ESMA: Public Statement on the Initial Implementation of European Sustainability Reporting Standards (ESRS)

On July 5, the European Securities and Market Authority (ESMA) has published a Public Statement on the initial application of the ESRS. This public statement is intended to help large issuers manage the learning curve of new reporting requirements.

Although primarily aimed at first time adopters, the Public Statement also addresses the second wave of entities that are in scope. The guidance aims to ease the adoption of new sustainability reporting standards by highlighting critical areas of focus.

In our blog below, we have summarized the main points from ESMA’s paper.

Highlights

• General guidance
  • When preparing the sustainability statement, ESMA strongly encourages issuers to consult the support materials provided by EFRAG. These materials offer insights for practical use of the standards and illustrations:
    • Implementation Guidelines 1
    • Implementation Guideline 2
    • Implementation Guidelines 3 
    • Q&A Platform
  • While ESMA recognizes the challenges associated with the implementation of ESRS, the document acknowledges the steep learning curve ahead. It highlights that the upcoming first reporting period will be a significant milestone.
• Double Materiality Assessment (DMA) – designing & conducting DMA and being transparent about it
  • Double Materiality assessment process
  • Materiality for Policies, Actions and Targets and related disclosures
  • Materiality for Metrics and related disclosures: The disclosure of metrics in the topical ESRS depends on a materiality assessment (as explained in paragraph 34 of ESRS 1). ESMA reminds issuers that this assessment is crucial, as excluding required disclosures or data points related to metrics implies that the information is considered unimportant. However, there’s an exception for data points required by other EU laws, such as the SFDR. If these aren’t considered important, you must explicitly state this. These data points are listed in Appendix B of ESRS 2. Additionally, factors specific to certain industries might affect which metrics are considered important.
• Being transparent about the use of transitional reliefs
  • Value chain disclosures during the transitional period: ESMA recognizes that initially meeting the ESRS data requirements might be tough, as it will necessitate improving data collection and control systems. Being transparent about any uncertainties, data limitations, and the methodologies used is essential for evaluating the sustainability statement’s comparability. This transparency is mandated in ESRS 2 disclosures. For upstream and downstream value chain information, continuous improvement assessments are encouraged. The ESRS does not allow the omission of material information due to data unavailability. For the first three years, issuers can explain unavailable value chain information, use in-house or public data for value chain-related disclosures, and exclude value chain information in metrics, except for those required by EU law, such as Scope 3 GHG emissions.
  • Transitional reliefs for undertakings not exceeding 750 employees: Under ESRS 1’s transitional provisions in Appendix C, companies with an average of fewer than 750 employees during the financial year can opt not to disclose information required by entire standards for a certain period. Specifically, they can omit:
    • ESRS E4 for the first two years,
    • ESRS S1 for the first year
    • ESRS S2, S3, or S4 for the first two years
    • ESMA emphasizes that if these companies find any of the sustainability topics covered by these standards to be material, they must disclose this fact. Additionally, for each material topic, they must provide the information required by paragraph 17 (a)-(e) of ESRS 2. This includes a description of the material topic, policies, actions, and targets related to the topic, the due diligence process implemented, the outcome of the policies and actions, and the principal risks related to the topic. This ensures that even if certain disclosures are phased in, stakeholders still receive essential information on material sustainability topics.
• Preparing a clearly structured and digitization-ready sustainability statement
  • Structure of the sustainability statement:
    • ESRS 1’s Section 8.2 and Appendix D provide guidelines on for structuring the sustainability statement, with Appendix F offering an optional template. This setup allows companies some flexibility in arranging their data, including the use of internal references.
    • Section 9.1 of ESRS 1 allows for the incorporation of specific details by reference, ensuring the sustainability statement remains cohesive and clear. Companies with prior sustainability reporting experience must align their reporting with CSRD and ESRS standards, when making necessary changes.
    • Issuers are also reminded to include the required disclosures and templates from Article 8 of the Taxonomy Regulation in their sustainability statement, specifically within the environmental information section as directed by paragraph 115 of ESRS 1.
  • Digitization of the sustainability statement
    • ESMA emphasizes the importance of designing sustainability statements for digitization from the start. IG 3 is structured to support the development of a digital reporting infrastructure that aligns with the detailed requirements of the ESRS. Adhering to the ESRS structure will simplify future digital tagging, regardless of the specific tagging rules that the European Commission (EC) will implement later.
    • The granularity of the final tagging will be based on rules proposed by ESMA through a draft Regulatory Technical Standard that will amend the ESEF Regulation. However, issuers won’t be required to markup their sustainability statement until the EC adopts the digital taxonomy.
  • Creating connectivity between financial and sustainability information
    • ESMA emphasizes the significance of linking the sustainability statement with the financial statements, as required in Section 9.2 of ESRS 1. This connection was also emphasized in the ECEP 2023. Issuers should report relevant links and reconciliations within the sustainability statement, particularly concerning current or expected financial impacts. This should also encompass other disclosures such as significant capital or operational expenditures for specific actions.
    • Appendix C of ESRS 1 permits the omission of anticipated financial effects disclosures in the first year and allows for qualitative disclosures only for the first three years. This approach aims to ensure a cohesive and comprehensive understanding of a company’s sustainability efforts and their financial implications.

Timeline

As usual, ESMA will publish its European Common Enforcement Priorities for the next reporting period later in 2024, including those concerning sustainability reporting.

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