European enforcers spell out priority areas under CSRD

ESMA publishes guidance with greater emphasis on greenwashing

The European financial watchdog has spelled out where it wants companies to focus in the first year of reporting under the Corporate Sustainability Reporting Directive (CSRD).

The European Market Supervisors Authority (ESMA) issued two sets of guidance last week to support listed firms and supervisors getting to grips with the rules, which will come into force from next year.

In a 10-page document, it flagged the most crucial elements of the underlying European Sustainability Reporting Standards (ESRS) in the eyes of EU supervisors, to give companies a steer on where they should focus when preparing their first reports.

“We know issuers have had a lot to do when it comes to ESRS, and this is our way of highlighting the most critical parts of the standards and all the supporting documents, to help them understand, in the enforcers’ view, where most attention needs to be placed during this transition phase,” explained Alessandro d’Eri, a senior policy officer in ESMA’s corporate finance and reporting department.

Many will view the document as a trailer for ESMA’s official enforcement priorities, which are published in the fourth quarter of each year.

Enforcement

The second document published on Friday outlines how Europe’s national authorities should enforce sustainability disclosure rules to ensure a consistent approach across the bloc.

In the final version, which comes following a public consultation, the term ‘greenwashing’ has increased in prominence. Originally a footnote, ESMA has added it to the main body of the text, along with the definition it developed last year.   

Unlike some of the EU’s other sustainable finance regulation, such as its investment fund disclosure rules, the CSRD’s primary objective is not to clamp down on greenwashing. However, given its role increasing transparency in the market, ESMA argues that it still contributes to the goal.

“The reference to greenwashing is meant to make it clear that, ultimately, enforcing sustainability disclosures is conducive to tackling greenwashing,” d’Eri told Real Economy Progress.  

The decision to raise the prominence of greenwashing in the final guidance could influence how supervisors choose which companies to evaluate for compliance with the EU’s disclosure rules.

Given the number of entities captured by the requirements, ESMA will work with national authorities to decide the process for selecting firms for assessment.     

“They will have to decide on risk factors to help them work out which issuers to prioritise,” said d’Eri. “One of the possible indicators could be how prone a company is to greenwashing.”

He stressed that this was not a requirement under the guidelines released on Friday, “but it’s something that could be developed on the back of them”.

ESMA also put stronger emphasis on the role of “dialogue” in the final guidelines.  

“There is a clear need to compare notes, so that we don’t go after cases of objective uncertainty that need to be fixed in the ESRS themselves,” d’Eri said.

“We want to make it clear that we’re here to discuss these issues.”

“We recognize that ESRS is an entirely new regime, and there will be ‘grey’ cases, but enforcement will certainly be taken in the clear cases of non-compliance.”

He added that enforcement should still be expected in the first year of reporting, but ESMA acknowledges “the learning curve that everyone is on – and that includes supervisors as well as issuers”.

Other ESRS and CSRD developments

The Swiss Government recently launched a consultation on proposals to introduce ESRS, or an equivalent, into its corporate reporting requirements. The plans would mean 3,500 Swiss companies were covered by the rules, up from around 300 under the current national regime, and it would align with the EU’s requirements.  

The Global Reporting Initiative published guidance on how its long-standing voluntary standards, which focus on sustainable development, interact with ESRS.  

And the Dutch financial regulator has evaluated 29 companies that have already conducted double materiality assessments, in a report issued last week.

AFM said firms needed to do more to “achieve fully transparent ESRS disclosures in their 2024 reporting,” highlighting good practice and offering 10 recommendations.