“Simplification promised, simplification delivered!”
So said EU Commission president Ursala von der Leyen when announcing its omnibus package of proposals for ESG reporting at the end of February.
But for companies in the early stages of grappling with sustainability reporting, and ESG regulations such as the Corporate Sustainability Reporting Directive (CSRD), it may have felt like anything but a simplification.
True, timelines have been pushed back and thresholds for CSRD reporting requirements raised, but for those firming up their ESG reporting, it has shuffled the deck and left them wondering: what now?
Everything is different…
How drastic are the changes really? And will they even come to pass? It’s worth bearing in mind that these are only proposals for now. The Commission has put forward changes to the Corporate Sustainability Due Dilligence Directive (CSDDD), Corporate Sustainability Reporting Directive (CSRD), and the EU Green Taxonomy among other policies. Full details can be found in the Commission’s announcement, but the changes making headlines are the removal of around 80% of companies from the scope of CSRD, with only the largest remaining, and the two-year postponement of reporting requirements for those already in scope and due to start reporting in 2026 and 2027.
This is a radical reduction in scope for CSRD in particular and means many firms that may have been gearing up to comply will no longer have to.
Or at least it will mean that if the proposals are adopted in full. They will now need to be debated in both the EU Parliament and EU Council (which could take six-nine months), before trialogue negotiations between the three institutions. No final text is likely to emerge before 2026 – though the ‘stop the clock’ proposal to postpone reporting by two years will likely be fast-tracked and finalized this year.
…Nothing has changed
What is a CFO to do? In short, whatever they were planning to do anyway. This is because, even if the proposals do go through in full, it doesn’t change the case for ESG reporting all that much because, really, compliance was only ever a secondary driver.
Of course, compliance, with its deadlines and penalties, certainly added urgency to the case for investing in ESG reporting, but it was never the primary source of value in doing so. In fact, those who were aiming only for minimum viable compliance to keep the regulators off their backs would have been at risk of costly mistakes, including investing in an ad hoc sprawl of unconnected point solutions, and missing out on value creation.
The true value of ESG reporting
The real case for investing in ESG or sustainability reporting is that it is – and always has been – a tremendously value creating exercise if done correctly. ESG reporting can drive value creation in a number of ways:
1. Attracting investment
ESG remains a core focus for investors, notably in the private equity and debt markets. Investors cite demand from their LPs, the proven commitment to long-term risk mitigation, and real-world track record of boosted exit valuations as reasons to keep ESG performance firmly in the crosshairs. As such, robust ESG reporting can attract sustainability-focused investors and open up access to capital typically reserved for larger firms.
2. Cutting the cost of capital
As well as attracting investment, companies with higher ESG scores tend to secure a lower cost of capital versus lower-performing peers. In fact, a company’s resilience to sustainability-related risks (as measured by its MSCI ESG Rating), has been shown to be negatively correlated with all examined cost of capital measures.
