News - Issuers subject to the Transparency Law: look out for the CSSF’s enforcement priorities for 2023 annual reports

On 25 October 2023, the European Securities and Markets Authority (“ESMA”) launched its annual Public Statement setting out the European Common Enforcement Priorities (“ECEPs”) for 2023 annual financial reports of issuers admitted to trading on European Economic Area (“EEA”) regulated markets^[1]. The ESMA presented the ECEPs, which included priorities to IFRS financial statements, non-financial statements and alternative performance measures.

The ESMA reminded issuers and auditors to consider the following topics, namely:

• ECEPs related to IFRS financial statements:
  • Climate-related matters; and 
  • Macroeconomic environment. 
• ECEPs related to non-financial statements:
  • Disclosure relating to Article 8 of the Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment (the “Taxonomy Regulation”)^[2];
  • Disclosure of climate-related targets, actions and progress; and
  • Disclosure on greenhouse haw (GHG) emissions.
• ECEPs related to other considerations:
  • Alternative Performance Measures (“APMs”) and European Single Electronic Format (“ESEF”). 

Please find the full text of ESMA’s public statement on the 2023 ECEPs available on https://www.esma.europa.eu.

Issuers preparing their reporting for the 2023 financial year in accordance with the requirements set out in the Transparency Law must consider these ECEPs as well as the below CSSF specific point of focus deriving from said ECEPs. 

1. IFRS Statements

1.1. Focus on climate-related matters

To achieve a global green transition, the European institutions are committed in ensuring that the financial sector actively contributes to the climate change.

Already identified as ECEPs in 2022 and 2023, climate-related matters remain particularly relevant for 2023 annual reports. Issuers need to include specific and relevant information on how climate risks have been factored in their financial statements. The ESMA launched a report dated 25 October 2023 that invites issuers to pay attention to the best practices relating to disclosures of climate-related matters in the financial statements^[3]. The CSSF strongly invites issuers to follow these recommendations.

The CSSF further underlines the importance of considering climate-related risks and opportunities in terms of impairment testing of non-financial assets. Additionally, cash flow projections in value in use measurements must be based on reasonable and supportable assumptions (related to climate matters) representing the management’s best estimate of the range of economic conditions that will exist over the remaining useful life of the asset.

Finally, issuers are expected to provide information when climate-related matters impact (i) the business plan assumptions used when estimating the recoverable amount of assets, (ii) the period considered beyond the business plan and if and how cash flows are impacted in this context, or (iii) the financial assumptions used, such as the discount rate and the growth rate.

1.2. Macroeconomic environment

1.2.1. Increase in interest rates and impact on (re)financing

When preparing their 2023 IFRS statements, issuers should provide specifics on how changes in the macroeconomic environment (resulting from recent interest rates hikes) affect their risk exposures and how such risks are managed.

The sensitive macroeconomic situation may lead issuers to look for additional financing and/or to amend the terms of existing debt. The CSSF reminds issuers that they must provide adequate disclosures on any renegotiation of financing specifically regarding the main changes in terms of debt agreements and their financial impacts in their accounts.

Issuers are also expected to provide disclosure on the impact of any potential breach of covenant requirement included in long-term loan arrangements.

1.2.2.  Fair-value measurement and disclosures

Determining fair values is made difficult in light of the current macroeconomic environment. Changes in the fair values may have a material impact on issuers’ financial position and performance. The CSSF reminds issuers that the current macroeconomic conditions (e.g. high interest rates, yields and vacancy expectations) are expected to be reflected in issuers’ fair value measurements and in the related disclosure with specific attention on IFRS 7 and IFRS 13 requirements.

2. Non-Financial Statements: greener as ever

The Taxonomy Regulation known as the cornerstone of the European sustainable finance framework continues to be applied as an important market transparency tool. Considering the green EU financial transformation objective, the European Commission has adopted on 27 June 2023 delegated acts with updated versions of the mandatory reporting tables and spell out technical screening criteria with regards to the climate change mitigation and adaptation which are applied from 1^st January 2024 for annual reports 2023^[4]. Following the requirements set out in Article 8 of the Taxonomy Regulation, the CSSF will ensure that issuers clearly disclose information about the environmental performance of their assets and economic activities providing information on the alignment of their activities with regard to the climate change mitigation and adaptation objectives.

Similarly, issuers are requested to pay attention to the entry into force of the Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 (“CSRD”)^[5] as from 1 January 2024 for annual reports to be published in 2025 for issuers currently reporting under Directive 2014/95/EU of the European Parliament and of the council of 22 October 2014 as regards disclosure of non-financial and diversity information by certain large undertakings and groups (“NFRD”)^[6]. Keeping in mind that CSRD extends the scope and strengthens the rules on non-financial reporting introduced by NFRD.

Finally, special attention will be brought to disclosures on climate-related targets, actions and progress.

Likewise, APMs remain an important point under the CSSF radar. The APMs should be treated in line with the ESMA APM Guidelines available on https://www.esma.europa.eu

For further information, please read the fullest CSSF publication available on https://www.cssf.lu/en/

Notes:

[1] ESMA, Public Statement, European common enforcement priorities for 2023 annual financial reports date 25 October 2023 available on www.esma.europa.eu

[2] Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 available on www.eur-lex.europea.eu    

[3] ESMA, Report, The Heat is On: Disclosures of Climate-Related Matters in the Financial Statements, 25 October 2023 available on www.esma.europa.eu

[4] Commission Delegated Regulation (EU) 2023/2486 of 27 June 2023 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to the sustainable use and protection of water and marine resources, to the transition to a circular economy, to pollution prevention and control, or to the protection and restoration of biodiversity and ecosystems and for determining whether that economic activity causes no significant harm to any of the other environmental objectives and amending Commission Delegated Regulation (EU) 2021/2178 as regards specific public disclosures for those economic activities available on https://eur-lex.europa.eu

[5] Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting (Text with EEA relevance) available on https://eur-lex.europa.eu

[6] Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups Text with EEA relevance available on https://eur-lex.europa.eu