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European common enforcement priorities

As national transpositions of the Non-Financial Reporting Directive became applicable in most EU Member States for reporting periods starting on or after 1 January 2017, ESMA’s European common enforcement priorities (ECEP) for disclosure covering 2017 for the first time included a reference to the requirements under the NFRD. The 2018, 2019 and 2020 Statements presented increasingly detailed recommendations in this area.

The purpose of these recommendations is to make issuers subject to the NFRD aware of the topics which ESMA and national enforcers deem it particularly important to cover in the non-financial information reported for a given year. ESMA and national enforcers will pay special attention to these topics when monitoring and assessing the application of the Non-Financial Reporting Directive disclosure requirements, and national enforcers will take corrective actions when material misstatements are identified.

ESMA follows up on issuers’ application of each year’s ECEP in its annual report on enforcement and regulatory activities (report covering 2017 ECEP, report covering 2018 ECEP).

In addition to the ECEP, national enforcers may decide to set further disclosure priorities which are relevant from a national perspective.ESMA coordinates national enforcers’ supervisory activities related to the reporting requirements of the Non-Financial Reporting Directive.

Feedback to the European Commission on legislative and regulatory set-up

  • Advice on disclosure under Article 8 of the Taxonomy Regulation

Article 8 of the Taxonomy Regulation obliges undertakings required to publish non-financial information under the Non-Financial Reporting Directive to include information on how and to what extent their activities are associated with economic activities that qualify as environmentally sustainable under the Taxonomy Regulation. For this purpose, non-financial undertakings are required to disclose the proportion of their turnover, capital expenditure and operating expenditure associated with economic activities that qualify as environmentally sustainable.

By 1 June 2021, the European Commission is required to adopt a delegated act to supplement the above obligations by specifying the content, presentation and methodology of the information to be disclosed. In September 2020, the Commission requested ESMA to provide advice relating to this delegated act. At the same time, the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) were requested to provide advice on aspects of the delegated act within their specific remits.

ESMA, EBA and EIOPA are invited to submit their respective advice to the Commission by the end of February 2021.

  • Review of the Non-Financial Reporting Directive

In its 2019 Communication on the European Green Deal, the European Commission committed to reviewing the Non-Financial Reporting Directive as part of its objective to strengthen the foundations for sustainable investment.

The Commission conducted a public consultation related to this review in the first half of 2020. ESMA submitted a response which notably presented the following views:

  • Guidelines on reporting climate-related information

As required by the Non-Financial Reporting Directive, the European Commission issued Guidelines on non-financial reporting in 2017 to help companies disclose relevant non-financial information in a more consistent and comparable manner.

In 2018, the Commission published its Action Plan on financing sustainable growth in which it committed to updating the Guidelines on non-financial reporting, specifically regarding the reporting of climate-related information. A consultation was conducted on the update of the Guidelines during early 2019, and ESMA provided a response, highlighting that a more stringent set of requirements would help fill the current transparency gap between financial and non-financial information.

Following the consultation, in June 2019 the Commission issued its Guidelines on reporting climate-related information which are effectively a supplement to the 2017 Guidelines.

Standard-setting

The Non-Financial Reporting Directive gives issuers the freedom to choose which framework to use, if any, when preparing their non-financial information. ESMA is of the view that this flexibility does not ensure that the information needs of users are met. ESMA therefore supports the introduction of a uniform set of disclosure standards to promote more relevant, reliable and comparable reporting of non-financial information.

In the medium term, the goal should be the international consolidation of disclosure standards. In the short term, standards are needed in Europe to meet user demand for high-quality reporting. Such standards should take account of internationally recognised frameworks and be set out in delegated acts.

EU Green Bond Standard

As part of its 2018 Action Plan on financing sustainable growth, the European Commission committed to developing an EU Green Bond Standard (EU GBS). The Commission’s Technical Expert Group on sustainable finance (TEG) delivered recommendations on how to design and implement an EU GBS in June 2019.

During 2020, the Commission invited views from the public on how to take the TEG’s recommendations forward in its consultation on a Renewed Sustainable Finance Strategy (ESMA’s response here) and in a dedicated EU GBS consultation (ESMA’s response here).