ESMA's Enforcement Actions on the CSRD

Specific sustainability reporting-related issues highlighted as enforcement priorities by the regulator include 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, which significantly expands the number of companies required to provide sustainability disclosures to over 50,000 from around 12,000. Based on the new principle 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 came into force as from the beginning of this year for large public-interest companies with over 500 employees, with the first reports to be issued in 2025. These will be followed by companies with more than 250 employees or €50 million in revenue in the following year, and listed SMEs one year later.

Double Materiality

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 a company, as well as on the company’s impacts on environment and society.

The ESMA makes it clear that the process companies follow in assessing and reporting on double materiality will be a priority enforcement area for the regulator. The regulator emphasises that 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 include the provision of sufficient information on the activities, business relationships, geographies and stakeholders considered, and transparency on how affected stakeholders are identified and prioritised by companies for engagement under the materiality assessment process.

 

Sustainability Statement

With respect to ESMA’s enforcement priorities on the scope and structure of the sustainability statement, the regulator highlights issues underlying the importance of connectivity between the sustainability statement and financial statements, including that each statement is based on the same reporting entity, and that monetary amounts or other quantitative information included in the sustainability statement include references to the corresponding financial statement information. The information provided in the sustainability statement must also 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.

EU Taxonomy

The EU Taxonomy is a classification system enabling the categorisation 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. With respect to taxonomy-related disclosures, the regulator insists on the requirement for issuers to use the templates set out by the taxonomy legislation, and which focuses on issues in which activities are aligned with more than one of the taxonomy’s environmental objectives.

Conclusion

Following this publication, the EMSA is being seen to be taking a harder approach towards compliance than the approach being suggested by European lawmakers. The overall message of the ESMA’s statement is that it stands ready to inspect and take enforcement action wherever necessary. This approach tends to diverge from the messages directed by the European Commission which suggests that the rollout of CSRD continues to be bumpy, with potential room for proportionality in supervision and enforcement. Many companies are facing extensive reporting on sustainability for the first time, and the continued uncertainty around the roll-out of CSRD may add to the anxiety in the market. 

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