Sustainability in the EU

Europe has long been a pioneer in establishing mandatory obligations for companies to report on Environmental, Social, and Governance (ESG) parameters. While social expectations and investor pressure for ESG transparency have intensified, the absence of uniform regulation historically resulted in fragmented and incomparable reporting practices across companies.

Over the past few years, the European Union has introduced a comprehensive set of frameworks—including the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), the EU Taxonomy Regulation, and other related legislative instruments—to enhance the consistency, quality, and comparability of sustainability reporting. These measures were designed not only to improve corporate accountability but also to help investors make better-informed decisions when allocating capital.

However, as with any ambitious regulatory agenda, these initiatives have faced criticism. Rooted in Friedman’s shareholder theory, opponents argue that regulatory intervention in business operations is unnecessary, inefficient, and economically burdensome. In today’s challenging economic climate—and amid a resurgence of populist economic narratives—such criticisms have found renewed resonance among certain political circles concerned about competitiveness and voter sentiment.

This raises a critical question:

Does ESG reporting truly impose an undue burden that undermines the competitiveness of EU businesses?

Empirical evidence suggests otherwise. Despite the costs associated with compliance, numerous studies demonstrate that companies with robust sustainability strategies tend to outperform their less sustainable peers financially. Strong ESG performance has been linked to greater innovation, improved talent attraction and retention, and resource efficiency. In essence, sustainability encourages businesses to find smarter, leaner, and more resilient ways of operating - leading to cost savings and, frequently, superior financial outcomes.

If this is the case, why are EU policymakers now retreating from the very regulations they once championed? The paradox is evident: the same legislators who endorsed the CSRD, CSDDD, and related frameworks as pathways to competitiveness and resilience are now promoting deregulation under the pretext of reducing administrative burdens. ESG reporting cannot simultaneously be both a driver and a deterrent of competitiveness. What is increasingly clear is that populism in politics is reshaping the sustainability agenda, with the EU not immune to global trends emanating from across the Atlantic. Economic stagnation in major EU economies such as Germany, France, and Italy only amplifies this political sensitivity.

The Omnibus initiative, currently under negotiation, exemplifies this shift. Early compromises suggest a dramatic rollback—reducing mandatory sustainability reporting obligations by up to 92–93% compared to the original CSRD scope. Alarmingly, this deregulation would even exempt Public Interest Entities (PIEs) that have been subject to non-financial reporting since the 2014 Non-Financial Reporting Directive (NFRD). Such revisions risk reversing nearly a decade of progress and eroding Europe’s global leadership in sustainability reporting.

Ironically, as the EU scales back, other regions around the world are moving forward with their own sustainability disclosure mandates. What was once Europe’s defining advantage may soon become a competitive vulnerability.

Beyond the geopolitical implications, this policy reversal appears increasingly misaligned with the sentiments of European businesses themselves. According to a recent Grant Thornton survey, 86% of EU companies plan to continue their sustainability strategies and reporting efforts, recognizing them as beneficial to their long-term competitiveness. In other words, while EU politicians claim to be “saving” European businesses from regulatory burden, businesses themselves do not wish to be “saved”.

The irony is striking: political decisions intended to protect EU enterprises may, in fact, be undermining their strategic interests - and strengthening their global competitors.