EU markets regulator the European Securities and Markets Authority (ESMA) announced the release of its annual European Common Enforcement Priorities (ECEP) Statement for corporate reporting, setting out key issues relating to the EU’s new Corporate Sustainability Reporting Directive (CSRD) as areas for close scrutiny over the next year for ESMA and national European enforcers.

Specific sustainability reporting-related issues highlighted as enforcement priorities by the regulator included double materiality assessments, the scope and structure of sustainability statements, and the use of EU Taxonomy templates for reporting.

The CSRD is a major update to the EU’s sustainability reporting framework, significantly expanding the number of companies required to provide sustainability disclosures to over 50,000 from around 12,000. Based on new underlying European Sustainability Reporting Standards (ESRS), the CSRD introduces more detailed reporting requirements on company impacts on the environment, human rights and social standards and sustainability-related risk. The CSRD took effect from the beginning of 2024 for large public-interest companies with over 500 employees, with the first reports to be issued in 2025, followed by companies with more than 250 employees or €50 million in revenue in the following year, and listed SMEs one year later.

Among the key requirements introduced by the CSRD is the use of a “double materiality” approach to sustainability reporting, which includes reporting both on the risks and impact of sustainability issues on an enterprise, as well as on the enterprises’ impacts on environment and society.

In its new publication, ESMA makes it clear that the process companies follow behind assessing and reporting on double materiality will be a priority enforcement area for the regulator, stating:

“Conducting a thorough materiality assessment covering both impact and financial materiality is the starting point for the determination of the information to be disclosed in the sustainability statement.”

Key areas of focus detailed by ESMA relating to materiality considerations providing detailed disclosures on the assessment process “including through providing sufficient information on the activities, business relationships, geographies and stakeholders considered,” and transparency on how companies identify and prioritize affected stakeholders for engagement under the materiality assessment process.

The release of the new priorities follows a public statement by ESMA in July advising companies to prepare for the CSRD requirements, including calling on issuers to “carefully set up their systems of data collection and analysis, as well as internal controls” in order to meet the ESRS’ detailed reporting requirements and to conduct double materiality assessments.

Under its enforcement priorities regarding the scope and structure of the sustainability statement, ESMA highlights issues underlying the importance of connectivity between the sustainability statement and financial statements, including reiterating that each statement is based on the same reporting entity, and that “monetary amounts or other quantitative information included in the sustainability statement and that are also presented in the financial statements” include references to the corresponding financial statement information. ESMA also noted that the information provided in the sustainability statement must cover impacts, risks and opportunities connected to a company’s value chain, and that while the ESRS includes transitional reliefs related to value chain information over the first three years of reporting, issuers are still required to describe the efforts made to obtain the value chain information, and their plans to obtain the information in the future.

The EU Taxonomy is a classification system enabling the categorization of economic activities that play key roles in contributing to at least one of six defined environmental objectives, and no significant harm done to the other objectives. In the area of taxonomy-related disclosures, ESMA reminds issuers of the requirement to use the templates set out by the taxonomy legislation, and focuses on issues in which activities are aligned with more than one of the taxonomy’s environmental objectives.

Following the release of EMSA’s enforcement priorities, sustainability reporting experts noted that the regulator appears to be taking a harder line towards compliance than that suggested by European lawmakers. Tom Willman, Regulatory Lead at sustainability technology platform Clarity AI noted that “the overall message of ESMA’s statement is that it stands ready to inspect and take enforcement action wherever necessary.”

Willman added:

“This appears to diverge from the European Commission’s recent messaging, which suggests that the rollout of CSRD continues to be a bumpy road, with potential room for proportionality in supervision and enforcement… In a world where many companies are facing up to reporting extensively on sustainability for the first time, the continued uncertainty around the roll-out of CSRD may add to the anxiety in the market. The contrast between ESMA’s statement and the tone from the Commission offers little reassurance.”