfil the new obligations.

Up to 200,000 family SMEs involved

The test bench, therefore, is much more extensive. A figure that, in Italy, it is estimated could reach up to 200,000 companies, many of them small and very small, which, in some way, will have to account for how, and even more, how much they invest in environmental, social and governance issues. Actions that will have to be translated into numbers to be included in financial statements.

"Many companies still experience this as a mere compliance exercise. The costs of conversion to more sustainable business models and reporting are high, while the benefits are still unclear," says Annalisa Prencipe. "Companies, especially smaller ones, need to be helped and supported in this journey. We need funding, clear reporting models, new professional figures and widespread and generalised education on sustainability that makes people understand its value as well as its cost'.

From consumption to training, the numbers to track

For a small, often family-owned business, it means presenting the larger companies with which it collaborates with precise and quantified esg parameters. "Among the information to be reported are those on the impacts resulting from the activities of the company and its value chain, i.e. suppliers and customers, on the environment and society. In addition, the current and potential financial effects for the company resulting from environmental and social issues are to be estimated and reported. The information to be reported and the estimates to be made are voluminous, which is causing a lot of concern, especially among smaller companies,' Prencipe further explains.

Translated, this means tracking energy consumption and greenhouse gas emissions, pollutants emitted into the air, water and soil, water consumption, the weight of the circular economy. But, also, the exposure to risks from climate change, at least in the most important areas. Equally, and perhaps greater, will be the effect on the social environment. Even small and medium-sized companies will have to account for gender diversity in governance bodies and training activities for employees. Or provide data on employees who are entitled to or have taken family leave. The aim is hopefully positive effects, but these risk turning into complex bureaucratic procedures. As well as costly and linked to professionalism that a small company does not always have at its disposal.

The market already rewards those who choose sustainability

On the other hand, it is not just a question of rules. The market and consumers are already moving in this direction. Already today, to give just one example, green bonds issued by major Italian banks have reached almost EUR 8 billion, 74% more than the previous year.

"Several studies confirm that sustainability can be a source of opportunities if it is properly integrated into strategy, governance systems and corporate culture. But companies and markets must be helped in this process with clear rules, transparency and targeted incentives, as well as with generalised initiatives aimed at educating consumers, investors and stakeholders in general towards a greater culture of sustainability,' concludes Annalisa Prencipe. The risk is failing to keep up or being swept away by the domino effect.