The EU’s High-Stakes Rethinking of Sustainability Reporting

Despite the fact that, according to the Corporate Sustainability Reporting Directive (CSRD), corporate sustainability statements should meet the needs of both the shareholders and the stakeholders, institutional investors are the primary users of sustainability reporting. Sustainability information, where it has a financial impact, is relevant for price discovery and the investment decisions of active asset managers, while also supporting passive investors’ stewardship strategies as a tool to reduce systemic portfolio risk and maximize the value of the portfolio. Sustainability reporting provides information that is functional to ESG investing, and is key to meeting the disclosure requirements imposed on institutional investors by the Sustainable Finance Disclosure Regulation (SFDR), which requires asset managers to explain how they deal with sustainability risks in their investment policies and products, and, for institutions that sell financial products marketed as environmentally sustainable, to disclose how and to what extent these financial products are invested in environmentally sustainable activities as listed in the Taxonomy Regulation.

As, with its centerpiece Proposal COM(2025)81, the EU moves to ease sustainability reporting obligations by more than significantly narrowing the scope of companies required to report and reducing the complexity of reporting standards, institutional investors face a growing risk of data gaps that could undermine sustainable finance.

The CSRD is not an isolated regulation; it underpins the EU’s broader sustainable finance framework. The SFDR relies heavily on company-level sustainability data for both entity-level and product-level disclosures, which include Principal Adverse Impact (PAI) indicators, “Do No Significant Harm” assessments, and Taxonomy alignment. If a substantive share of companies now in-scope of the CSRD was exempted from reporting, financial market participants’ reliance on ESG information from third-party data providers would increase, exacerbating the issues of reduced comparability (as methodologies differ across providers) of sustainability information and making it harder for investors to assess the reliability of corporate sustainability claims.

Moreover, exempting listed SMEs from mandatory sustainability reporting undermines the goal (as set out in the EU’s Listing Act) to improve visibility and research coverage for smaller issuers, and facilitate SMEs’ access to financing. While voluntary reporting may appeal to some SMEs, it is unlikely to deliver uniform coverage. 

At the same time, the fundamental principle of double materiality remains, which underpins mandatory sustainability reporting in the EU. While conceptually sound, double materiality assessments are burdensome and complex in practice, as stakeholder identification is subjective and inconsistent, materiality thresholds lack standardization, leading to divergent outcomes, and the potential for information overload risks reducing the usability of reports for users. Interoperability efforts with ISSB standards help limiting the effects of international fragmentation in the reporting standards, but the fundamental divergence between double and single materiality does not relieve undertakings subject to the CSRD from impacts assessments and the uncertainties surrounding them.

The rationale for the Commission’s initiative is clear: reduce administrative burdens, enhance competitiveness, and align with global peers. Simplifying sustainability reporting (and accordingly aligning and streamlining the associated pieces of regulation, starting from the SFDR), and even retuning the EU’s green ambitions, is certainly needed to improve the Union’s competitiveness in an increasingly polarised, unstable world. Yet, curtailing reporting obligations too aggressively risks creating blind spots for investors precisely when capital allocation for the green transition depends on robust, comparable data. As anticipated in an article forthcoming in the European Business Law Review, the drastic solutions envisaged by the Commission risk eroding the information infrastructure that underpins sustainable finance, and justify the question as to whether adopting a lighter but mandatory baseline for all companies now in-scope of the CSRD, or at least for all listed undertakings, including listed SMEs, while providing much clearer guidance on materiality assessments, would better serve both market transparency and competitiveness. 

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Gaia Balp is an Associate Professor of Business Law at Bocconi University Milan. 

This blog is based on a discussion which took place at The Corporation in Society: Corporate Law and Criminal Law Perspectives Workshop. Visit the event page to explore more conference-related blogs.

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