ESMA is an independent EU authority that was established in 2011. ESMA’s mission is to enhance the protection of investors and promote stable and well-functioning financial markets in the European Union.

Carbon pricing programmes have developed (and may continue to develop) in many shapes, forms and sizes, and the terminology associated with them often combines and mixes different definitions, concepts and classifications (e.g., credit, offset, allowance, etc.). For the purposes of ESMA Statement, carbon pricing programmes refer to instruments representing i) a permission to emit one ton of carbon dioxide (CO₂) in a specified time period, or ii) a tradeable credit generated through emissions reductions or carbon removal measures or projects, representing one ton of CO₂ reduced or removed. Carbon pricing programmes are certified by governmental bodies (compliance market) or independent verifiers (voluntary markets), have a unique serial identifier, and are issued, tracked and cancelled within an electronic registry.

The ESMA statement focuses on compliance carbon pricing programmes and specifically emission allowances, rights and permits (hereafter, carbon allowances). The statement aims at improving financial reporting for issuers engaging in carbon allowance programmes.

This Statement

• Takes stocks of the different accounting approaches observed to date in the financial statements of European listed issuers regarding carbon pricing programmes,
• Encourages issuers to consider which IFRS Accounting Standards could be used to account for carbon allowances in their financial reporting, and
• Provides disclosure recommendations to enhance decision usefulness for users by promoting transparency of the information included in the financial statements with respect to carbon pricing programmes, in which an issuer is engaged.

The statement does not prescribe a method according to which carbon allowances should be accounted for in the financial statements, but rather reinforces ESMA’s prior calls and recommendations for increasing transparency and decision usefulness for users. The Statement aims to raise issuers’ awareness regarding a topic whose relevance in corporate reporting has increased in recent years and is expected to continue to gain further attention as the targets set out in the 2015 Paris Agreement draw closer and issuers may need to consider carbon allowances to compensate greenhouse gas (GHG) emissions. Its contents should be considered in light of materiality.

The statement also comments on connectivity and calls for consistency between the assumptions used in estimations and measurements related to climate matters and the information provided across the different sections of the annual financial report. It notes that issuers should carefully and consistently connect the information that is provided with respect to carbon allowances in the financial statements with the disclosures required under the European Sustainability Reporting Standards (ESRS).

Please click to access the statement on the ESMA website.