Two ESMA documents to support consistent application of sustainability reporting requirements

The European Securities and Markets Authority (ESMA) has released a 'Final Report on the Guidelines on Enforcement of Sustainability Information (GLESI)' and a 'Public Statement on the first application of the European Sustainability Reporting Standards (ESRS)'.
The following is a brief summary of the two reports.

Final Report on the Guidelines on Enforcement of Sustainability Information (GLESI)

The purpose of the GLESI is to provide guidance to build convergence on supervisory practices on sustainability reporting.

These guidelines apply to all competent authorities undertaking supervision of sustainability information under the Transparency Directive. These guidelines apply in relation to the enforcement of sustainability information under Article 24(4) of the Transparency Directive to ensure that sustainability information provided by issuers, who have securities admitted to trading on a regulated market and who are required to publish sustainability information under the Accounting Directive, complies with the requirements of the Transparency Directive.

This means sustainability information of issuers already listed on a regulated market. It includes issuers from third countries using the European Sustainability Reporting Standards as well as issuers from third countries using sustainability reporting requirements which have been declared equivalent to the European Sustainability Reporting Standards.

The guidelines are principles-based and define enforcement of sustainability information and its scope under the Transparency Directive, set out what characteristics enforcers should possess, describe selection techniques that should be followed and other aspects of enforcement methodology, describe as well as the types of enforcement actions that enforcers should make use of and explain how enforcement activities are coordinated within ESMA.

GLESI shall apply to enforcement of sustainability information published from 1 January 2025

The GLESI apply to all competent authorities undertaking supervision under Article 24(4) of the Transparency Directive of sustainability information prepared by issuers listed on an EU regulated market in accordance with Articles 19a, 29a and 29d of the Accounting Directive along with the European Sustainability Reporting Standards and Article 8 of the Taxonomy Regulation along with the related Disclosures Delegated Act10 . The GLESI comprise of 22 guidelines grouped into six main areas:
a. Basic concepts
b. Enforcers’ internal organisation
c. Selection
d. Examination
e. Enforcement actions
f. European coordination

In accordance with Article 16(3) of the ESMA Regulation, competent authorities must make every effort to comply with the GLESI and shall notify ESMA whether they:

comply,
do not comply, but intend to comply, or
do not comply and do not intend to comply with the guidelines and the reasons for the non-compliance.

ESMA will publish on a regular basis on its website a list of the competent authorities with the indication of their compliance status vis-à-vis the GLESI

Public Statement on the first application of the European Sustainability Reporting Standards (ESRS):

With a view to supporting the implementation of these new requirements, ESMA wishes to:

point to elements of guidance by the European Commission and EFRAG; and
highlight the following key areas of attention which, in ESMA's view, are of particular relevance in the preparation of ESRS sustainability statements:

establishing governance arrangements and internal controls that can promote high-quality sustainability reporting;
properly designing and conducting the double materiality assessment and being transparent about it;
being transparent about the use of transitional reliefs;
preparing a clearly structured and digitisation-ready sustainability statement; and
creating connectivity between financial and sustainability information.

ESMA highlights the importance for issuers to engage in:

continuous training on the ESRS, also leveraging on the available support material from the European Commission and EFRAG; and
as appropriate, dialogue with industry peers on issues of common relevance as well as with auditors or other independent assurance services providers.

ESMA calls on members of administrative, management and supervisory bodies of issuers as well as on those providing assurance on sustainability statements, to ensure that the aspects of highlighted points mentioned above are carefully considered when complying with the ESRS.

Establishing governance arrangements and internal controls that can promote high-quality sustainability reporting

ESMA highlights that the mandatory governance disclosures in ESRS 2 seek to foster transparency on the governance processes regarding sustainability matters in general. In particular, Disclosure Requirement GOV-1 covers the appropriate skills and expertise of the administrative, management and supervisory bodies in relation to sustainability matters and GOV-2 covers the related information made available to them, while GOV-5 specifically addresses risk management and internal controls over sustainability reporting. ESMA stresses that implementing and providing transparency on robust processes and internal controls contributes to the quality and credibility of the sustainability statement

Properly designing and conducting the double materiality assessment and being transparent about it

ESMA highlights that full transparency on the materiality assessment process is required irrespective of the materiality of the specific topics, as the topical specifications of IRO-1 disclosures are always mandatory. These disclosures will help better understand the outcomes of the process especially as, except for climate change, issuers are not required to disclose the reasons justifying the nonmateriality of a sustainability topic.

ESMA also highlights that if no policy, action, or target have been defined for a given material sustainability matter, the issuer is required to state this fact and it may also disclose a timeframe in which it aims to have these in place. ESMA reminds issuers that assessment of materiality for metrics and related disclosures is particularly important because the omission of disclosure requirements or datapoints relating to metrics is an implicit statement that the related information is not deemed material. As an exception to this principle, for the datapoints derived from other pieces of EU legislation, such as SFDR, non-materiality shall be explicitly disclosed.

Being transparent about the use of transitional reliefs

ESMA highlights that when an eligible issuer decides to adopt these phase-in reliefs it shall nevertheless disclose whether any of the sustainability topics covered by any of these standards are material to the issuer and, if so, for each material topic, provide the information required by par. 17 (a)-(e) of ESRS 2. ESMA emphasises that issuers need to consider whether their entity-specific disclosures pass the significance or decision usefulness tests of materiality at information level, as required by par 31 of ESRS 1.
ESMA highlights the requirement to ensure that the complementary information does not obscure material information.

Preparing a clearly structured and digitisation-ready sustainability statement

ESMA stresses that it will be particularly important for issuers that have experience in sustainability reporting under different frameworks to carefully assess whether their historical approach to the presentation of sustainability information is consistent with the CSRD and ESRS and, if not, to make adjustments accordingly.

Creating connectivity between financial and sustainability information

ESMA notes that issuers should be able to report relevant connections and reconciliations within the sustainability statement as part of the disclosures on current or anticipated financial effects, as well as through other disclosures (e.g., those on significant CapEx / OpEx to implement specific actions).