By Florian Hoos, Giulia Neri-Castracane, Sara Ratti and Rebecca Elliott Carballo
European SMEs’ relief following the adoption of the EU’s Omnibus package may be misplaced. While their direct sustainability reporting obligations narrow, indirect obligations, contractual requirements, and greenwashing risks intensify. The truth is that there remain pressing reaons for SMEs to build sustainability data infrastructure, and do it now.
Sustainability-related due diligence and reporting are facing strong resistance. ESG (environmental, social, and governance) regulations are being challenged in the US and elsewhere. The European Union – for a long time the poster child of sustainability – is watering down its once-ambitious set of sustainability-related regulations, starting with the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), through the Omnibus packages.1 In Switzerland, SIX Swiss Exchange has suspended its opt-in sustainability reporting regime as of 2026.
Since much of the business case for sustainability has been built on regulatory pressure to report on ESG topics, many are questioning whether sustainability will remain relevant in business at all, given the drastic reduction of mandatory reporting. And many presume that if it is relevant at all, then it will probably only affect big multinational firms.2 This perception is reinforced by the narrower scope of CSRD and CSDDD, which will from 2027 apply only to companies with more than 1,000 employees and a net turnover exceeding €450 million. These thresholds are far removed from small and medium-sized enterprises (SMEs), which form the majority of companies in the EU. The result is a dangerous reflex emerging among SME leaders: the belief that sustainability will no longer affect them in the foreseeable future. This assumption is wrong – and potentially costly.
For years, companies approached sustainability primarily through a compliance lens, with SMEs in particular oscillating between preparing for potential sustainability reporting requirements and abandoning the effort, depending on the latest regulatory draft. Now, with the latest votes on the Omnibus package and particularly the developments in the US, many SMEs feel relieved that they have been let off the hook entirely, as sustainability reporting will be voluntary, if at all applicable to them.
However, this narrow focus on sustainability reporting obligations misses the bigger picture. The backlash is a reaction to the volume of data that companies, particularly SMEs, would have had to report, not to the relevance of sustainability itself, though the two are often conflated. SMEs are in the sustainability game whether they like it or not. We outline four reasons why sustainability remains critical for SMEs, demonstrating why companies with foresight will view it through a competitive advantage lens rather than treating it as optional compliance theater. SMEs can use these four reasons as assessment criteria before making any decisions on their sustainability strategy, data measurement, and reporting.
Four reasons SMEs can’t afford to ignore sustainability data
1. Indirect legal obligations: compliance beyond borders
At first glance, SMEs – which constitute approximately 99 per cent of European, but also US and Chinese businesses – may assume that sustainability reporting is beyond their scope. Most employ fewer than 50 people. Many have never given serious thought to sustainability reporting or have abandoned it after the adoption of the Omnibus package by the European Parliament on 13 November 2025. And technically, they’re right, they’re outside the direct scope of CSRD. So they can relax, right?
Wrong. SMEs face indirect legal obligations arising from their position within the value chain of directly regulated companies. For every large company directly obligated to report, there are many smaller companies indirectly pulled into their reporting web. This isn’t bureaucratic overreach; it’s causal inevitability.
SMEs face indirect legal obligations arising from their position within the value chain of directly regulated companies.
These indirect obligations emerge through two primary mechanisms: as a subsidiary of a regulated parent company or as a co-contractor (a business partner or value-chain actor). Either way, the data must be collected, verified, and disclosed. And that data can only come from one place: the companies actually operating in that value chain. Even though the revised CSRD aims to offer greater flexibility to companies, the entire upstream value chain remains in scope. While this flexibility is intended to reduce the trickle-down effect of information requests on smaller business partners, these partners are nonetheless still implicated and must therefore be prepared to provide essential information.3
Consider the following illustrative example in the coffee industry. To meet regulatory requirements and maintain access to key markets, multinational coffee-machine manufacturers, such as De’Longhi, increasingly require verifiable sustainability information from agricultural and industrial suppliers. And the cascade effect begins. For coffee beans sourced in Latin America and Africa, this means that cooperatives and traders are requested to document the management conditions of environmental and social issues. What was once informal disclosure is now formalized through supplier codes of conduct, due-diligence surveys, and external certification requirements. Coffee suppliers that can demonstrate integrity and transparency about, for instance, labor conditions, deforestation risks, and water and pesticide use retain a preferred-supplier status.
The same applies to industrial suppliers of metals used in coffee machines, such as aluminum, steel, and electronic components. Human rights and duty of care across mining, smelting, and refining are key obligations for sourcing contracts. Suppliers must prove labor rights risks, sourcing regions, audit results, and compliance with international standards relating to forced and child labor. The requirements continue to cascade upstream, affecting smaller subcontractors and raw material providers across the supply chain.
In practice, sustainability data has become a gatekeeping mechanism and, rather than direct regulations, these indirect obligations operate through market pressure, carrying similar practical consequences for large and small companies alike. Businesses unable or unwilling to provide the required sustainability data risk exclusion from major supply chains, reduced competitiveness, and ultimately, loss of revenue.
2. Sustainability as a contractual duty
As a consequence of the indirect obligations described above – or of the trickle-down effects generated by the adherence of major actors to the UN Guiding Principles on Business and Human Rights (UNGPs), OECD principles, ILO frameworks, the UN Global Compact, sustainability labels, or sectoral initiatives such as the Responsible Jewellery Council or the UN Alliance for Sustainable Fashion – an increasing number of companies are now formalizing their sustainability expectations in legally binding contractual terms. For large market players the integrity and transparency of value-chain activities have become non-negotiable. Regulatory step-backs do little to change this reality; the reputational, legal, and commercial risks arising from illicit or irresponsible practices remain substantial. Courts have begun issuing landmark judgments that recognize businesses’ responsibilities regarding sustainability, in particular the duty to reduce greenhouse-gas emissions, even in the absence of binding national legislation.4
What once appeared as voluntary or “nice-to-have” expectations is rapidly formalizing as a baseline requirement for doing business. In sectors such as fashion, the shift is already well advanced. Fashion giants, such as Kering, already embed Code of Ethics, Human Rights Policy, and detailed corporate standards into supplier agreements, making compliance with sustainability, human rights, traceability, and animal-welfare criteria contractually enforceable. Suppliers must use third-party-verified raw materials, ensure full traceability, avoid high-risk sourcing regions, and adhere to rigorous social and labor standards. Regular audits, risk mapping analysis, and performance reviews assess alignment with these expectations. Responsible, traceable, and verifiable products and services are no longer aspirations but operational and contractual obligations.
For SMEs, this trend carries critical commercial implications. Investing in credible sustainability measurement and reporting is increasingly essential to safeguard key business relationships. SMEs that fail to adapt risk being left out of major value chains and associated opportunities.
3. A must-have to unlock new business frontiers
Beyond avoiding supply chain exclusion, sustainability data is increasingly a prerequisite for accessing new opportunities. Companies that can demonstrate credible environmental and social performance gain advantages in public tenders, client acquisition, talent recruitment, and financing negotiations.
As procurement practices evolve across Europe, many public buyers now assess bids under the “most advantageous tender” principle, which weighs environmental and social performance alongside price. SMEs able to document sustainability progress therefore stand to strengthen their positioning in competitive tenders. Beyond procurement, robust reporting on climate and biodiversity risks enhances credibility with clients, talent, and the expanding pool of investors. Financial institutions, guided by supervisory expectations such as the Swiss Financial Market Supervisory Authority’s (FINMA) circular on nature-related financial risks, increasingly integrate environmental risk exposure into lending terms, making transparent SMEs more likely to secure favorable financing.
Sustainability measurement, in this context, opens doors. It supports access to new markets, strengthens commercial differentiation, reduces the cost of capital, and improves an SME’s ability to attract both customers and talent.
4. Staying competitive through strengthening resilience and value creation
A genuine commitment to sustainability is essential to remain competitive. Superficial marketing claims are increasingly scrutinized, as both regulations and industry self-regulations emerge to combat greenwashing. For SMEs with limited resources, the stakes are particularly high: accusations of greenwashing can lead to reputational damage, regulatory investigations, competitor lawsuits, and NGO campaigns. The consequences are tangible and growing. If most high-profile legal actions so far involve large multinational companies (such as Adidas’ vague climate claims or KLM’s “Fly Responsibly” campaign), there are still notable enforcement actions and legal complaints involving smaller businesses. The sports-shoe company On (officially On AG), known for its performance footwear, has been accused of greenwashing in relation to a recycling / circular-economy program. Even though the claim was dismissed, the topic was on the front page of major Swiss journals in 2025. In 2022, Evergreens (UK) Ltd was found by the Advertising Standards Authority (ASA) to have misled consumers with unsubstantiated “eco-friendly” and air-purifying claims about its artificial grass, leading to the ads being banned and underscoring that SMEs must provide robust, product-specific, and lifecycle-based evidence for any absolute environmental claims. These cases demonstrate a new reality: without supporting data, sustainability statements can become legal liabilities.
This context urgently calls for a strategic materiality approach. SMEs cannot afford to spread resources too thinly or attempt to be good at everything, which only spreads limited resources across dozens of sustainability topics whilst making meaningful progress on none. Strategic materiality requires asking two critical questions: which sustainability topics are most essential to the business model’s success? And where do the company’s business activities have the greatest impact on sustainability issues?
Answering these two questions turns sustainability measurement from a costly burden into growth infrastructure – not by doing everything, but by doing the most important things, concentrating on what truly drives business value creation and / or business resilience and, in turn, secures the company’s long-term success.
Conclusion: Compliance trap versus competitive edge
Here’s the irony: SMEs celebrating their escape from mandatory sustainability reporting may be making the costliest mistake of all. While regulatory obligations have narrowed, the four drivers outlined above – indirect legal obligations, contractual requirements, market access, and greenwashing risk – haven’t disappeared. They’ve intensified. The difference is that large companies now have regulatory mandates forcing them to build sustainability infrastructure, while SMEs face the same pressures without the regulatory push to justify the investment internally.
This creates a dangerous asymmetry. Large companies are building data systems, hiring specialists, and developing sustainability capabilities, however reluctantly, because they must. SMEs risk falling further behind, stuck in reactive mode, scrambling when a major client threatens to switch suppliers, panicking when a tender requires environmental data they don’t have, or discovering too late that competitors have already positioned themselves as the “sustainable choice.”
Savvy SMEs won’t treat sustainability data as a compliance burden to minimize. They’ll build it as strategic infrastructure that serves multiple purposes simultaneously. They’ll use strategic materiality to focus resources where social and environmental performance and business value creation align – not attempting to be good at everything but exceptional at what matters most.
The question isn’t whether your SME will eventually need sustainability data. The question is whether you’ll build that capability proactively – on your terms, aligned with your strategy – or reactively, when a client gives you 30 days to provide data you don’t have.
The SMEs that will succeed won’t be those avoiding sustainability; they’ll be the ones embracing it, measuring its impact, and using it as a lens to transform their business.
