By Ries Breijer and Michael Erkens

Despite facing criticism, the Corporate Sustainability Reporting Directive (CSRD) represents a significant step in holding companies accountable for their impact on the environment and society. Michael Erkens and Ries Breijer, drawing on prior academic research, argue that the CSRD reflects lessons learned from previous efforts to make sustainability information comparable across companies.  

Almost 50,000 European firms must meet the disclosure requirements of the Corporate Sustainability Reporting Directive (CSRD) over the next three years. Leaders at these firms are confronted with numerous alarming articles – many from consulting firms – pointing out that the European Sustainability Reporting Standards (ESRS) include 1,200 metrics.  

In practice, however, most companies will have to report significantly fewer metrics – the mandatory assessment ensures they only report on relevant topical areas. Early studies indicate that the average firm considers only about half of these areas.   

Still, a common criticism remains that the standards are overly comprehensive and lack flexibility. This criticism is unjust for two reasons. 

Firms must report on financial impact of environmental and social issues 

The CSRD’s comprehensiveness stems from considering a wide range of stakeholders, including employees, customers, suppliers, and society as a whole – not just financial stakeholders like banks and shareholders.   

As a result, the CSRD requires firms to report on both the financial impact of environmental and social issues on their operations (the so-called outside-in perspective) and the impact of their operations on environmental and social issues (the so-called inside-out perspective).  

In contrast, other reporting standards, such as those from the SEC in the United States and from the IFRS Foundation (internationally), focus solely on the former.   

Logically, the broader dual perspective of the CSRD means that companies need to disclose more metrics. This incentivises companies to adopt more sustainable practices and to reduce their negative impact on the environment and society, as they can also be held accountable for environmental and social issues they cause, both by those directly affected and by those advocating for their rights. 

Rigid standards and limited flexibility  

The second reason the criticism of the CSRD is unjust is that the imposition of rigid standards, and thus limited flexibility, reflects the lessons learned from previous efforts to make sustainability information comparable across companies.  

Our research highlights that the predecessor to the CSRD, the Non-Financial Reporting Directive (NFRD), has been ineffective in promoting transparency among firms with weak incentives to disclose meaningful information.  

Since the NFRD gave firms flexibility to decide which frameworks and standards to use to report sustainability information, some firms exploited this flexibility, resulting in generic, low-quality and boilerplate sustainability disclosures, or even withholding information.  

The option to strategically withhold information creates an uneven playing field. Fashion brands that reveal their supplier lists, for example, face negative publicity when one of these suppliers is involved in a forced labour scandal. Meanwhile, brands using the same supplier but keeping it secret avoid such backlash.   

With the CSRD in place, all firms in scope must disclose the same comprehensive information, including details about their suppliers. This is how sustainability reporting under the CSRD levels the playing field; by mandating the disclosure of consistent metrics, it prevents companies from strategically withholding information or misleading the public, commonly known as greenwashing.  

Firms may still hide information – even under the new rules 

However, with many metrics being disclosed for the first time, collecting, aggregating and interpreting the new information will be difficult. Firms with weak incentives to report may still find their way out and hinder cross-firm comparisons, even under the CSRD.   

For example, the materiality analysis to identify relevant topical areas – subjective in nature – allows firms to omit specific standards if they are not deemed material, creating opportunities to strategically withhold information once again.   

Furthermore, the disclosure requirements are less stringent for small and medium-sized companies, and part of the standards are sector-specific, increasing relevancy but decreasing comparability.  

Strict enforcement is needed   

To ensure that the CSRD truly creates a level playing field and that firms uphold the goal of achieving transparency and comparability in sustainability reporting, it is crucial to minimise further flexibility and to have timely and strict enforcement in place.   

Allowing too much time for compliance or imposing too lenient penalties in case of non-compliance will reduce the urgency for companies to start doing better and establish the necessary data collection procedures.  

Furthermore, although interoperability with standards from other jurisdictions (such as the U.S.) is essential, it may allow European firms to omit specific standards if other disclosure regulations already address them. Ensuring caution here is essential to maintain comparability among European companies. 

The CSRD is a significant step in the right direction. When not watered down and strictly enforced, companies must disclose the negative (and positive) impacts on society and the environment associated with their products and financial profits. This enables consumers and investors to decide whether these impacts are acceptable.   

Let’s not turn back but keep moving forward.

About the Authors

Ries Breijer, an assistant professor at Nyenrode Business University, has a strong interest in financial and sustainability reporting. His research focuses on the regulatory impacts on sustainability reporting, the consequent economic and real effects, and how changes in financial reporting standards can contribute to a more sustainable economy.  

Michael Erkens, a professor at Nyenrode Business University and an associate professor at Erasmus School of Economics, specialises in financial and sustainability reporting and corporate governance. His research addresses firms’ disclosure practices, executive compensation, succession planning, and the effect of regulations on firm behaviour.