AI in sustainability reporting: opportunities and challenges for SMEs

1 The current state of sustainability reporting

Sustainability reporting has become increasingly important in recent years, particularly due to regulatory requirements and increased social awareness of sustainable business practices. While large companies are already subject to comprehensive reporting obligations, the question for small and medium-sized enterprises (SMEs) is to what extent they have to deal with this topic and what requirements they will face. This section explains the current situation of sustainability reporting, taking into account the legal framework and existing standards and challenges. It should be noted that the European Commission recently presented a reform proposal that essentially contains two elements: Reducing the number of companies subject to reporting requirements by increasing the number of employees recognized and postponing the first reporting year to 2027.

ESG criteria (environmental, social, governance) are particularly important for investors and financial institutions, as they enable an assessment of a company's sustainability performance. Even if ESG reporting is not mandatory for SMEs, they must provide such information when requested by banks and investors, for example, in order to obtain financing.

At present, SMEs in Germany are not yet directly required by law to provide sustainability reporting, but the requirements are increasing due to indirect market influences, bank requirements and regulatory developments. The increasing importance of sustainability issues and the extended reporting obligation under the CSRD will also affect SMEs in the medium to long term. It therefore makes sense for SMEs to address sustainability-related reporting structures at an early stage in order to meet future requirements and secure strategic competitive advantages. This statement applies regardless of the fact that the requirements are likely to change as a result of the omnibus procedure described above or only come into force at a later date. This change in European regulation is expected in summer / fall 2025.

2 Legal framework

Sustainability reporting in Germany is based on various national and European legal provisions that oblige companies to disclose non-financial information. Overall, it is clear that SMEs are increasingly being forced to report due to indirect obligations and market expectations, even if they are not formally subject to the statutory regulations. However, the EU is currently pursuing a de-bureaucratization of sustainability reporting. The simplified standard for SMEs (VSME) is intended to ease the burden on smaller companies. In addition, existing disclosure obligations are being reviewed and partially withdrawn as part of the omnibus procedure. Nevertheless, reporting remains relevant for SMEs, particularly in the supply chains of large companies or in access to financing. The most important legal principles are explained in the following chapter.

2.1 Existing legal bases

CSR Directive / Non-Financial Reporting Directive (NFRD)

The EU's CSR Directive was introduced in 2014 and obliges large capital market-oriented companies as well as banks and insurance companies with more than 500 employees to disclose non-financial information. This includes environmental, social and employee matters, respect for human rights and the fight against corruption. SMEs were not directly affected.

Corporate Sustainability Reporting Directive (CSRD)

The CSRD represents a significant expansion of the NFRD and envisaged the gradual inclusion of a growing number of companies from 2024. For example, the thresholds for the reporting obligation were to be significantly lowered: Accordingly, capital market-oriented companies and companies with more than 250 employees would be required to report. In addition, the obligation should apply to companies of public interest if they have a balance sheet total of more than 20 million euros or a net turnover of more than 40 million euros. These regulations would therefore have covered significantly more medium-sized companies than before. In the long term, small and medium-sized enterprises (SMEs) could therefore also be affected, particularly due to indirect pressure along the supply chain and increasing market requirements. In Germany, however, the CSRD has not yet been fully transposed into national law. It has yet to be transposed into law by the Bundestag, which creates uncertainty regarding the specific national requirements. In addition, there are now drafts from the European Commission to streamline the CSRD or reduce the reporting obligations for companies (the so-called omnibus procedure). According to this, only companies with more than 1,000 employees are to prepare sustainability reports and the voluntary reporting standard VSME is to be simplified. However, it remains to be seen what real changes will be implemented in European and national law. Despite the higher thresholds, the pressure could also increase on SMEs if, for example, they have business relationships with large companies and these expect suppliers and business partners to provide evidence.

EU Taxonomy Regulation

The EU Taxonomy Regulation serves as a uniform definition of sustainable economic activities within the EU. It establishes criteria that companies can use to assess whether their business activities are classified as sustainable. The classification is based on six environmental goals, 13 sectors and the overarching assessment as a “green”, “enabling” or transitional activity.

A central element of sustainability reporting is the determination of the taxonomy-eligible and taxonomy-compliant shares of business activities. Companies must state what proportion of their sales, investments (CapEx) and operating expenses (OpEx) is taxonomy-eligible - i.e. falls within the scope of the taxonomy - and what proportion is actually taxonomy-compliant, i.e. meets the minimum criteria. Taxonomy-compliant means making a significant contribution to one of the environmental objectives, not compromising the other environmental objectives and complying with minimum social and corporate governance standards. These requirements mean that companies (including SMEs) are increasingly confronted with taxonomy criteria and are therefore well advised to deal with them at an early stage.

Supply Chain Due Diligence Act (LkSG)

The starting point was the European Corporate Sustainability Due Diligence Directive (CSDDD), which was implemented in Germany by the LKSG. This law, which came into force in 2023, affects companies with more than 3,000 employees (from 2024: 1,000 employees) and obliges them to check their supply chains for human rights and environmental aspects. Even if SMEs are not directly affected, as part of the value chain they are required by large companies to provide sustainability information and comply with certain standards.

2.2 Existing reporting standards and frameworks

In addition to the legal requirements, there are a large number of voluntary standards and frameworks that can be used for sustainability reporting. These standards help companies to present their sustainability performance in a structured and transparent manner.

Due to the increasing spread of these standards and frameworks, sustainability reporting is becoming more and more prescribed and formalized, but also - according to the intention of the legislators - more comparable. It should therefore be on almost the same level as corporate financial reporting. This is also evident from the fact that many companies prepare and publish both reports together, i.e. integrated.

European Sustainability Reporting Standard (ESRS)

The ESRS forms the regulatory framework for sustainability reporting under the CSRD. It sets out detailed reporting requirements that companies must meet when disclosing their environmental, social and governance-related impacts. A key principle is dual materiality, which takes into account a company's financial as well as environmental and social impacts. The materiality analysis and the associated perspectives “by” and “on” the company are intended to define only the material points that the respective companies must report. The ESRS comprises cross-sector and sector-specific standards, whereby the general standards have already been adopted and others for specific sectors will follow. A simplified standard (VSME) is currently being developed for SMEs in order to reduce the reporting burden. Digital tools help companies to implement the complex requirements by collecting ESG data, automating materiality analyses and creating CSRD-compliant reports. The ESRS is intended to ensure uniform and comparable sustainability reporting in the EU and provide investors and other stakeholders with a sound basis for decision-making.

Global Reporting Initiative (GRI)

The GRI Standards are recognized worldwide and are used by companies of all sizes to document their economic, environmental and social impacts. The modular structure allows SMEs to choose a graduated approach to reporting depending on their resources and reporting requirements. GRI reporting facilitates comparability with other companies and improves transparency towards stakeholders.

German Sustainability Code (DNK)

The DNK was developed specifically for German companies and offers a low-threshold way of structuring and disclosing sustainability information. It comprises 20 criteria relating to environmental, social and governance aspects. The DNK is no longer being maintained and is practically merging with the European ESRS standards.

Sustainable Development Goals (SDGs)

The 17 sustainability goals of the United Nations (UN) serve as a guide for companies to align their sustainability strategy with global sustainability goals. Companies can use the SDGs to align their business strategies and document progress in terms of sustainable development.

2.3 Challenges for SMEs

SMEs face several challenges when introducing and implementing structured sustainability reporting:

• Scarcity of resources: many SMEs do not have specialized sustainability departments or the necessary financial and human resources for comprehensive reporting.
• Complexity of requirements: The large number of existing standards and legal regulations makes it difficult for SMEs to develop a reporting strategy that is right for them.
• Pressure from the value chain or banks: Large companies are increasingly demanding sustainability information from their suppliers, meaning that SMEs have to indirectly fulfill reporting obligations. Banks are also increasingly requesting sustainability data because they also have to report on their share of green investments via banking regulations (the so-called green asset ratio) and are bound by the EU taxonomy.
• Lack of digitalization: The collection and evaluation of sustainability data is not yet digitalized in many SMEs, which impairs the efficiency of reporting.

 

3 AI in sustainability reporting

Artificial intelligence (AI) is developing rapidly and is increasingly being used in sustainability reporting (see e.g. Wamba et. al. 2021 or Dauerer et. al. 2025). AI can provide significant support for companies by automating processes, optimizing data collection and improving analyses. Especially in times of increasing regulatory requirements and complex reporting standards, AI opens up new opportunities for companies to report efficiently and transparently. The most important competencies, risks and potentials of AI in the context of sustainability reporting are discussed below.

3.1 General functions

The use of artificial intelligence (AI) in sustainability reporting offers companies numerous advantages by automating processes, improving data analysis and implementing regulatory requirements more efficiently. The most important functions and their benefits:

• Automation of data collection and processing: AI systems collect and standardize ESG data from various sources, including sustainability reports, supply chain analysis and regulatory requirements. This reduces manual effort, minimizes errors and speeds up reporting processes.
• Recognition of patterns and correlations: Machine learning algorithms identify correlations between environmental, social and corporate factors. This enables companies to identify potential for improvement and optimize their sustainability strategy.
• Creation of precise and regulatory-compliant reports: AI-supported systems check reports for completeness, identify inconsistencies and ensure compliance with standards such as CSRD, ESRS or GRI. Automated text suggestions improve report quality and comprehensibility.
• Risk management and predictive analyses: ESG risks can be identified at an early stage using predictive analytics. AI analyzes anomalies in data and helps companies to take preventive measures to avoid financial or reputational damage.

Despite the numerous advantages, the use of AI in sustainability reporting also poses challenges and risks. These must be taken into account and addressed with suitable measures:

• Lack of transparency and explainability: many AI models work with complex algorithms whose decision-making is not always comprehensible to companies (“black box” problem). This can be particularly problematic in regulatory audits, as companies have to prove how certain reports are generated.
• Dependence on high-quality data: AI systems are only as good as the data they are trained with. Incorrect, incomplete or biased data can lead to inaccurate reporting and misinterpretation. This can lead to flawed sustainability strategies and pose regulatory risks. The accessibility of data in supply chains often requires a great deal of effort.
• Data protection and ethical issues: The use of AI in ESG reporting requires access to a wide range of sensitive data. Companies must ensure that they comply with data protection guidelines and ethical standards. Breaches of data protection regulations can not only have legal consequences, but can also damage stakeholder confidence in reporting.
• Technological hurdles for SMEs: While large companies often have sufficient resources to implement AI systems, SMEs often face financial and technical challenges. The integration of AI requires investment in know-how and infrastructure, which can be a significant hurdle for many small companies, especially missing or insufficient data sources / data quality when suppliers also need to be considered.

AI can significantly improve sustainability reporting by automating processes, optimizing reports and identifying risks at an early stage. However, challenges such as data quality, transparency and technological hurdles need to be considered, especially for SMEs. Strategic implementation can increase efficiency, reduce costs and increase the credibility of reporting in the long term.

3.2 Machine readability of sustainability reports

A crucial aspect for the efficient use of AI in sustainability reporting is the machine readability of reports. Many companies currently record and publish ESG data in non-standardized formats, which makes automated processing difficult. The CSRD requires companies to submit their sustainability reports in the European Single Electronic Format (ESEF). This format combines XHTML for human readability with Inline XBRL (iXBRL), which enables automated processing.

Structured formats such as XBRL (eXtensible Business Reporting Language) or JSON enable more efficient analysis and comparability of sustainability data. AI can use these formats to automatically check reports, identify inconsistencies and compare regulatory requirements with company data. Natural language processing (NLP) can also be used to convert unstructured documents (e.g. PDF reports or website content) into structured data, allowing relevant information to be extracted and processed. This reduces manual effort and increases the quality and accuracy of reporting.

For companies (including SMEs), the introduction and standardization of machine-readable reporting formats offers considerable advantages. On the one hand, the internal data structure is optimized as ESG data is recorded and processed uniformly. Secondly, companies benefit from greater transparency vis-à-vis investors, banks and regulatory authorities, which use the ESG data or reports for automated assessments and risk analyses. Companies that rely on standardized reporting formats at an early stage can also secure strategic advantages by meeting regulatory requirements more quickly and efficiently.

3.3 Tools and software solutions

Various digital tools and software solutions that can support companies in implementing their sustainability reporting are presented below. The naming of these tools does not constitute a recommendation, but serves solely to illustrate the technical options currently available. The tools are divided into free and fee-based solutions.

• An overview and comparison of tools and software can be found, for example, at https://esrs-services.de.
• Sample reports that have been produced on such tools and software can be found at https://sustainabilityreportingnavigator.com/#/csrdreports.

 

3.3.1 Free tools

ecocockpit from the Efficiency Agency NRW:

• ecocockpit is the free solution for determining the carbon footprint with information on product-, process- and location-related greenhouse gas emissions. It can be used to create greenhouse gas balances quickly and easily.
• Link: https://www.efa.nrw/fuer-unternehmen/angebote/beratung-ressourcenschonung/ecocockpit

DNK database and reporting platform (German Council for Sustainable Development):

• The German Sustainability Code (DNK) provides a free online platform on which companies can create, manage and publish their sustainability reports.
• The platform offers structured input masks based on the 20 Sustainability Code criteria and is supported by help texts and examples.
• It is particularly suitable for SMEs that are looking for an introduction to reporting and want to gain transparency.
• Link: https://www.deutscher-nachhaltigkeitskodex.de/

 

3.3.2 Paid tools

Materiality analysis:

• Software solutions such as SASB Materiality Finder, Datamaran or Navigator help companies to identify relevant sustainability issues according to dual materiality (financial and environmental impact).
• AI-supported tools analyze industry-specific risks and compare them with regulatory requirements. Datamaran, for example, uses AI-based text analysis to evaluate regulatory, media and internal company documents. The AI is primarily used here to systematically extract ESG risks from structured and unstructured data. The models used are rule-based and specialized on specific sources. Navigator (E&Y) uses structured databases and rule-based evaluations; the AI component is limited and focuses on the automation of existing classifications - comprehensive “learning” about new subject areas has not yet been automated.

Data management and automation:

• Platforms such as Sphera, Worldfavor or Enablon enable the automatic collection, consolidation and analysis of ESG data from various sources.
• Cloud-based systems offer centralized data storage and facilitate integration into existing company processes.

ESG reporting and compliance:

• Solutions such as Workiva, Reporting 21 or Greenomy support companies in creating CSRD and ESRS-compliant sustainability reports.
• Many of these tools offer pre-structured report templates and export functions for various stakeholders.
• Greenomy offers a modular system for implementing CSRD/ESRS requirements with an integrated set of rules. The AI application is currently limited to automated text and rule interpretations within the platform (e.g. assignment of key figures to reporting obligations). There is no independent analysis or interpretation of company data by generative AI.

Supply chain and risk management:

• Platforms such as EcoVadis or Integrity Next help companies to assess the sustainability performance of their suppliers and monitor regulatory requirements along the supply chain.

Specific target groups (SMEs) or regional focus:

• For example, ProEco, a spin-off of the savings banks in the Rhineland, supports companies and property owners with a holistic range of solutions on the topic of sustainability. They offer integrated consulting, software for reporting and/or greenhouse gas balancing.

 

4 Conclusion

Sustainability reporting is expected to continue to rapidly gain in importance for SMEs in Germany in the coming years. Nevertheless, there are currently uncertainties regarding the long-term development of regulatory requirements and the concrete implementation of CSRD at national level. Political changes, economic crises or geopolitical developments could also influence the dynamics of regulation and the prioritization of sustainability issues.

Despite these uncertainties, there are numerous indications that sustainability will continue to play a central role in corporate strategies. Social pressure, the requirements of investors and banks and market mechanisms mean that SMEs are also increasingly obliged to prepare their ESG data in a structured and comprehensible manner.

AI offers enormous potential for increasing efficiency and improving quality. In particular, AI can support the automation of data collection, analysis and reporting while identifying risks at an early stage. However, this requires a solid database and the use of machine-readable formats to enable processing by AI systems. It turns out that much of the data required for sustainability reporting can be collected and processed using existing or free tools. The challenge lies less in accessing the data than in systematically processing it. Before selecting a tool, it is therefore essential to check whether it also supports the creation of machine-readable reports (e.g. in XBRL or XML format).

The selection of suitable software can be made much easier through targeted internet research and advice. In practice, it has been shown that the use of a comprehensive solution that integrates several functions such as data collection, analysis, visualization and report output is significantly more efficient than the parallel use of several individual solutions. An integrated approach reduces interface problems, saves resources and ensures a consistent database.

Overall, it is advisable for SMEs to start digitizing and structuring their sustainability reporting at an early stage - even if there are uncertainties regarding the long-term regulatory landscape. This not only creates the basis for regulatory compliance, but also strengthens the trust of customers, business partners and investors. The combination of a legally sound reporting structure, digital data usage and intelligent technologies such as AI opens up new ways for SMEs to make sustainability strategically and economically effective.