Sustainability reporting in ESMA’s enforcement priorities for 2025

At the end of October, the European Securities and Markets Authority (ESMA) – the independent European Supervisory Authority responsible for investor protection and the promotion of financial markets in the EU – published its enforcement priorities in respect of FY2024 annual reports of issuers admitted to trading on regulated markets within the EU. This sets out the areas which ESMA, together with national enforcers in the EEA, intend to pay particular attention to when examining whether the relevant reporting requirements have been met. 

This blog post considers ESMA’s three priorities in respect of sustainability statements, being:

1. materiality considerations in reporting under the European Sustainability Reporting Standards (ESRS);
2. scope and structure of the sustainability statement; and
3. disclosures relating to Article 8 of the Taxonomy Regulation.

This blog post also highlights certain sustainability priorities which may be of particular interest for large corporates ahead of the upcoming reporting season where the first Corporate Sustainability Reporting Directive (CSRD) reports are being released. 

Priority 1: Materiality considerations in reporting under the ESRS

Much of this section calls attention to particular aspects of the ESRS disclosure requirements, ranging from the mandatory nature of disclosures under ESRS 2 (General Disclosures) to a suggestion of how entities should approach entity-specific disclosures.

The materiality assessment process also receives particular attention from ESMA. The assessment should be thorough and supported by detailed disclosures relating to the assessment process itself, to enable users of the sustainability statement to gain a full understanding of the extent of the different steps the issuer has undertaken to reach its materiality conclusions. In practice, this could involve disclosing information on the activities, business relationships, geographies and stakeholders considered in the assessment. Additionally, although the ESRS refers to impacts, risks and opportunities collectively, issuers should disaggregate the processes followed for assessing the materiality of impacts, risks and opportunities. ESMA also notes that, where possible, the materiality assessment should rely on quantitative information as objective evidence of the materiality of an impact, risk or opportunity.

ESMA also emphasises that the sustainability due diligence process is a “crucial aspect” of the materiality assessment process. Although the ESRS states that they “do not impose any conduct requirements in relation to due diligence”, and guidance released by the European Commission also states that the ESRS “do not mandate specific behaviour on stakeholder engagement”, ESMA’s approach appears to be slightly less conciliatory. In particular, issuers are expected to connect their assessment of impact materiality to stakeholder engagement, and provide full transparency in their disclosures on how they identify and prioritise the stakeholders with which they engage. 

Priority 2: Scope and structure of the sustainability statement

In relation to the scope of the sustainability statement, ESMA has highlighted:

1. the scope of consolidation of sustainability statements should, as a default, be the same as the scope of consolidation of the financial statements – data for the entire group should be included in sustainability reporting; and
2. the requirement to disclose the extent of an undertaking’s value chain – ESMA expects issuers to do the legwork needed to obtain the information required in the ESRS relating to the value chain, notwithstanding the availability of transitional reliefs.

In relation to structuring, CSRD reporting should ultimately meet the “general presentation objectives” of facilitating access and understanding of the reported information. Notwithstanding the fact that some incorporation by reference is permitted by the ESRS, ESMA suggests that the detailed structure set out in the ESRS should be “applied […] as an illustration”. It all but cautions against extensive use of “alternative presentation formats” and internal cross referencing, suggesting that issuers should bear in mind the overall presentation objectives if they choose to do so.

Priority 3: Disclosures relating to Article 8 of the Taxonomy Regulation

ESMA starts by referring issuers to its 2023 Public Statement on its enforcement priorities, which contains a number of further recommendations relating to Taxonomy disclosures. ESMA also reminds issuers of the mandatory nature of the templates set out in the Article 8 Delegated Act,[1] as amended by the Taxonomy Environmental Delegated Act,[2] which should generally be applied without any adaptation or amendment. 

ESMA also sets out separate suggestions for non-financial and financial undertakings:

• Non-financial issuers should pay particular attention to economic activities which are eligible to multiple environmental objectives. In these situations, issuers should conduct an assessment for each relevant objective and report on respective eligibility and alignment, and properly differentiate between the most relevant objective and the other objectives.
• Financial issuers should differentiate between voluntarily-disclosed estimates of Taxonomy alignment of their exposures (which should be accompanied by explanations of methodologies applied) from legally-required Taxonomy KPIs.

Connectivity of financial and sustainability statements

More generally, ESMA highlights the importance of connectivity across an issuer’s financial and sustainability statements. In particular, it:

1. expects to see more consistency and connectivity between the information related to climate risks and opportunities included in financial statements and the information included in the sustainability statement or elsewhere in the management report;
2. emphasises ESRS requirements to cross-reference monetary and quantitative information which is included in both the sustainability and financial statements; and
3. stresses the importance of consistency between Taxonomy and transition plan disclosures, such as when describing objectives or plans for the alignment of activities with the Taxonomy criteria.

Implications for corporates

This publication makes clear that ESMA expects the disclosure process described in the ESRS to be rigorously applied by reporting companies, notwithstanding the steep learning curve and lack of precedents. ESMA’s focus on maintaining the usability of the sustainability statement highlights the fine balancing act in sustainability reporting between providing sufficiently granular information for reporting to be useful, against the danger of obscuring truly material issues with overly prescriptive disclosure requirements.

Particular areas of note are the rigour expected in respect of the materiality assessment – the expectations around use of quantitative information and stakeholder engagement are likely to involve extensive changes to existing data collection processes for many reporting undertakings. The expectations around the conduct of due diligence and the procurement of information from the value chain dovetail with the requirements of the EU’s Corporate Sustainability Due Diligence Directive applicable to larger entities, but may be onerous for many smaller corporates.

Lastly, given that the CSRD effectively brings far greater numbers of corporate entities within scope of the disclosure requirements under Article 8 of the Taxonomy Regulation (particularly large EU subsidiaries of groups not listed in the EU), this document is of particular relevance to any company which may be making these disclosures for the first time. While the ESRS has rightly received a lot of focus in corporate reporting, the disclosures required by Article 8 are extensive and technical in nature, and therefore we would recommend ensuring sufficient resource to understand and comply with these requirements.

[1] Commission Delegated Regulation (EU) 2021/2178

[2] Commission Delegated Regulation (EU) 2023/2486