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ESMA's New CSRD Guidelines Enhance Corporate Sustainability Reporting
The European Securities and Markets Authority (ESMA), the EU's financial markets regulator, recently unveiled two pivotal documents that promise to significantly enhance corporate sustainability reporting across the continent.
The 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) are instrumental in fostering consistent and transparent sustainability reporting practices.
These guidelines are designed to support companies in aligning with new CSRD and promoting investor confidence in sustainability disclosures.
Understanding the GLESI
The GLESI provides a comprehensive framework aimed at harmonizing supervisory practices related to sustainability reporting among EU member states. This guidance is crucial for building convergence in how sustainability information is enforced and disclosed, ensuring that companies' reports are consistent, reliable, and comparable across the EU. This effort aligns with ESMA's broader objective of promoting EU capital markets as a hub for green finance.
Related Article: The New European Sustainability Reporting Standards (ESRS)
Key Objectives of the GLESI in CSRD Guidelines
Promoting Clarity and Comprehension
The GLESI underscores the importance of clear and comprehensible sustainability disclosures. This includes clarifying the disclosure of sustainability information to aid investors' understanding, potentially through the use of sustainability labels and categories. By making sustainability data more accessible and straightforward, ESMA aims to empower investors to make informed decisions.
Reducing Compliance Complexity
One of the primary goals of the GLESI is to ease the compliance burden on companies. By providing a standardized framework for sustainability reporting, ESMA aims to streamline the reporting process, reducing the complexity and cost associated with compliance. This can lead to more efficient and effective sustainability practices within companies.
Enhancing Supervisory Consistency
The GLESI seeks to foster cooperation and convergence among EU National Authorities. By promoting harmonized enforcement outcomes, ESMA aims to create a level playing field for all companies operating within the EU, ensuring that sustainability information is consistently enforced across different jurisdictions.
Related Article: Understanding the New CSRD Law: Compliance Essentials
First Application of the ESRS in ESMA's CSRD Guidelines
The Public Statement on the first-time application of the ESRS is designed to support large issuers in navigating the initial phase of implementing these new reporting standards. Starting in 2025, large public-interest entities will be required to publish sustainability statements under the ESRS, as mandated by the Corporate Sustainability Reporting Directive (CSRD). This marks a significant step forward in enhancing transparency and accountability in corporate sustainability practices.
Significant Aspects of ESRS Implementation
Governance and Internal Controls
Effective governance and robust internal controls are critical for high-quality sustainability reporting. ESMA emphasizes the need for companies to establish clear governance structures and rigorous internal control mechanisms. This includes continuous training for staff and active engagement with industry peers and auditors to ensure compliance with ESRS requirements.
Double Materiality Assessment
The ESRS requires companies to conduct double materiality assessments, which involve evaluating both the financial impact of sustainability risks and opportunities and their broader societal and environmental impacts. This comprehensive approach ensures that all relevant sustainability matters are considered in corporate reporting.
Transparency in Reporting
Transparency is a cornerstone of the ESRS framework. Companies must provide full disclosure of their sustainability practices, including any transitional reliefs used and the methodologies applied. This level of transparency is essential for building trust among stakeholders and preventing greenwashing.
Structured and Digitisation-Ready Reports
To facilitate easier access and analysis, sustainability statements must be clearly structured and prepared for digital tagging. This aligns with future regulatory requirements for digital reporting, ensuring that sustainability information is easily accessible and comparable under the CSRD guidelines.
Related Article: EFRAG IG 3: Overview of ESRS Data Points
Key Elements of the Public Statement
Establishing Governance Arrangements and Internal Controls
Effective governance and robust internal controls are essential for producing high-quality sustainability reports. The ESRS highlights the importance of:
Clear Roles and Responsibilities: The administrative, management, and supervisory bodies of companies, including audit committees, must be well-informed about the new requirements and ensure their implementation.
Data Collection and Analysis Systems: Companies need to establish robust systems for data collection and analysis, enabling them to conduct meaningful double materiality assessments and deliver high-quality sustainability information.
Properly Designing and Conducting Double Materiality Assessments
The ESRS requires companies to undertake a thorough double materiality assessment, involving:
Identifying Impacts, Risks, and Opportunities (IROs): Companies must evaluate both the financial and broader societal impacts of their sustainability practices.
Transparency in the Materiality Process: Full transparency is required in the materiality assessment process, ensuring that stakeholders understand the methodology and assumptions behind the sustainability disclosures.
Transparency in Reporting and Use of Transitional Reliefs
Transparency is critical in the ESRS framework, particularly regarding:
Data Limitations and Methodologies: Companies must be transparent about any data limitations and the methodologies used in their sustainability reports.
Transitional Reliefs: Companies can use transitional reliefs for certain disclosures during the initial implementation phase, but they must clearly explain their plans to address any gaps.
Preparing a Clearly Structured and Digitisation-Ready Sustainability Statement
To align with digital reporting requirements, sustainability statements must:
Be Clearly Structured: Follow the structure outlined in ESRS 1, ensuring that information is organized and easy to navigate.
Include Taxonomy Regulation Disclosures: Integrate disclosures required by the Taxonomy Regulation within the environmental information section.
Creating Connectivity Between Financial and Sustainability Information
The ESRS emphasizes the importance of connecting sustainability information with financial statements, ensuring:
Relevance and Consistency: Sustainability statements should be consistent with financial disclosures, providing a comprehensive view of a company's performance.
Detailed Reconciliations: Include relevant connections and reconciliations within the sustainability statement, particularly regarding financial effects and significant expenditures.
Related Article: 12 Business Benefits of Sustainability Reporting
Ongoing Monitoring and Future Recommendations
ESMA will continue to monitor sustainability reporting practices in 2025, ensuring adherence to the GLESI. Translations of the GLESI will be available in all EU languages on ESMA's website.
Additionally, in Q4 2024, ESMA will release further recommendations related to sustainability statements as part of its Public Statement on the 2024 European Common Enforcement Priorities.
A Milestone in Corporate Sustainability Reporting
ESMA's new guidelines and standards mark a significant milestone in the journey toward more effective and transparent corporate sustainability reporting. By promoting clarity, reducing complexity, and enhancing supervisory consistency, these initiatives support the broader goal of fostering a sustainable economy.
As companies adapt to these new requirements, ongoing support and guidance from ESMA will be crucial in ensuring a smooth transition and high-quality sustainability disclosures.
You can find the 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) through the provided links:
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