Understanding ESMA’s Public Statement on the First Applicability of European Sustainability Reporting Standards (ESRS)

In a significant move towards enhancing transparency and accountability in sustainability reporting, the European Securities and Markets Authority (ESMA) has released a public statement outlining the first applicability of the European Sustainability Reporting Standards (ESRS). The statement, aimed at large public-interest entities, provides critical guidance on implementing ESRS as mandated by the Corporate Sustainability Reporting Directive (CSRD). 

This blog will unpack the critical aspects of the statement, explore its implications for businesses and stakeholders, and provide insights into how organizations can navigate and comply with these new standards. As these entities prepare to publish their first sustainability statements in 2025, ESMA’s insights are invaluable in navigating the complexities of these new requirements. 

 

Transforming Sustainability Reporting through Strong Governance 

The CSRD brings transformative changes to sustainability reporting, aimed at boosting transparency and accountability. To assist issuers in aligning with these new requirements, ESMA stresses the need for strong governance structures and internal controls. These components are critical for promoting high-quality sustainability reporting and ensuring compliance with ESRS. 

 

Governance and Internal Controls

1. Establishing Systems and Controls: Issuers are encouraged to set up comprehensive systems for data collection and analysis, as well as internal controls that can effectively support double materiality assessments. These systems are essential for delivering the granular sustainability information required by ESRS. 
2. Reviewing Existing Processes: For issuers with prior experience under the Non-Financial Reporting Directive (NFRD), assessing whether existing processes and controls are still fit-for-purpose under the new CSRD and ESRS requirements is critical. 
3. Transparency in Governance Disclosures: ESRS mandates detailed disclosures about governance processes concerning sustainability matters. Specifically, ESRS 2 covers the skills and expertise of administrative, management, and supervisory bodies (Disclosure Requirement GOV-1), the information available to them (GOV-2), and risk management and internal controls over sustainability reporting (GOV-5). 
4. Role of Governance Bodies: The roles and responsibilities of administrative, management, and supervisory bodies, including audit committees, are underscored. These bodies must ensure the overall internal consistency of sustainability statements and their alignment with annual financial reports. 

Continuous Training and Dialogue

1. Leveraging Available Support: Continuous training on ESRS is vital. Issuers should utilize the support materials from the European Commission (EC) and the European Financial Reporting Advisory Group (EFRAG) to stay updated on best practices and regulatory expectations. 
2. Engaging with Stakeholders: ESMA recommends regular dialogue with industry peers, auditors, and independent assurance service providers (IASP) to address common challenges and improve the quality of sustainability reporting. This engagement is particularly important for aligning understanding and practices across the industry. 

 

Double Materiality and Transparency

Double materiality, a key concept in ESRS, requires issuers to evaluate and report on both financial and non-financial impacts. Transparency in conducting and reporting these assessments is crucial for credibility and compliance. 

Double Materiality Assessment

1. Designing Assessments: Issuers must carefully design double materiality assessments, ensuring that they capture all relevant impacts. This process involves evaluating both the effect of sustainability matters on the business and the impacts of the business on sustainability matters. 
2. Transparency in Methodology: Being transparent about the methodologies used in double materiality assessments is essential. Issuers should clearly document and communicate their approaches to stakeholders. 

 

Use of Transitional Reliefs

1. Disclosing Transitional Reliefs: The CSRD allows for transitional reliefs during the phased implementation of ESRS. Issuers must be transparent about how they are using these reliefs and their plans for transitioning to full compliance. 
2. Preparing for Full Compliance: During the transitional period, issuers should focus on strengthening their systems and processes to ensure they are fully prepared for the end of the relief period. 

 

Digitization and Connectivity

ESMA highlights the importance of preparing sustainability statements that are clearly structured and ready for digitization. This approach not only streamlines reporting but also enhances the integration of financial and sustainability information. 

Digitization-Ready Reporting

1. Structuring Statements: Sustainability statements should be prepared in a manner that facilitates easy digitization. This structure supports the efficient processing and analysis of data, making it more accessible and usable. 
2. Enhancing Accessibility: Digitization-ready reporting ensures that sustainability information is readily available for stakeholders, including regulators, investors, and the public. 

 

Financial and Sustainability Information Integration

1. Creating Connectivity: Establishing a connection between financial and sustainability information is crucial for presenting a comprehensive view of an issuer’s performance. This integration supports a holistic understanding of the business’s impact and value creation. 
2. Ensuring Consistency: The sustainability statement should be internally consistent and aligned with other parts of the annual financial report. This alignment enhances the credibility and usefulness of the information provided. 

 

Areas of Focus for First-Time Application 

ESMA’s statement identifies specific areas that issuers should prioritize in their first application of ESRS: 

1.Governance Arrangements and Internal Controls 

Establish and document governance structures. 

Ensure internal controls and data collection systems are robust and capable of supporting detailed sustainability reporting. 

2.Double Materiality Assessment 

Design a comprehensive process for assessing material sustainability-related impacts, risks, and opportunities. 

Ensure transparency in the assessment process and disclose the methodology used. 

3.Transparency on Transitional Reliefs 

Clearly disclose any transitional measures being used and the plans for moving beyond these reliefs. 

4.Structured and Digitisation-Ready Reports 

Prepare reports that are well-organized and easily integrated into digital platforms. 

5.Connectivity Between Financial and Sustainability Information 

Integrate financial and sustainability reporting to provide a cohesive view of the company’s overall performance. 

 

The Role of Administrative, Management, and Supervisory Bodies 

ESMA places significant emphasis on the roles of administrative, management, and supervisory bodies in ensuring high-quality sustainability reporting. These bodies must ensure the internal consistency of sustainability statements and their alignment with other parts of the annual financial report. Additionally, implementing and supervising internal controls is crucial to maintaining the integrity and credibility of sustainability information. 

 

Importance of Continuous Training and Peer Engagement 

To stay abreast of evolving requirements and best practices, ESMA encourages continuous training on ESRS. Leveraging available support materials from the European Commission and EFRAG, along with engaging in dialogue with industry peers and auditors, will be vital in navigating the new reporting landscape. This proactive approach will help issuers address common challenges and enhance the overall quality of sustainability reporting. 

Looking ahead, ESMA will publish its European Common Enforcement Priorities (ECEP) for the next reporting period, including those concerning sustainability reporting. This continued guidance will support issuers in meeting ESRS requirements and improving their reporting practices over time. 

 

Leveraging Support from EC and EFRAG

To aid issuers in implementing ESRS, the EC and EFRAG have developed a range of guidance materials. ESMA encourages issuers to make extensive use of these resources to navigate the new reporting landscape effectively. 

Guidance Materials

1. EC’s Frequently Asked Questions: The EC has published FAQs to accompany the adoption of ESRS Set 1. These documents provide practical guidance and address common questions about the new standards. 
2. EFRAG’s Implementation Guidance: EFRAG has prioritized the development of implementation guidance for the first set of ESRS. This guidance includes documents on materiality assessment, value chain considerations, and a comprehensive list of data points in ESRS Set 1. 
3. Interoperability Guidance: EFRAG, in collaboration with the IFRS Foundation and the Global Reporting Initiative (GRI), has issued guidance on interoperability between ESRS and other global sustainability standards. This guidance helps issuers align their reporting with multiple frameworks. 

EFRAG’s Online Platform

1. Technical Questions and Support: EFRAG’s online platform allows issuers to submit technical questions related to ESRS implementation. The platform categorizes and addresses these questions, providing timely and relevant support. 
2. Living Literature: The implementation support material from EFRAG is considered non-authoritative and is updated regularly to reflect evolving needs and insights. Issuers should regularly consult this material to stay informed about the latest guidance. 

Conclusion

ESMA’s public statement on the first applicability of ESRS marks a critical step in advancing sustainability reporting across Europe. By providing clear guidance and highlighting key areas of focus, ESMA aims to support large public-interest entities in delivering high-quality, transparent, and reliable sustainability statements. As these entities prepare for their first reporting cycle under ESRS, adhering to ESMA’s recommendations will be crucial in ensuring a smooth transition and fostering greater accountability in sustainability reporting.  

For more detailed guidance and support materials, issuers are encouraged to consult the resources provided by the EC and EFRAG and engage in continuous dialogue with peers and assurance providers. High-quality sustainability reporting is not just a regulatory requirement; it is a critical component of a well-functioning and transparent sustainable investment value chain.