ESMA to Focus on Materiality, Impacts, Risks, Opportunities and Targets as Sustainability Reporting Enforcement Priorities

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 it will focus on for the current year of disclosures, with sustainability reporting remaining a focus topic for this year.

Within its sustainability reporting topic, as in recent years, materiality will remain a priority enforcement area for ESMA, with a focus on the materiality of impacts, risks and opportunities (IROs) and the double materiality assessment (DMA) process. Additionally, ESMA said that it will focus on issuer’s disclosures on IROs, policies, actions and targets (PATs) and metrics.

One of the key issues noted by ESMA in its focus on issuers’ double materiality assessments is ensuring that issuers disclose their positive and negative impacts with comparable granularity, with  the regulator noting that it “has observed that some issuers provide more extensive disclosure on positive impacts than on negative impacts which may not give users a sufficiently balanced view of the issuer.”

ESMA also highlighted the importance of high-quality disclosure on the identification, assessment and determination of IROs, emphasizing that IRO disclosures should cover both the issuer’s own operations as well as its upstream and downstream value chain.

In its discussion of its priority for providing connected information on IROs, PATs and metrics, ESMA emphasized that it “expects consistency across issuers’ disclosures on IROs, policies, actions and targets (PATs) and metrics,” and said that in the current year, its enforcers will focus on particular on disclosures under European Sustainability Reporting Standards(ESRS) E1 – Climate Change and S1 – Own Workforce, due to the advanced maturity of these topics.

Specific IROs, PATs and metrics issues and guidance topics discussed by ESMA included enhancing connectivity within the sustainability statement, including ensuring that issuers provide clarity about how their policies and targets address the IROs, aim for comparable granularity when describing their policies and their IROs, disclose when they do not have PATs for a material IRO, and when disclosing key actions, explain how the actions help it reach corresponding policy objectives.

ESMA also said that it will focus on improving connectivity between the sustainability statement and other parts of the annual financial report, noting for examples mismatches between the two in issuers’ disclosure of IROs.

Additionally, the regulator said that it will focus on ensuring clarity on targets, with issuers encouraged to disclose their measurable, time-bound and outcome-oriented targets, use clear terminology to define targets, and to make sure that methodological information is disclosed and specific to the target at hand. ESMA also reminded issuers to state if it has met a target it previously disclosed and that users will benefit from knowing if it has established a new target, and to disclose if it has missed or abandoned a target, or if it will not be able to meet a target.

For GHG emissions reduction targets, ESMA noted that “some issuers mention ‘science-based’ or ‘1.5 degrees’ without explicitly stating whether and how their targets meet these characteristics, and this should be improved to avoid misleading users,” and the regulator reminded issuers to disclose absolute (rather than just intensity) values for their targets.

For ‘own workforce’ targets, ESMA noted that it “observed instances where issuers do not make a clear distinction between broad commitments and actual targets,” and reminded issuers to be clear about their actual targets and to link them to material IROs, policies and key actions.

Click here to access ESMA’s corporate reporting enforcement priorities.