ESMA Invites Feedback on its Enforcement Approach Under New EU Sustainability Reporting Rules

Companies required to disclose and publish sustainability information under the EU Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy Regulation have the opportunity to comment on the European Securities and Markets Authority’s (ESMA) approach to enforcement when the requirements take effect from 1 January 2025.

The CSRD, which will replace the current reporting requirements under the current Non-Financial Reporting Directive (NFRD), entered into force on 5 January 2023, with member states required to transpose the directive into their respective law by 6 July 2024.

Among the changes in the new legislation is that a broader set of large companies, as well as listed SMEs, will now be required to report on sustainability. It also gives the European Commission a mandate to adopt delegated acts setting out detailed sustainability reporting standards. The first of those is the development of the European Sustainability Reporting Standards (ESRS), which corporates will be required to report against, and which were finalised last year. The CSRD also introduces a new Article 28d into the Transparency Directive, giving ESMA the authority to issue guidelines.

ESMA proposes that in respect to enforcement of sustainability information requirements, it will take a similar approach to that which it already takes under its Guidelines on Enforcement of Financial Information

Enforcement responsibilities will the responsibility of member state financial market supervisory agencies, as per the EU supervisory arrangements spelled out in the EU Transparency Directive. They will be expected to include the new sustainability reporting requirements into their standard markets supervisory policies and practices. Their own compliance will be monitored by ESMA.

Member state supervisory agencies have the power to examine compliance of financial information and compel the production of documents, carry out on-site inspections, and issue orders that investors be informed of material infringements discovered and provided with timely corrected information. Member states, as is the case under the NFRD, are able to set their own penalties.

France was the first member states to transpose the CSRD into French law. Under this legislation, dated 6 December 2023, a company director who fails to have information certified, or who hinders such certification, can be subject to criminal penalties of up to five years of imprisonment and a fine of up to €75,000. Any auditor who gives false information will also be exposed to the same penalty.

ESMA has released a consultation document for discussion until 15 March 2024, with market participants asked to provide comments on specific sections, including the examination types and objectives of sustainability information enforcement.

The goal of the guidelines are to outline the procedures for enforcing sustainability reporting standards, and on the approach it will take to examine whether sustainability information complies with the framework.

The consultation paper can be found here, where feedback can also be provided. #EU #regulation #reporting #CSRD