ESMA Common Enforcement Priorities for 2021: Priorities Identified for Non-Financial Statements
The European Securities and Markets Authority (“ESMA”) issued its statement on the European common enforcement priorities for 2021 annual financial reports of listed companies, with a focus on COVID-19 and climate-related disclosures.
In relation to non-financial statements, priorities include:
- Impacts of COVID-19 – ESMA recommends that issuers provide transparency on how the consequences of the pandemic are affecting their plans to meet sustainability targets and whether any new or adjusted goals have been determined. Issuers are encouraged to disclose how they foresee the development of their business in response to changing conditions arising from the pandemic, in particular in relation to any expected structural changes to the way they conduct their business and arrange the working conditions for their employees. ESMA also recommends transparency on any material effects that the pandemic might have had on non-financial key performance indicators (“KPIs”) and on any new non-financial KPIs which may have been developed to reflect any long-term effects of the pandemic.
- Climate-Related Matters – ESMA reminds issuers of the requirements under the EU Accounting Directive to disclose policies in relation to non-financial matters and the outcome of those policies, emphasising the importance of providing such transparency in climate-related matters. ESMA reminds issuers of the guidance provided by the European Commission in its non-binding guidelines on reporting climate-related information which is also consistent with the disclosures envisaged by the TCFD. Following review of the 2019 European Common Enforcement Priorities, ESMA noted that in several instances the issuers reviewed did not disclose information specific to climate change and have only generically referred to policies addressing environmental issues, often omitting to provide explanations for any such omissions. ESMA notes that a good practice could be to disclose the reasons to conclude why the disclosures on climate-related matters were not provided. ESMA emphasises the importance of disclosing which policies, if any, issuers have in place to address climate change, including the most significant transitional and physical risks identified as having a current or future expected material impact on its business model and activities, how those risks are managed and the actions in place to address those risks. Issuers should provide specific indicators and explain how the entity’s performance on such indicators is consistent with any pre-defined targets. ESMA notes that an issuer’s strategy, plans, targets and current performance in relation to climate-related matters should be taken into account both in terms of non-financial disclosures as well as financial information.
- Disclosures Relating to Article 8 of the Taxonomy Regulation – ESMA reminds issuers to make the necessary preparations to fulfil the disclosure requirements under Article 8 of the Taxonomy Regulation, which will come into force with effect from 1 January 2022. ESMA notes that the assessment of the degree of alignment of an issuer’s economic activities with the taxonomy criteria and the disclosure of the related information may require collection of data that may not always be readily available to issuers. ESMA, therefore, encourages issuers to put in place the necessary preparations to ensure a timely and correct application of the relevant requirements.
Issuers are also reminded that annual financial reports must be prepared in compliance with the European Single Electronic Format.