Preparing for ESMA’s 2024 Corporate Reporting Priorities: What doe EU regulators Need to Know

Today, when environmental, social, and governance (ESG) considerations are increasingly intertwined with financial health, the European Securities and Markets Authority (ESMA) has raised the bar on corporate reporting requirements. ESMA’s 2024 European Common Enforcement Priorities (ECEP) emphasize double materiality, sustainability compliance, and an alignment of sustainability with financial reporting standards. As regulatory bodies across the European Union brace for an influx of expanded disclosures, understanding the nuances of ESMA’s expectations is crucial for ensuring compliance, transparency, and meaningful ESG reporting. 

This guide provides insights into ESMA’s 2024 priorities, exploring why double materiality, taxonomy compliance, and sustainability reporting are paramount. It also highlights practical ways regulators can support entities in this transition, helping drive impactful sustainability reporting that aligns with global goals. 

One of ESMA’s top priorities is the concept of “double materiality.” For those who may be new to this term, double materiality under the Corporate Sustainability Reporting Directive (CSRD) asks companies to look beyond traditional financial materiality by assessing both: 

• The impact of sustainability issues on the company’s financial health. 

• The company’s impact on environmental, social, and governance factors. 

Double materiality reflects a growing recognition that businesses affect—and are affected by—a broader set of factors than those captured by financial metrics alone. From a regulatory standpoint, it pushes entities to adopt a more transparent, accountable, and ultimately sustainable approach to business operations. When companies perform a double materiality assessment, they can better identify and disclose potential risks, such as supply chain disruptions due to climate change, or social concerns that could harm their reputation. 

As a regulator, encouraging companies to undertake comprehensive double materiality assessments is essential. Clear, documented, and publicly available disclosures allow stakeholders to understand how a company’s business model aligns (or doesn’t align) with a sustainable future, ultimately enabling better-informed decision-making across the board. 

One of the standout aspects of ESMA’s 2024 priorities is the call for connectivity between financial statements and sustainability reports. Here, ESMA is advocating for alignment in terms of reporting entities, risk assessments, and quantitative information. 

This alignment is not just a compliance exercise—it’s about embedding sustainability into the core of business operations and financial health. Companies are encouraged to use a unified approach to identify and disclose risks, thus providing a more accurate portrayal of both financial performance and ESG risks. 

For regulators, this alignment requirement offers a clear path for assessing a company’s financial resilience against its sustainability risks. This shift helps regulators oversee not only the financial health of companies but also how well they are prepared to manage evolving ESG-related challenges that could affect long-term financial performance. 

• Develop Clear Guidelines: Regulators can provide specific examples and case studies to clarify how entities can align sustainability data with financial data. 

• Create Harmonized Templates: By developing standardized templates for alignment reporting, regulators can ensure that companies present data consistently, simplifying comparative analysis. 

• Support Training Initiatives: Training sessions on integrated reporting could help both preparers and auditors understand the nuances of alignment between financial and sustainability reporting. 

ESMA’s emphasis on EU Taxonomy compliance signals a significant push towards consistency and transparency in how companies report on sustainable economic activities. The EU Taxonomy is a classification system that establishes criteria for determining whether an economic activity is environmentally sustainable. 

The taxonomy acts as a guide for companies on what qualifies as sustainable, offering a structured approach to ESG reporting. Compliance with taxonomy rules enables stakeholders to identify which parts of a company’s business model are aligned with environmental goals, making it easier to distinguish between genuinely sustainable businesses and those with potentially overstated ESG credentials. 

• Create Educational Resources: Providing companies with straightforward explanations on how to implement EU Taxonomy compliance can alleviate confusion. 

• Monitor and Enforce Consistency: Ensuring that entities use mandated templates and report accurately is essential for creating a transparent ecosystem where sustainable businesses can thrive. 

• Encourage Collaboration with Auditors: Working with auditors to develop taxonomy-compliant auditing practices can help verify the accuracy and reliability of taxonomy disclosures. 

Social sustainability is also at the forefront of ESMA’s 2024 enforcement priorities. ESMA emphasizes workforce diversity and inclusion as crucial metrics in sustainability reporting. In doing so, the regulator is underscoring the view that social responsibility is as important as environmental impact in assessing a company’s overall sustainability. 

The focus on workforce diversity and social inclusivity signals a move towards recognizing the full scope of corporate social responsibility. Regulators can support this priority by establishing social disclosure standards that companies can follow. This will allow regulators to track trends and identify areas where social sustainability needs more attention. 

One of the critical aspects of ESMA’s 2024 priorities is the emphasis on auditing and assurance processes for ESG data. Auditing ESG data promotes data integrity and trustworthiness, enhancing the credibility of sustainability disclosures. 

As ESG reporting becomes more mainstream, stakeholders are increasingly seeking assurance that the data is reliable. Robust auditing practices reduce the risk of greenwashing by holding companies accountable for the ESG data they disclose.

• Establish Clear Assurance Standards: Defining what constitutes an acceptable ESG audit and creating a framework for assurance can give companies and auditors a roadmap for compliance. 

• Encourage Collaboration with Third-Party Auditors: By advocating for independent, third-party assurance on ESG data, regulators can promote an environment of trust. 

• Provide Regular Feedback and Recommendations: Giving companies feedback on their ESG disclosures and audit practices can help them align with ESMA’s priorities more effectively. 

• In response to ESMA’s stringent requirements, industry leaders and experts are seeing a clear message: compliance will be rigorously enforced. This stricter approach stands in contrast to the European Commission’s recent messaging, which has leaned toward flexibility in the rollout of the CSRD. This divergence points to potential challenges, as businesses may encounter conflicting interpretations of sustainability reporting requirements. However, for regulators, this dynamic also presents an opportunity. By staying aligned with ESMA’s guidelines and fostering a supportive but firm approach, regulators can help companies better understand and fulfill their obligations. 

ESMA’s 2024 enforcement priorities underscore a pivotal shift in how the EU views corporate reporting. By focusing on double materiality, taxonomy compliance, and the alignment of financial and sustainability data, ESMA is paving the way for a more accountable, transparent, and sustainable corporate landscape. Regulators play a central role in ensuring that companies not only understand but also implement these requirements effectively. As we move forward, regulators must keep engaging with entities, helping them navigate the complexities of compliance and fostering a culture of transparency and integrity in corporate sustainability. By supporting companies in their journey towards meeting these stringent new standards, regulators are not just enforcing rules—they’re laying the groundwork for a resilient, ESG-focused economy that benefits businesses, stakeholders, and society at large.