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First-time reporting under ESRSs

European regulator highlights key focus areas for sustainability statements

event 15 Aug, 2024
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Highlights

–�Which companies are affected?

–�What are ESMA’s key focus areas?

� What’s next � Key actions for companies

    To support the first wave of companies in applying European Sustainability Reporting Standards (ESRSs), the European Securities and Markets Authority (ESMA) has issued aÌýÌý³ó¾±²µ³ó±ô¾±²µ³ó³Ù¾±²Ô²µ:

    • the guidance already available or under development that companies are expected to consider; and
    • the key areas to assess when preparing sustainability statements under ESRSs for the first time.

    In addition, the European Commission has issued a set ofÌýfrequently asked questionsÌý(FAQs) to support companies in scope of the Corporate Sustainability Reporting Directive (CSRD).

    The speed of implementing the CSRD, its scope and the detailed data requirements of ESRSs mean that many companies may find reporting sustainability information challenging, even those that have prior experience � e.g. those that have previously reported under the Non-Financial Reporting Directive (NFRD).

    Ramon Jubels
    Ramon Jubels

    Partner, ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø EMA Department of Professional Practice

    ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø in the Netherlands

    The publication of the first sustainability statements prepared under ESRSs will be a significant milestone in the journey towards mandatory sustainability reporting. Companies implementing the new standards are on a learning curve, but ESMA reminds companies that this does not relieve them of their responsibility to ensure compliance with ESRSs.

    Ramon Jubels

    Partner, ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø EMA Department of Professional Practice

    Which companies are affected?

    ESMA’s statement is directed at those companies that are required to:

    • prepare sustainability statements under ESRSs for the first time â€� i.e. for their 2024 year-end reporting; and
    • those applying ESRSs for their 2025 year-end reporting.

    It does not cover reporting required by the EU Taxonomy Regulation1.

    What are ESMA’s key focus areas?

    ESMA’s key focus areas include the following.

    Key focus areaÌýÌýESMA’s expectationsÌýÌý
    Governance and internal controls

    Companies need to have robust governance and controls to enable them to:

    • perform effective double materiality assessments; and
    • deliver the granular sustainability information needed to meet the qualitative characteristics of useful information.

    Companies also need to carefully assess whether their existing processes, systems and controls remain fit-for-purpose andÌýto be transparent when disclosing information about them under ESRS 2ÌýGeneral disclosures.

    Double materialityÌý

    When undertaking their double materiality assessment (DMA) process, companies need to:

    • reconsider their materiality process and related disclosures, if they have already reported under the NFRD, to capture the full breadth of the requirements in ESRSs;
    • consider the DMA process described in EFRAG’sÌý2;
    • be fully transparent about the DMA process and provide information that will help stakeholders better understand the results of the process;
    • consider the qualitative characteristics of information for all disclosures, especially their relevance and faithful representation;
    • provide all mandatory disclosures and datapoints relating to policies, actions and targets for each material sustainability-related matter identified; and
    • carefully assess whether reported actions contribute to addressing material impacts, risks and opportunities (IROs).
    Transition reliefs

    Companies need to be transparent when using the transition relief available under ESRSs. Specifically, ESMA highlights the following.

    • Value chain informationÌýâ€� companies are expected to provide transparency on the uncertainties, data limitations, methodologies and significant assumptions used.
    • Phase-in relief for companies with no more than 750 employeesÌý–companies are expected to disclose which sustainability-related matters they assess as material and provide information about targets, policies, actions and metrics relating to those matters, as required by ESRSÌý2.
    • Company-specific disclosuresÌýâ€� companies need to consider whether any disclosures provided in prior periods meet the requirements of material information under ESRSs.
    Other areas of focus
    • Structure and formatÌýâ€� companies need to carefully assess whether their historical approach to presenting their information is consistent with the CSRD and ESRSs, and to plan to make adjustments.
    • ConnectivityÌýâ€� a company’s financial and sustainability reporting needs to provide a coherent, connectedÌýand integrated picture.

    What’s next � Key actions for companies

    • Read ESMA’s statement and understand how your company will meet ESMA’s expectations.
    • Read EFRAG’sÌýimplementation guidance,ÌýÌýandÌýÌýand understand how they can help when implementing ESRSs.
    • Consider theÌýjoint interoperability guidanceÌýissued by the International Sustainability Standards Board and EFRAG in conjunction with EFRAG’s implementation guidance if you are a dual reporter and consider if the differences are relevant for your reporting.
    • Monitor further guidance from ESMA, EFRAG and the European Commission. ESMA will publish its European Common Enforcement Priorities (ECEP) on sustainability reporting later in 2024.

    1ÌýRegulation (EU) 2020/852 (EU Taxonomy Regulation) is the EU’s framework to facilitate sustainable investment.

    2ÌýEuropean Reporting Advisory Group’s (EFRAG) IG 1:ÌýMateriality Assessment Implementation Guidance.

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