ESMA: materiality assessments and taxonomy to be enforcement priorities in 2025
Financial market watchdog highlights key areas for firms preparing sustainability statements under new European regulation
The European Securities and Markets Authority (ESMA) has published its annual enforcement priorities, spelling out the issues regional and national supervisors will “pay particular attention to” when examining companies’ sustainability disclosures for FY24.
On sustainability statements, the document identifies three priorities: materiality assessments, scope and structure, and taxonomy disclosures.
ESMA urged companies to pay attention guidance from EU advisory body EFRAG on materiality assessments, and provide “detailed disclosures of the assessment process itself… to enable users of the sustainability information to gain a full understanding of the extent of the different steps the issuer has undertaken to reach its materiality conclusions”.
It described stakeholder engagement as a “crucial aspect of the materiality assessment process”, adding that “the objective of such engagement is to obtain the views of the key affected stakeholders”.
To ensure this has been done robustly, ESMA said it expects issuers to be transparent about how they identified and prioritised which stakeholders to engage.
Structure
Companies should use quantitative information to demonstrate materiality decisions, the regulator added, and present a list of disclosed topics in the form of a “content index” to make it easier for users to navigate the sustainability statement.
More broadly, ESMA said it “encourages” firms to stick to the structure outlined in the European Sustainability Reporting Standards (ESRS), saying those that have “relied extensively on alternative presentation formats for the sustainability statements [should] carefully consider the compliance of their approaches”.
Value chains
ESMA will also be looking to make sure companies adhere to ESRS requirements to report on the full extent of their value chains.
It noted that there will be some flexibility on this requirement in the first three years of reporting, but insisted “issuers are still required to explain the efforts made to obtain the necessary information about their value chain, the reasons why not all of the necessary information could be obtained, and their plans to obtain this information in the future”.
Taxonomy
On the taxonomy, ESMA “underlines the need for non-financial issuers to pay particular attention to situations where an economic activity is eligible to multiple environmental objectives” – something that will get more common as the framework is expanded.
“ESMA reminds issuers that they are required in these situations to conduct an assessment for each relevant objective, and report on respective eligibility and alignment,” it said.
Companies should also ensure their taxonomy disclosures are consistent with any relevant transition plans they publish, the document warned.
Going into 2025
ESMA urged companies, auditors and supervisory bodies to take its priorities into account when preparing and assessing 2024 annual financial reports. National enforcers may decide on additional focus areas.
Earlier this month, the regulator released its upcoming annual work programme, in which it confirmed it would publish technical standards for the EU’s new green bond regulation and work on rules for ESG ratings. It will also publish a set of greenwashing indicators.