Companies need to further improve their non-financial reporting, and in some respects “urgently”, according to the EU financial markets watchdog.

Every year ESMA publishes a report about enforcement and regulatory activities related to corporate reporting, which over the years has also come to entail increased scrutiny of non-financial statements.

Based on companies’ non-financial statements reviewed last year, it said it “observes that there is room for improvement in relation to certain requirements, notably disclosure of the principal risks related to environmental matters and especially climate change, the impact of the environment/climate change on issuers and the financial consequences of that impact”.

“ESMA acknowledges that issuers may still be undergoing a learning curve as regards to preparing non-financial information in accordance with the requirements of the Accounting Directive, but nevertheless highlights that these important aspects of the non-financial statement merit further urgent enhancements in the upcoming reporting period,” it added.

Other observations relayed by the watchdog included that more work needed to be done on specific aspects of Key Performance Indicator (KPI) disclosure, such as how the KPIs selected by the issuer relate to its targets, and that issuers in its sample used a wide range of disclosure frameworks to prepare their non-financial statements.

“ESMA is ready to assist the European Commission to ensure that appropriate standards for non-financial reporting are established.”

Steven Maijoor, chair of ESMA

“Investors are […] increasingly demanding reliable and relevant disclosure on ESG factors,” said Steven Maijoor, chair of ESMA. “Examinations of non-financial statements during 2019 show that further efforts are needed from European issuers.

“Together with national enforcers, ESMA will continue its focus on this area to ensure that investors are provided with high-quality ESG information.”

Maijoor added: “To support this work ESMA is ready to assist the European Commission, as part of its review of the Non-Financial Reporting Directive (NFRD), to ensure that appropriate standards for non-financial reporting are established.”

The Commission is on the second leg of a two-part consultation process on the revision of the NFRD.

From late January to late February it ran a high-level consultation on three policy options: continuing with the current approach of non-binding guidelines and updating them; having the Directive be more based on standards, or one standard; or strengthening the legislation itself.

Shortly before that consultation closed for feedback the Commission launched a more detailed questionnaire on changes to the NFRD, which at the moment is scheduled to close on 14 May.

Relatedly, the Commission has backed the development of EU-wide non-financial reporting standards while saying it would continue to engage with international efforts to develop a global reporting standard.

ESMA has previously said better non-financial reporting could help counter short-termism.

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