Ecovis Newsletter ESG 02-2025
Ecovis is ready to support you in all areas related to ESG and consulting. Click here to send us an email and start assessing your readiness for your ESG journey.
ESMA Emphasises Climate Reisks and ESG Investing
The European Securities and Markets Authority (ESMA) shone a spotlight on climate-related risks and ESG investing at its inaugural Research Conference. With discussions on sustainable investment trends, portfolio exposure to physical climate risks and the reliability of ESG data, ESMA highlighted the critical role of the financial sector in managing indirect climate risks and driving the green transition.
The conference provided key insights into how EU funds are exposed to climate-related risks, with northern European funds more vulnerable to flooding, while southern Europe faces water scarcity challenges. In parallel, ESMA’s updated Sustainable Finance Timeline sets out new guidelines for ESG-related fund labels, promoting greater transparency and investor protection. By improving data reliability and analyzing systemic risks, ESMA aims to support sustainable capital markets and mitigate climate vulnerabilities.
Recommendation:
Firms managing investment portfolios or advising clients on ESG strategies should assess geography-specific climate risks, taking advantage of ESMA’s findings on regional exposures. Prioritize compliance with ESMA’s updated fund naming guidelines and ensure that ESG data used for decision-making meets emerging reliability standards. Developing robust frameworks to manage indirect climate risks is essential for financial stability and investor confidence.
EU Flagship Project Arims to Boost SMA Capacities in Sustainability Reporting
To advance the EU’s framework for sustainable finance, a new flagship initiative will provide technical assistance to Member States to help companies meet the requirements of the Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards (ESRS) and the EU Taxonomy. The program focuses on simplifying sustainability reporting, especially for SMEs, while addressing financial and administrative burdens.
The initiative targets both listed and unlisted SMEs that, while not directly subject to the CSRD, face increasing demands for sustainability data from financial and value chain partners. Proposed support measures include data mapping, reporting templates, automated disclosure tools and the creation of public ESG data hubs. In addition, capacity-building measures such as training programs, communication campaigns and cross-sector workshops aim to raise awareness and streamline compliance. By increasing transparency in reporting, this initiative will enable SMEs to access sustainable finance and strengthen their competitiveness.
Recommendation:
SMEs should start preparing for sustainability reporting by assessing internal ESG data collection processes and identifying gaps in readiness to comply with the CSRD and the EU Taxonomy. Take advantage of available EU-funded training and capacity building programs to reduce administrative burdens. Member States should prioritize applications for technical assistance under this initiative by the October 2024 deadline to develop resources such as reporting templates, automated tools and helpdesk support for SMEs to facilitate implementation.
Fit-for-55: EU Climate Stress Test Assesses Financial Sector’s Resilience
In support of the EU’s Fit for 55 targets to reduce emissions by 55% by 2030, the European Supervisory Authorities (ESAs) and the European Central Bank conducted a climate stress test of the financial sector. This analysis assesses the sector’s resilience and ability to support the transition to a low-carbon economy under stressed conditions, providing insights into climate-related risks and vulnerabilities.
The test covers an extensive dataset, including 110 banks, 2,331 insurers, 629 pension funds, and nearly 59,000 global mutual funds. The results, which will be published at an aggregate level, are intended to inform policies to strengthen financial system stability and align financial flows with the EU’s green transition goals. This assessment will help identify potential gaps in readiness as the EU accelerates its transition to renewable energy, cleaner transport and greener buildings under the Fit for 55 package.
Recommendation:
Financial institutions should prepare for increased regulatory scrutiny of climate risks by integrating climate scenario analysis into their risk management frameworks. Improve alignment with Fit-for-55 targets by assessing portfolio exposure to carbon-intensive sectors and increasing investments in green assets. Regulators should use stress test results to develop targeted guidance to improve sectoral resilience and steer financial flows towards sustainable activities critical to the EU’s decarbonization goals.
Navigating ESRS Materiality Assessments: Clarity and Challenges
The European Sustainability Reporting Standards (ESRS), effective from January 2024 under the Corporate Sustainability Reporting Directive (CSRD), require companies to apply dual materiality to assess sustainability impacts, risks and opportunities (IROs). While EFRAG’s guidance supports implementation, Accountancy Europe identifies areas that require further clarification, including value chain integration, group assessments and reporting on social issues.
The ESRS mandate a dual materiality approach, assessing both impact and financial perspectives. Companies need to consider IROs across their operations and value chains, taking into account short, medium and long-term horizons. However, challenges remain in defining value chain boundaries, assessing social and human rights impacts, and addressing complex scenarios for large, multinational companies. Coordination with international frameworks, such as the ISSB and GRI, is also essential to ensure global alignment and reduce compliance burdens.
Recommendation:
Entities should review EFRAG’s guidance and develop robust materiality assessment processes tailored to their operations, value chains and industries. Financial institutions and multinationals should prioritize establishing clear boundaries for IRO assessments and prepare for forthcoming sector-specific ESRS standards. Regulators and standard-setters should fill gaps by providing practical examples, particularly for social issues and value chain assessments, while deepening collaboration with the ISSB and GRI to harmonize practices and streamline reporting requirements globally.
Clarifying Sustainability Reporting under the CSRD: Key Insights from the European Commission’s FAQs
The European Commission has published a detailed FAQ document to assist businesses in complying with the sustainability reporting requirements introduced by the Corporate Sustainability Reporting Directive (CSRD). These requirements, which amend several EU directives and regulations, aim to enhance transparency, comparability, and usability of sustainability information, aligning with the broader goals of the EU Green Deal.
The CSRD applies to large undertakings, listed SMEs (excluding micro-enterprises), and parent undertakings of large groups, including certain third-country entities with significant EU market activity. Reporting must adhere to the European Sustainability Reporting Standards (ESRS), include a digital reporting format, and be assured by an external provider. Key challenges addressed in the FAQs include scope determination, the materiality assessment process, and assurance obligations.
Recommendation:
Companies subject to CSRD should prioritize mapping their compliance timelines based on size and activity criteria outlined in the directive. Engage with EFRAG’s guidance on ESRS and integrate sustainability reporting into existing financial reporting processes to streamline compliance. For entities on the fringes of CSRD’s scope, assess voluntary reporting benefits to meet stakeholder demands. Policymakers and auditors should closely monitor updates to the FAQs to ensure alignment with evolving EU sustainability frameworks.
CSRD Implementation: Opportunities, Challenges and Market Readiness
The EU’s Corporate Sustainability Reporting Directive (CSRD) and accompanying European Sustainability Reporting Standards (ESRS) mark a transformative shift in corporate sustainability reporting, aiming to close the data gap for investors while strengthening companies’ due diligence and risk management systems. Beginning in 2025, large companies will be required to report in accordance with the ESRS, addressing transparency challenges and improving comparability across industries.
The CSRD framework integrates seamlessly with other regulatory requirements, such as the Corporate Sustainability Due Diligence Directive (CSDDD), allowing companies to comply with both directives through a single, comprehensive reporting process. But while the standards provide a robust tool for prioritizing risks, engaging stakeholders, and building resilience, early market signals show the risk of superficial, box-ticking compliance that could undermine the directive’s transformative goals.
This research, which assesses 100 high-impact companies, highlights challenges such as inconsistent disclosure, lack of comparability, and difficulties in accessing reliable sustainability data. At the same time, it identifies emerging good practices, such as integrating due diligence findings into reports to build coherence and drive behavior change. Adequate guidance, oversight, and public support are critical to overcome early implementation hurdles and prevent the spread of poor practices.
Recommendation:
Companies should view the implementation of the CSRD as an opportunity to go beyond compliance by embedding sustainability into their core strategy. Focus on producing meaningful disclosures that reflect material impacts and risks, rather than relying on checklist reporting. Policymakers and auditors should emphasize capacity building and develop guidance to help companies navigate the complexities of ESRS. Regulators should actively monitor the quality of compliance to ensure that early adopters set a strong precedent for sustainability reporting.
IFRS Foundation issues guidance on sustainability risks, opportunities and materiality
The IFRS Foundation has published a comprehensive guide to assist companies in identifying and disclosing sustainability-related risks and opportunities under the International Accounting Standards Board (IASB). Central to the guidance is the concept of integrated thinking, which emphasizes a company’s interdependence with its stakeholders, society, the economy, and the natural environment throughout its value chain. This approach is consistent with IFRS S1’s focus on how these interdependencies and impacts affect an entity’s cash flows, access to finance or cost of capital over different time horizons.
The guidance provides a clear framework for integrating sustainability disclosures into financial reporting, using the materiality principles set out in IFRS Practice Statement 2. Companies already using IFRS accounting standards, which are applied in over 140 jurisdictions, will find the process closely aligned with existing financial materiality assessments. For global application, the guidance outlines how ISSB standards can complement frameworks such as the European Sustainability Reporting Standards (ESRS) and Global Reporting Initiative (GRI) standards, fostering an interconnected reporting landscape.
Recommendation:
Companies should integrate the ISSB materiality framework into their reporting practices to align sustainability disclosures with financial statements. Companies using IFRS should leverage their existing materiality assessment processes for efficiency. Companies reporting under multiple frameworks (e.g. ISSB, ESRS, GRI) should align disclosures to minimize duplication and ensure consistency across stakeholder needs. Policymakers and regulators should use this guidance to promote the link between sustainability and financial reporting and support global comparability.
EU adopts regulation to improve transparency and integrity of ESG ratings
The Council has adopted new rules for environmental, social and governance (ESG) rating activities aimed at improving the reliability, transparency and comparability of ESG ratings in the EU. These rules aim to increase investor confidence in sustainable financial products by ensuring consistency and avoiding conflicts of interest among ESG rating providers.
Under the Regulation, ESG rating providers established in the EU must be authorised by the European Securities and Markets Authority (ESMA), comply with transparency requirements and disclose methodologies and data sources. Non-EU providers must either partner with EU-authorized providers, meet equivalence criteria, or be recognized through an endorsement or equivalence decision to operate in the Union. The regulation also enforces the separation of commercial activities to mitigate conflicts of interest.
Recommendation:
Companies that rely on ESG ratings for investment or disclosure should prepare for increased scrutiny by ensuring transparency of their sustainability practices and data. ESG rating providers will need to align their methodologies with the new requirements and prepare for ESMA oversight. Investors should use the regulation’s transparency provisions to critically assess the quality of ratings. Early engagement with ESG rating providers can ensure compliance readiness when the rules come into force in 18 months’ time.
EU cements leadership in sustainable finance with Next Generation EU Green Bonds
The European Union continues to lead the world in sustainable finance, with more than €65 billion of Next Generation EU (NGEU) Green Bonds to be issued by 2021. This positions the EU as the world’s largest issuer of green bonds, with a target to allocate 30% of NGEU financing to green investments, as announced by President Ursula von der Leyen in the 2020 State of the Union address. These bonds are expected to support €264.6 billion of green investments in nine key sectors, including clean transport, renewable energy and energy efficiency.
The latest NGEU Green Bonds Impact Report highlights significant climate benefits, with investments projected to reduce EU greenhouse gas (GHG) emissions by 55 million tons per year, equivalent to taking 38 million combustion cars off the road or the emissions of 15 million households. Transparency remains at the heart of the initiative, with a Green Bond Dashboard providing real-time updates on the allocation of funds, ensuring compliance with market standards and building investor confidence.
Recommendation:
Governments and private sector participants should use the EU Green Bond Framework as a benchmark for transparency and market alignment, particularly for reporting and impact assessment. Investors should monitor opportunities in NGEU green bonds, given their robust climate impact and compliance with International Capital Market Association principles. Member States must ensure rigorous implementation of Recovery and Resilience Plans (RRPs) to meet green investment targets and maintain the EU’s momentum in driving the global green transition.
EFRAG publishes Voluntary Sustainability Reporting Standard (VSME) for non-listed SMEs
EFRAG has published its Voluntary Sustainability Reporting Standard (VSME) for non-listed micro, small and medium-sized enterprises (SMEs), providing a streamlined framework to address uncoordinated ESG data requirements and support access to sustainable finance. Developed at the request of the European Commission as part of the 2023 SME Relief Package, the VSME aims to simplify sustainability reporting for SMEs not covered by the Corporate Sustainability Reporting Directive (CSRD).
The VSME consists of two modules: a basic module for general information and a comprehensive module for more detailed reporting. Together, these modules aim to meet the needs of SMEs’ business partners, including banks, investors and large corporations, while reducing the administrative burden of managing multiple ESG data requests. Stakeholders have called for complementary digital tools, guidance, and training to support adoption of the standard, which EFRAG plans to address in 2025 through awareness campaigns, educational materials, and outreach initiatives.
Recommendation:
Non-listed SMEs should consider adopting the VSME to meet the sustainability information needs of business partners, improve access to green finance, and enhance operational insight. Large corporates and financial institutions are encouraged to recognize the VSME as a standard framework to reduce uncoordinated data requests. EFRAG’s planned support tools in 2025 will further facilitate the implementation of the VSME. Policymakers and standard-setters should promote market-wide adoption to ensure that the VSME becomes a widely adopted solution for ESG reporting.
EFRAG’s updated ESRS Q&A Compilation: 157 Explanations to support preparers
EFRAG has published an updated compilation of technical explanations for the European Sustainability Reporting Standards (ESRS), with 64 new explanations, bringing the total to 157. The explanations address practical issues raised by stakeholders between January and November 2024 and provide guidance to preparers on navigating the complex requirements of the ESRS. Divided into five topical areas – general requirements, environmental, social, governance, and XBRL/data points – these responses address key challenges from a practitioner’s perspective.
Key findings include
- Judgment for metrics (ID 58): Companies will need to use professional judgment in complying with metrics-related requirements, including the number, type, and level of granularity of metrics, such as global-level disclosures without disaggregation.
- Transitional provisions (ID 268): Transitional provisions allow smaller companies (with fewer than 750 employees) to omit certain disclosures (e.g., E4, S2-4) for up to two years, while still requiring the topic to be assessed for materiality.
- Goal-Policy Linkage (ID 1136): While the ESRS does not require each sustainability objective to be linked to a specific policy, companies must explain such linkages when objectives do not have associated policies. This ensures transparency, although it may highlight inefficiencies in achieving targets without clear implementation frameworks.
Recommendation:
Preparers should closely review EFRAG’s Q&A Compilation to clarify complex disclosure requirements and identify practical solutions to challenges such as metrics assessment, transition provisions, and alignment of policies with objectives. Use these insights to improve reporting accuracy, align with ESRS expectations, and avoid inefficiencies in setting sustainability objectives. Stakeholders are encouraged to monitor future updates to the Q&A platform and incorporate lessons learned into their reporting frameworks to ensure compliance and improve the quality of sustainability disclosures.
EBA finalizes guidelines on ESG risk management for banks
The European Banking Authority (EBA) has published its final guidelines on environmental, social and governance (ESG) risk management, setting out requirements for banks to identify, measure, manage and monitor ESG risks. These guidelines are in line with the Capital Requirements Directive (CRD6) and aim to increase the resilience of financial institutions as ESG risks intensify and the EU moves towards its 2050 climate neutrality goal.
The guidelines outline the internal processes and risk management frameworks that institutions must adopt, including transition plans, to address financial risks arising from ESG factors. These plans should be consistent with other transition plans required by EU legislation and support banks’ preparedness for climate and sustainability challenges. Large institutions will have to comply by January 11, 2026, while small and non-complex institutions will have an additional year until January 11, 2027. The EBA also plans to issue complementary guidance on ESG scenario analysis.
Recommendation:
Banks should immediately assess their current ESG risk management frameworks against the EBA’s requirements and begin to develop or enhance transition plans to address climate and ESG risks. These plans should be aligned with broader EU sustainability regulations and carbon neutrality targets. Institutions should also prepare for ESG scenario analysis as part of broader risk assessments. For smaller institutions, take advantage of the extended timeline to implement compliant frameworks, but start planning early to ensure readiness.
Streamlining sustainability reporting: Mapping Voluntary Standards to Mandatory Requirements
The European Union is promoting sustainable business practices by clarifying the relationship between voluntary environmental management frameworks and mandatory sustainability reporting standards. A recent paper from the EFRAG Secretariat identifies significant synergies between the voluntary Eco-Management and Audit Scheme (EMAS) and the new mandatory European Sustainability Reporting Standards (ESRS), showing that many environmental disclosure requirements can make use of data already collected under EMAS.
For the more than 4,100 organizations already using EMAS, the new guidelines offer significant benefits. They can now incorporate existing environmental statements directly into their ESRS reporting, reducing duplication of effort and simplifying compliance with the new standards, which come into force in 2024. Key stakeholders, such as Patrick de Cambourg and Pedro Faria, underscore the importance of this approach, highlighting how 30 years of environmental management experience can help companies meet evolving sustainability reporting requirements.
Recommendation:
Companies should immediately assess how their existing environmental management systems align with the new ESRS requirements. Use the mapping document to identify opportunities to streamline reporting processes, leverage existing data collection mechanisms, and prepare for the 2025 reporting cycle. For companies already registered under EMAS, consider incorporating existing environmental statements directly into sustainability reports to minimize additional administrative burden.
ESMA publishes clarification on ESG and sustainable investment fund naming guidelines
The European Securities and Markets Authority (ESMA) has published a comprehensive set of questions and answers covering specific aspects of its guidelines for funds using ESG or sustainability-related terms. The guidance focuses on key areas such as green bonds, sustainable investment definitions and controversial weapons exclusions, and aims to ensure consistent application of regulatory standards across investment funds.
The Q&As provide important clarifications for fund managers, including a specific threshold that funds must meet to be considered “meaningfully invested in sustainable investments” – requiring at least 50% sustainable investments. In addition, the guidance provides nuanced treatment of green bonds, specifying that investment restrictions do not apply to European green bonds, and provides a standardized approach for evaluating controversial weapons exclusions by referencing the SFDR’s principal adverse impact indicator.
Recommendation:
Firms should comprehensively review these ESMA guidelines and ensure that their fund designations and investment strategies are consistent with the new clarifications. Immediate steps should include reassessing portfolio composition, reviewing sustainable investment percentages, and updating investment restrictions to comply with the detailed Q&A provisions.
Sustainability Reporting Assurance: Key Guidelines and Regulatory Framework
The Corporate Sustainability Reporting Directive (CSRD) introduces mandatory sustainability reporting standards, requiring companies to disclose sustainability information in a digital, machine-readable format. The Directive increases corporate accountability by introducing an EU-wide assurance requirement, requiring limited assurance on sustainability reporting from 2025 for the 2024 reporting period.
The assurance process includes a risk-based approach with three stages: planning, execution and reporting. Practitioners will perform limited assurance engagements focusing on understanding the compilation process and identifying potential material misstatements. The Directive establishes key requirements, including dual materiality assessments, specific reporting standards, and professional qualifications for assurance providers.
Recommendation:
Companies should prepare for the new sustainability reporting requirements by developing robust internal reporting mechanisms, ensuring data accuracy, and familiarizing themselves with the CSRD’s detailed assurance guidelines. Companies should also begin to evaluate their current sustainability reporting processes to align them with the new European Sustainability Reporting Standards.
Ecovis is ready to support you in all areas related to ESG and consulting. Click here to send us an email and start assessing your readiness for your ESG journey.
Simona Reggiani
- Italy
- Ecovis in Genoa
- +39 010 55 32 41