The EU financial markets watchdog has recommended the European Commission take steps to improve the quality of environmental, social and governance (ESG) disclosure as a potential counter to “undue short-termism” in financial markets.

It said there were shortcomings in existing EU legislation in terms of providing for comparable, relevant and reliable ESG disclosure, which made it “more difficult for the positive relationship between ESG disclosure and long-term investment to materialise”.

It has advised the Commission to amend the Non-Financial Reporting Directive (NFRD), promote a single set of international ESG disclosure standards, and require the inclusion of non-financial statements in annual financial reports.

The Commission has already said it will review the NFRD this year. According to ESMA’s recommendations the EU executive should consider amending the Directive to allow for the development of binding measures, including to provide for a limited set of specific disclosure requirements.

Adopted in 2014, the NFRD requires listed companies to publish reports on the policies they apply in relation to areas such as environmental protection or treatment of employees, but it misses more specific requirements to prepare both narrative and quantitative disclosures.

ESMA also noted that introducing binding measures covering specific disclosure requirements should allow “better coordination” between the availability of data from investee companies and the disclosure obligations imposed on investors under the new sustainable finance disclosure regulation.

Released last month, ESMA’s report also addressed institutional investor engagement, suggesting the Commission mandate a review of the so-called White List of activities that shareholders can co-operate on without the presumption of acting in concert.

“One particular area of analysis could be to assess whether the White List should explicitly include coordination activities among institutional investors in the area of ESG risks in order to address potential obstacles to related engagement,” said the securities market watchdog.

It also floated the idea of giving shareholders a vote on companies’ non-financial statements, and monitoring the application of the revised Shareholder Rights Directive to see if it effectively encourages long-term engagement.

ESMA was responding to a request for advice that formed part of the Commission’s sustainable finance action plan from 2018. The EU executive asked ESMA, EIOPA and the European Banking Authority to investigate potential evidence and sources of “undue short-term pressures” on corporations from the financial sector and provide advice on areas which regulators should address.