One of the most common sources of confusion in Article 8 reporting is the distinction between eligible, aligned, enabling, and transitional KPIs (i.e., Turnover, CapEx and OpEx).

Here is a breakdown:

⭕ Eligible activity – is “in scope”

Turnover (or CapEx or OpEx) is eligible when it comes from an economic activity listed in the EU Taxonomy (i.e., it appears in the Climate Delegated Act or Environmental Delegated Act), regardless of whether the company meets the technical screening criteria.

➡️ Eligibility = in scope, not green. It is the first filter in Article 8: companies must disclose the share of turnover, CapEx, OpEx associated with Taxonomy‑eligible activities before assessing alignment.

⭕ Aligned activity – is “fully compliant”

Turnover (or CapEx or OpEx) is aligned when the activity:

🌿 Substantially contributes to one EU environmental objective

🌿 Does no significant harm to the other environmental objectives

🌿 Complies with the technical screening criteria

🌿 Meets minimum safeguards (on an enterprise level)

➡️ Alignment = fully Taxonomy‑compliant. This is the KPI investors look at to understand how “green” a company truly is.

⭕ Enabling activity – “makes others green”

Enabling activities generate turnover (or CapEx or OpEx) by helping other activities achieve substantial contribution (e.g., components for wind turbines, low‑carbon inputs). They are not green on their own, but they are essential to green outcomes.

➡️ Enabling activities are a subset of aligned activities – not an alternative.

Financial products must disclose enabling activities separately.

⭕ Transitional activity – is “on the pathway”

Transitional activities apply where no low‑carbon alternative exists yet, but the activity is on a credible decarbonisation pathway. They must:

▪️ Have lower emissions than the sector average
▪️ Avoid lock‑in
▪️ Not hinder low‑carbon alternatives
▪️ Tighten criteria over time

➡️ Transitional = necessary interim activities on the path to net zero. Also disclosed separately in financial product reporting.

👉 How they fit together in Article 8 KPI reporting:

▪️ Eligible = activity appears in the Taxonomy

▪️ Aligned = meets all SC + DNSH + safeguards + TSC

▪️ Enabling = subset of aligned

▪️ Transitional = subset of aligned

Enabling and transitional activities do not replace alignment – they refine it.

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🌿 A well‑structured, machine‑readable sustainability statement strengthens governance, accelerates internal learning, reveals strategic blind spots, and positions your organization for the EU’s dual green and digital transition.

👉 Contact us if you want to use our guided digital ESRS end-to-end templates to get a head start.

At the EFRAG 25th Anniversary Conference, Chiara Del Prete outlined what is becoming the new reference framework for high‑quality sustainability reporting in the EU. Europe is not simply implementing standards – it is building a coherent, future‑proof system designed to stand on equal footing with financial reporting.

🌿 1. Double Materiality as a Cornerstone

Europe’s model starts where others hesitate: recognising that impacts and financial risks & opportunities are inseparable. Double materiality ensures reporting reflects both a company’s footprint on the world and the world’s effects on the company – enabling realistic, holistic and forward‑looking analysis.

🌿 2. Robust Characteristics of Quality

Sustainability information must meet the same qualitative bar as financial reporting: relevance, fair representation, comparability, verifiability and understandability. This is the quiet revolution – sustainability reporting is no longer “extra‑financial” but co‑equal corporate reporting.

🌿 3. Holistic Coverage of Topics

Environmental, social and governance matters are treated as interacting dimensions, not separate chapters. This reflects how real‑world impacts and dependencies unfold – and how they translate into regulatory exposure, supply‑chain fragilities, reputational effects or shifts in market demand, while governance determines resilience.

🌿 4. Principle‑Based Approach

In line with the EU’s standard‑setting culture, ESRS remain principle‑based, enabling proportionality, judgement and sector‑specific relevance. The result is a system that is rigorous yet adaptable in a fast‑evolving landscape.

🌿 5. Structured Sustainability Statements

Sustainability reporting is now the “second leg” of standardised corporate reporting, structurally connected to financial statements. This strengthens connectivity, coherence and long‑term value understanding – anchoring sustainability firmly within the corporate reporting package.

🌿 6. Interoperability by Design

The EU framework is built to onboard other EU regulations and global frameworks (GRI, ISSB & others) through a single, coherent report. This reduces duplication, increases comparability and ensures a holistic view across reporting requirements.

🌿 7. Digital Readiness as a Prerequisite

With digital taxonomies and AI‑compatible structures, sustainability reporting enters the era of machine‑readable, assurance‑ready, decision‑useful data – the foundation for future supervision, analytics and capital‑market integration.

A European Reporting System Built for the Next Decade

These 7 pillars show how far the EU has come: from fragmented disclosures to a coherent, interoperable, digitally ready reporting system supporting Europe’s economic, environmental and social ambitions.

Sustainability reporting is no longer an add‑on – it is a strategic, structured and globally influential pillar of corporate reporting.

What happens when financial reporting, sustainability, geopolitics and technology converge?

EFRAG’s 25‑year milestone offered a rare moment to step back and see the full picture: a reporting system in transformation, a new governance logic, and a Europe determined to lead.

From the political battles of IFRS adoption to the emergence of a fully integrated sustainability reporting system, EFRAG’s 25th Anniversary Conference showed just how far Europe has come – and how much is still ahead.

Sustainability reporting is now strategic and central to capital markets. Sustainability impacts, risks and opportunities are business risks and opportunities. No company can afford blind spots.

I’ve summarised key messages that emerged across panels and keynotes – from connectivity to anticipated financial effects, AI, interoperability, digitalisation and the future of double materiality – and where corporate reporting is heading next. 👇

Enjoy the reading

Leila Hellgren

EFRAG at 25: Corporate Reporting Enters Its Next Era

The 2026 EFRAG Conference marked more than an anniversary. It captured a turning point in Europe’s corporate reporting journey – from the political battles of IFRS adoption to the emergence of a fully-fledged, interconnected system where financial and sustainability reporting stand side by side.

Across panels and keynotes, one message resonated: sustainability reporting is no longer an adjunct. It is reshaping corporate reporting, governance and capital markets – and Europe intends to lead.

From Accounting Debates to a European Reporting System

Speakers revisited the origins of EFRAG: a time when accounting was anything but technical. As Karel Van Hulle put it, “accounting is too important to be left to the accountants.”

The early 2000s were marked by divergent national views, resistance to IFRS, and the political realisation that only an EU regulation could ensure simultaneous adoption across Member States. The 2008 financial crisis then pushed accounting rules onto the front page of the Financial Times, revealing how standards can influence behaviour, market stability and public trust.

This history matters because it sets the stage for today’s transformation: sustainability reporting is now just as political, consequential and contested as financial reporting once was.

The Shift to Sustainability: A More Complex, More Political Landscape

Speakers acknowledged that sustainability reporting has become deeply intertwined with geopolitics, energy security and societal expectations. The ESRS revision – and the forthcoming Delegated Act – reflect this broader shift: not only a rethinking of the role of the economy in society, but also the recognition that corporate activity does not operate in isolation from an increasingly polarised world.

Supply‑chain disruptions, geopolitical tensions, social fragmentation and the energy transition all shape the risks companies face, and the expectations placed upon them. Sustainability reporting is therefore becoming a tool to navigate complexity, demonstrate resilience and maintain trust in a context where economic decisions are inseparable from political and societal dynamics.

Interoperability and the Global Landscape

In this contexte, Europe and the ISSB “have different north stars but look in the same direction.” The EU’s choice to remain independent – driven by its own political goals and double materiality approach – was widely seen as the right one.

Interoperability is the pragmatic solution: a way to reduce duplication, support global comparability and ensure that companies can access capital markets across jurisdictions.

Over 40 jurisdictions have adopted ISSB standards, each with their own policy objectives. Europe’s voice is heard – and increasingly influential – in this global dialogue.

Connectivity: Europe’s Distinctive Contribution to Corporate Reporting

A central theme of the conference was connectivity – the structured linkage between sustainability information and financial statements.

Speakers stressed that:

• Sustainability goals influence financial decisions, provisions and performance.
• Impacts drive risks and opportunities, which ultimately shape financial outcomes.
• Financial reporting is the X‑ray; sustainability reporting is the MRI scan.
• Together, they offer a full picture of a company’s resilience and long‑term value creation.

Connectivity is not consolidation. It is coherence: consistent boundaries, reconciliations, cross‑references and a shared narrative. As one preparer put it: “It is difficult to connect on paper what has not been connected in internal processes.”

This is why connectivity is ultimately a governance issue, not a reporting one.

Anticipated Financial Effects: The Next Frontier

Anticipated financial effects (AFE) remain one of the most challenging areas. Practices are immature, methodologies differ, and companies fear disclosing assumptions that may change.

Yet investors see AFE as “an analyst’s dream”: numbers build confidence, especially when accompanied by transparent methodologies and scenario‑based narratives.

The long phase‑in period until 2030 reflects this complexity – and the need for learning, capacity building and cross‑disciplinary collaboration.

Digitalisation and AI: Opportunity and Risk

Digitalisation was another recurring theme. Despite lobbying to remove XBRL, Sébastien Harushimana (FCCA) stressed that research shows that AI complements structured data – it does not replace it.

AI can streamline reporting and enable real‑time analysis, but it also introduces risks:

• Models are probabilistic and may produce different outputs: press the button again and you may have another outcome.
• Sustainability data is less mature and less structured than financial data. AI systems perform best when the data they analyse is consistent, standardised, complete and historically rich. Financial reporting meets these conditions: decades of harmonised standards, clear definitions and structured formats. Sustainability data does not – yet.

Structured formats remain the backbone of reliable, machine‑readable reporting. And transparency about which AI models are used becomes essential.

Sustainability Risks and Opportunities are Business Risks and Opportunities

No company can afford blind spots. If you truly understand your business, you also know where the vulnerabilities lie – even if speaking about them feels uncomfortable at first.

And if a company chooses not to disclose, investors will construct their own view from external data sources. Reporting is where companies can tell their story on their own terms.

Why Companies Should Not Wait

A strong warning was issued to companies outside the CSRD scope: the wait‑and‑see approach is dangerous.

Not understanding your impacts, risks and opportunities is a governance failure. Value‑chain due diligence obligations will still apply. And investors will create their own assessments if companies do not disclose.

Early movers gain:

• better internal management of impacts, risks and opportunities
• clearer value‑creation logic
• stronger investor trust
• readiness for future regulatory or market expectations

As one speaker noted: “The topics on the CSO’s table will be on the CFO’s table within two to three years.”

The Future: A More Integrated, More Strategic Reporting System

Several themes emerged as defining the next decade:

• Standardisation is replacing the “alphabet soup” of voluntary frameworks.
• Double materiality will remain Europe’s distinctive contribution.
• Performance, strategy, risk and resilience will shape sustainable business models.
• Connectivity will reduce “cheap talk” and reward companies that tell a coherent story across financial and sustainability sections.
• Technology will bring real‑time communication between companies and investors.

Above all, sustainability reporting is not a burden – it is a strategic tool for risk management and decision‑making.

A System Still Evolving – But Here to Stay

The conference closed with a clear message: sustainability reporting and connectivity are here to stay.

Europe must continue learning, adjusting and balancing ambition with operational feasibility. But the direction is set: a reporting system that is relevant, reliable, connected and forward‑looking.

The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, has published its Report on 2025 Corporate reporting enforcement and regulatory activities for issuers, auditors and other corporate reporting professionals.

For sustainability reporting the report provides:

• Key messages to improve future sustainability reports by assessing how issuers comply with European Sustainability Reporting Standards (ESRS) and digital reporting obligations.
• An overview of the activities carried out by ESMA and enforcers to promote transparency and accountability to the market.

The scope of enforcement and regulatory activities reported relate to listed companies. As such, the report does not cover all enforcement and regulatory activities undertaken by enforcers.

At the end of 2025, approximately 2,000 issuers’ sustainability statements were within the scope of ESRS‑based enforcement in the EEA (Articles 19a and 29a), the Top-3 being:

• 299 in Sweden,
• 268 in Germany,
• 223 in France –
• followed by 142 in Italy.

2025 was the first year of ESRS enforcement for many issuers. In some Member States, CSRD was not yet transposed, so issuers remained under NFRD but some voluntarily applied ESRS.

63% of issuers reported under ESRS following national CSRD transposition and 37% reported voluntarily under ESRS in jurisdictions where NFRD still applied (based on the analyzed sample).

Enforcers continued to focus on improving the quality of sustainability reporting in 2025, in a way that acknowledges the learning curve which issuers are on and the changing regulatory environment during the Omnibus period. Expect less tolerance for shortcomings as ESRS moves into full enforcement.

Most enforcement actions taken on statements prepared in accordance with the CSRD/ESRS related to reporting on climate change under ESRS E1 (40%) and on the general disclosures required by ESRS 2 (36%).

The high proportion of actions relating to the topical area of climate change reporting might be due to this area being more mature than other reporting areas and enforcers therefore having slightly higher expectations of issuers.

Key takeaways for 2026 ESRS Preparers

ESMA’s 2025 enforcement cycle highlights three dominant themes for sustainability reporting:

1. Materiality disclosures remain overly generic – issuers must demonstrate how they performed double materiality, not merely state that they followed ESRS instructions.

2. Terminology, referencing and connectivity are insufficient –

• frequent use of non‑ESRS terminology hinders mapping to ESRS topics and obscures the applicable disclosure requirements,
• inconsistent referencing makes required information difficult to locate and hinders the overall cohesiveness of the sustainability narrative, and
• missing links to the financial statements makes it difficult to understand how sustainability topics affect financial reporting.

1. Taxonomy Article 8 disclosures remain inconsistent – particularly the alignment between transition plans and Taxonomy objectives, and incomplete or unclear KPI referencing.

In addition, two additional areas of attention emerge:

1. Preparing for digital mark‑up and XBRL tagging of sustainability statements – with particular emphasis on tagging completeness and machine readability: we learn that mandatory financial information must be presented as text and correctly marked up, not embedded in images.
2. Emerging interpretative issues discussed within the SRWG – enforcers continue to exchange cases to ensure consistent application of ESRS requirements, including: Portraying remediation of negative impacts as positive impacts; Treatment of franchise workers (S1 vs S2); Remuneration ratio when the CEO is not the highest‑paid individual (S1‑16); Explaining how Taxonomy alignment was assessed; Financial undertakings stating they have no Taxonomy‑aligned activities.

Materiality Assessment (ESRS 2 + topical standards)

Overall quality of first‑year ESRS materiality reporting 

Most issuers described their double‑materiality assessment, but many disclosures remained generic and did not explain how the methodology was adapted to the issuer’s own business model, value chain, or risk profile. Enforcers frequently noted boilerplate language and missing topical‑level detail, especially where issuers did not explain why certain sustainability matters were deemed not material.

Process disclosures: thresholds, parameters, stakeholder engagement 

Around 60% of issuers provided adequate information on thresholds, input parameters, and stakeholder engagement. However, in many cases the disclosures lacked entity‑specific reasoning, making it difficult to understand how the assessment was actually performed or how decisions were reached.

IRO identification and terminology issues 

Enforcers found frequent use of non‑ESRS terminology, which complicated the mapping to ESRS topics and sometimes obscured which topical disclosure requirements should apply.

Completeness of ESRS disclosure requirement (DR) lists 

Most issuers provided a list of ESRS DRs they complied with, but lists were often incomplete, especially regarding datapoints derived from other EU legislation. Some issuers omitted DRs that should have been disclosed based on their own materiality conclusions.

What this signals for 2026 (implicit expectations)

• Describe your actual process, not the ESRS textbook steps.

• Explain thresholds, parameters, weighting, stakeholder engagement, and how they influenced outcomes.
• Use ESRS terminology consistently (impacts, risks, opportunities; sustainability topics).

• Ensure traceability between IROs, sustainability topics, and topical DRs.

• Provide a complete list of ESRS DRs complied with and datapoints from other EU legislation.

• Ensure topical disclosures match the materiality results – no missing DRs for material topics.

In short, mature, entity specific, auditable materiality processes

Scope & Structure of the Sustainability Statement, including connectivity and financial linkages

Scope and structure

Most issuers confirmed that they prepared the sustainability statement for the same scope as that of the financial statements, but enforcers noted some cases of misalignment.

Issuers generally followed the structure of the sustainability statement in four parts, as prescribed by the ESRS, although enforcers identified some deviations where custom structures were implemented and/or some information was positioned outside the designated section.

Referencing practices and connectivity

Only 35% of the issuers in the sample provided full information to enable an understanding of the connections to other parts of the issuers’ corporate reporting.

For some issuers who made use of incorporation by reference, enforcers identified situations where the use of incorporation by reference impaired the overall cohesiveness and readability of the sustainability statement, notably

• when hyperlinks were broken or led to non‑existent webpages,
• when large portions of governance and strategy, business model and value chain sections were redirected to broad sections of the Board of Directors’ report spanning multiple pages and
• when references to other reports (such as the consolidated management report) did not align with the sections indicated by the issuer, making required disclosures difficult to locate.

These issues, combined with inconsistent referencing practices, created fragmentation and hindered users’ ability to follow the sustainability narrative.

Cross‑references were often incomplete, non‑specific or missing altogether, with many references pointing to broad financial statement notes that did not isolate sustainability‑related CapEx, OpEx, financial effects or resources required under ESRS.

In other cases, issuers stated that no significant financial effects or dedicated resources existed and therefore did not reference the financial statements, while in others they disclosed financial effects without linking them to the corresponding accounting figures.

Outside of Taxonomy issuers rarely provided page numbers, explicit datapoint identification or quantitative linkages, and in some cases the financial statements themselves did not contain the information implied in the sustainability report, resulting in fragmented, inconsistent and only partially connected reporting.

In many cases issuers either disclosed no current financial effects or had no action plans requiring significant CapEx or OpEx.

References, when provided, were generic, incomplete or limited to taxonomy disclosures, with missing cross‑references, mismatched figures or unclear indications of whether effects were current or anticipated.

Several issuers relied solely on qualitative descriptions of risks and opportunities and stated that no material financial effects existed, while others disclosed CapEx or OpEx amounts without connecting them to the financial statements.

As a result, enforcers concluded that the disclosures did not provide the required linkage between sustainability information and the financial statements, leading to no or only very limited connectivity.

What this signals for 2026 (implicit expectations)

• Confirm full alignment between financial and sustainability consolidation scopes; explain any exceptions.
• Follow ESRS structure and terminology rigorously to avoid ambiguity and ensure traceability.
• Use incorporation by reference only when all ESRS conditions are met.
• Ensure explicit cross‑references with page numbers, datapoint identifiers, and quantitative reconciliation.
• Provide clear, traceable links between sustainability disclosures and the financial statements; no more generic or boilerplate connectivity statements.
• Ensure consistency between sustainability statements and accounting figures.
• Ensure Taxonomy KPIs tie back to the financial statements.
• Clearly articulate current and anticipated financial impacts.
• Reconcile CapEx, OpEx and other financial effects with the financial statements.
• Ensure clear linkage between IROs, sustainability topics and their financial consequences, including how these relate to Taxonomy KPIs and transition planning.
• Provide entity‑specific explanations of how sustainability topics affect financial reporting.
• Substantiate when claiming no significant financial effects exist, supported by data rather than generic statements.

Disclosures relating to Article 8 of the Taxonomy Regulation

Consistency with transition plan

Only 24% of issuers in the sample provided explanations in their ESRS E1-1 transition plan disclosures which showed consistency with any objective or plans reported for the alignment of activities with the Taxonomy criteria.

For 40% of issuers in the sample there was no information under E1‑1 and no Taxonomy objectives because the issuers explained that they had not yet developed a transition plan, lacked the necessary data, methodologies, evidence systems or sectoral frameworks to set Taxonomy‑related objectives, and therefore postponed alignment work to future years.

What this signals for 2026 (implicit expectations)

• Clearly articulate Taxonomy‑related objectives within transition plans, showing how activities will align with Taxonomy criteria over time.
• Demonstrate consistency between ESRS E1‑1 transition plan disclosures and Taxonomy alignment objectives, avoiding disconnects between climate strategy and Taxonomy reporting.
• Ensure transparent disclosure of current and anticipated financial effects linked to transition pathways and Taxonomy alignment.

Digital mark‑up and XBRL tagging

To prepare for digital mark‑up, sustainability report preparers should also consider ESMA’s and national enforcers’ key messages on the compliance of Annual Financial Reports (AFRs) prepared and published in the ESEF format in 2025 (p. 34):

Machine‑readability requirements: To safeguard machine readability, issuers must avoid embedding mandatory elements of AFR and relevant financial information within images, ensuring that all mandatory disclosures are properly marked up and text‑based, where such disclosures are applicable.

Use of PDF version: Where a PDF AFR is provided as an additional convenience –  for example, as a voluntary extra language version – issuers must include a clear disclaimer stating that the PDF is not the official report and that the ESEF version prevails for Transparency Directive purposes. Any inconsistencies or outdated PDFs should be corrected or replaced without delay.

Tagging all numeric data: Issuers should ensure that all numbers in a stated currency are marked up even if part of a footnote, and that empty fields and/or hyphens which represent the meaning “nil” are also transformed and marked up. This means that every single numeric value – even tiny ones in footnotes, and even “zero” represented by a dash – must be tagged in XBRL, because un‑tagged numbers break machine‑readability, comparability, and automated analysis. (In XBRL/ESEF, “nil” is a data point, not an absence of data.)

Other issues that were discussed

Within the Sustainability Reporting Working Group (SRWG), enforcers also discuss the application and enforcement of the sustainability information framework in regular meetings, ad-hoc conference calls or through written procedure. Case discussions enable enforcers to learn about the experience of other enforcers who have already encountered similar issues and to gather useful input for the analysis of technical issues.

Examples of cases discussed:

Portraying remediation of negative impacts as positive impacts

Enforcers discussed the case of an issuer which had presented the possible remediation of negative impacts coming from its own business as positive impacts, using EFRAG’s guidance as a reference point. The case was useful since it illustrates a tendency which enforcers might encounter and it furthermore provided enforcers with the occasion to discuss the clarification of this matter which is included in the draft revised ESRS.

How to treat franchises in the sustainability statement

The discussion revolved around whether to cover franchise workers under S1 (Own workforce – as non-employees) or S2 (Workers in the value chain). As the reporting obligations under S1 are more substantial, this question is important. Enforcers considered that classification may depend on the nature of the franchise contract, notably whether the issuer controls the work performed by the franchise workers which, enforcers agreed, was usually not the case.

Remuneration disclosure when CEO is not highest paid individual (S1-16, paras 95 and 97b ESRS Set 1)

In relation to the requirement to disclose the ratio between the remuneration of an issuer’s highest paid individual and the median remuneration for all employees excluding the highest paid individual, enforcers discussed an observed diversity in application whereby some issuers calculate the ratio based on the remuneration of the CEO even when they are not the highest paid individual while other issuers use the remuneration of the highest paid individual even when they are not the CEO. The divergence likely comes from the word “CEO” in the footnote reference to an SFDR PAI indicator whereas S1-16 itself consistently refers to “highest paid individual” which enforcers therefore agreed was the reference point.

Disclosure on how alignment in relation Article 8 of the Taxonomy Regulation was assessed

Enforcers discussed the requirement for disclosures explaining how issuers assessed the Taxonomy alignment of their activities. In one specific case, the issuer only briefly stated that it complied with the disclosure requirements regarding technical screening criteria and do no significant harm without providing any explanation or analysis regarding how it assessed its alignment. However, enforcers had generally seen several such cases and agreed that explanation was needed on the way in which issuers had assessed their alignment, notably for some activities where alignment is less obvious.

Statement that financial undertakings have no Article 8 Taxonomy-aligned economic activities 

Enforcers discussed how to apply the new provision in the Amending Delegated Act, published by the Commission in July 2025, according to which financial undertakings do not have to report under the Taxonomy provided that they include a statement in the management report that they do not have Taxonomy aligned economic activities. Notably, enforcers discussed that, if this statement is to be covered by the assurance engagement, it has to sit within the part of the management report dedicated to sustainability reporting.

The best way to prepare? Guided digital ESRS end-to-end templates.

 Contact us if you want to use our guided and pre-markedup digital ESRS end-to-end templates to get a head start.

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The full Report on 2025 Corporate reporting enforcement and regulatory activities published on 7 May 2026 by ESMA is available here:

https://www.esma.europa.eu/press-news/esma-news/esma-outlines-enforcement-activities-corporate-reporting-across-eea-2025

https://www.esma.europa.eu/sites/default/files/2026-05/ESMA32-2064178921-9413_Report_on_2025_Corporate_reporting_enforcement_and_regulatory_activities.pdf

Why Companies Should Care

The European Central Bank has released its updated compendium of good practices on climate and nature‑related risk management – and the message is blunt: progress is real, but major blind spots remain.

Banks now have the basic frameworks in place, yet implementation is uneven. Many still fail to cover all material risk drivers, portfolios, and transmission channels.

🔎 Two areas stand out:

• Physical climate risks – methodologies are still immature, and the non‑linear, forward‑looking nature of these risks means they are likely underestimated.
• Nature‑related risks – most banks have run materiality assessments, but two‑thirds haven’t turned them into concrete actions. KRIs exist, but often without thresholds that trigger decisions. KRI = Key Risk Indicator measuring risk exposure.

Notably, one‑third of all new good practices focus on nature‑related risks – a clear signal of supervisory priorities.

⚠️ A risk landscape defined by uncertainty

The ECB warns that Europe is moving toward a disorderly transition, with faster‑moving physical and transition risks. Banks must prepare for a wider range of plausible futures, supported by more granular scenario analysis and stress testing.

🛡️ The insurance protection gap is widening

With insurance coverage shrinking and public finances strained, more climate‑ and nature‑related losses will fall directly on banks’ balance sheets – increasing scrutiny on exposed sectors and borrowers.

🌿 What this means for companies

This is not just a banking issue. It directly affects corporates seeking financing or refinancing.

1. Expect more granular asset‑level data requests on Physical risk exposure, Transition plans, Nature‑related dependencies and impacts and Adaptation measures
2. Weak disclosures = higher financing costs. If banks cannot quantify your risks, they will price in uncertainty.
3. Nature‑related risks enter mainstream credit analysis. Expect more questions on biodiversity, land use, water dependency, and supply‑chain exposure.
4. Transition plans must be credible and operational. Banks are moving from “statements” to evidence of execution. Companies without costed, time‑bound plans will face tighter covenants and reduced credit appetite.
5. Scenario analysis becomes a shared language. Companies able to articulate resilience under disorderly transition scenarios will stand out.

The ECB’s message is clear: Climate and nature‑related risks are rising, complex, and still underestimated. Banks must accelerate – and so must companies.

Those who provide granular data, credible transition plans, and transparent nature‑related disclosures will secure better financing conditions and stronger long‑term resilience.

📘 The best way to prepare? Adopt ESRS.

The ECB’s expectations align closely with the European Sustainability Reporting Standards (ESRS). For companies, learning and adopting ESRS is the fastest, most reliable way to meet banks’ rising data needs.

👉 Contact us if you want to use our guided digital ESRS end-to-end templates to get a head start.

Source: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.thematicreviewcercompendiumgoodpractices052026.en.pdf

Across the Atlantic, the ESG narrative is splitting in two – as highlighted in the Harvard Law School Forum article “ESG Shifting Tides” – and it is reshaping the landscape in which companies operate.

In the U.S., ESG as a label is shrinking. Mentions in S&P 500 and Fortune 1000 proxies peaked in 2024, fell in 2025, and early 2026 filings have dropped below 2022 levels.

Companies are “greenhushing,” stripping out sustainability language to avoid political, regulatory, and litigation risk.

At the judicial level, new 2025-2026 cases challenge ESG mandates under the doctrine of “unconstitutional vagueness,” arguing that ESG criteria lack objective definition and cannot guide fiduciary duty.

Yet sustainability references in 10‑K risk factors continue to rise – because removing them could expose companies to liability if investors face losses.

Target’s 2021-2025 proxy evolution captures the shift:

▪️ 2021 – sustainability as risk oversight
▪️ 2022-2023 – ESG as a strategic brand asset
▪️ 2024-2025 – ESG nearly disappears, replaced by “resilience” and “long‑term value creation”

ESG isn’t dead, but it’s being rebranded to avoid risk.

Europe, however, is taking a longer‑term view, grounded in the understanding that a company’s negative impacts and dependencies are not abstract ESG issues but concrete financial risks.

The revised ESRS and SFDR 2.0 are not a retreat but a consolidation. While the U.S. backs away from ESG terminology, the EU is doubling down on clarity, comparability, and enforceability.

The ESRS revision simplifies reporting while preserving core objectives. It strengthens definitions, aligns with the Accounting Directive, and reinforces double materiality, preventing companies from reducing sustainability to a pure risk narrative.

SFDR 2.0 complements this by providing a clear financial product framework – clear categories, naming rules, exclusions, thresholds, PAIs – built on CSRD/ESRS data.

This is the opposite of “unconstitutional vagueness.” It is regulatory architecture designed to reduce ambiguity, prevent greenwashing, and support long‑term capital allocation.

ESG as branding is fading. ESG as evidence is rising ‼️ Regulators and investors expect structured, defensible data – not slogans.

Risk‑only framing won’t work in the EU. Double materiality requires addressing both impacts and financial risks.

Simplification is not dilution. ESRS and SFDR 2.0 streamline reporting but raise expectations on quality and comparability.

Capital follows clarity. While U.S. ESG funds face outflows, the EU is building conditions for stable, long‑term sustainable finance.

The EU is not following the U.S. retreat. It is professionalizing sustainability reporting.

Companies that prepare now – with robust data, clear governance, and integrated reporting processes – will be best positioned to benefit from regulatory stability and investor confidence.

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The Harvard Law School Forum article “ESG Shifting Tides” is available here: https://corpgov.law.harvard.edu/2026/05/07/esg-shifting-tides-an-analysis-of-the-changing-narrative-around-sustainability-and-esg-investment-contraction/

#CSRD, #ESRS, #SFDR

ESMA has just published its new Assessment Framework (11 May), and it’s an important milestone for the future of ESRS.

Unlike the February Opinion on the revised ESRS, this Framework is not a legal deliverable – it’s an internal supervisory tool designed to bring clarity, consistency, and transparency to how ESMA evaluates EFRAG’s technical advice.

The Framework provides a stable methodology that ESMA will use for all future ESRS assessments. It reflects the lessons learned from the February Opinion and ESMA’s core mandate:

▪️ High‑quality, decision‑useful sustainability information
▪️ Investor protection
▪️ Financial stability
▪️ Coherence with EU sustainable finance rules

ESMA evaluates ESRS across four criteria, each with detailed sub‑criteria and indicators, rated from fully capable to not capable:

1️⃣ Quality of sustainability information

Are disclosures forward‑looking, risk‑based, comparable, entity‑specific, and aligned with the Accounting Directive?

2️⃣ Consistent application

Are the standards clear, auditable, enforceable, and compatible with ESEF digital tagging?

3️⃣ Consistency with EU legislation

Do ESRS align with SFDR PAI indicators, Taxonomy Article 8, CTB/PAB benchmarks, and other EU rules?

4️⃣ Interoperability with global standards

How well do ESRS align with IFRS S1/S2 and GRI, while preserving EU‑specific concepts like double materiality?

ESMA may update the Framework as legislation evolves – but it now provides a transparent reference point for future ESRS evaluations.

How this differs from the February Opinion

ESMA’s Opinion on the revised ESRS (Feb) was not a methodology – it was a concrete assessment of EFRAG’s December 2025 draft standards.

ESMA welcomed simplification but flagged some issues affecting investor protection and comparability, including:

• Reliefs: Too broad or permanent, reducing data quality and weakening alignment with IFRS S1/S2.
• Materiality: Need for clearer guidance on top‑down assessments and treatment of non‑material subsidiaries.
• Climate & transition plans: Requests for clearer definitions, ambition levels, and stronger requirements on targets and financed emissions.
• SFDR & Taxonomy alignment: Risks of burden‑shifting and loss of key datapoints.
• Digital reporting: Some grouped disclosures still need separate tagging.
• Interoperability: Divergences in scenario analysis, GHG boundaries, and reliefs absent from IFRS.

In short

• The February Opinion = ESMA’s judgement on the revised ESRS.
• The May Assessment Framework = the methodology ESMA will use going forward.

Together, they signal a clear direction: simplification is welcome, but not at the expense of investor‑grade sustainability information – meaning sustainability data that is as trustworthy, comparable, and decision‑useful as financial information.

👉 Contact us if you want to use our guided digital ESRS end-to-end templates to get a head start >>>

#CSRD, #ESRS

The Assessment Framework is available here: https://www.esma.europa.eu/sites/default/files/2026-05/ESMA32-846262651-5443_ESRS_assessment_framework.pdf

The audit profession is being rewritten in real time. Full AI audit automation and advanced AI agents are being deployed to transform how evidence is gathered and insights are delivered.

This shift is not incremental. It is structural – and it directly impacts sustainability reporting.

Under #ESRS 1 §104, sustainability information must be clearly identifiable, structured, and both human‑readable and machine‑readable. In short: your sustainability statement must be ready for AI.

Why this changes everything 👇

1. AI audits require precision, not narrative padding

AI detects gaps, inconsistencies, missing datapoints, and unsubstantiated claims instantly. Vague narratives and inconsistent connections will be surfaced immediately.

Reporting standards exist for a reason: to deliver standardized, comparable, verifiable information – and that visibility is exactly how #CSRD and transparency drive progress.

2. Manual testing is disappearing

KPMG has confirmed that AI will perform routine audit testing, with humans supervising rather than executing the work. PwC anticipates full AI integration across the audit cycle within the year.

This means sustainability statements will be examined by systems capable of scanning 100% of data, cross‑checking disclosures against ESRS datapoints, identifying missing IRO linkages, detecting inconsistencies between narrative and metrics, and flagging anomalies.

3. Governance expectations are rising

AI‑enabled audits increase transparency, professional skepticism, and audit quality. Boards must now understand how AI decision‑making and human oversight interact – and adapt governance frameworks accordingly. This is not just a technology shift. It is a governance shift.

🖥️ ESRS: built for a digital audit era

ESRS was designed for machine readability. Paragraph 104 makes this explicit. This is not optional, it is foundational.

In practice, your sustainability statement must:

▪️ mark every required datapoint, incl GDR requirements

▪️ separate ESRS‑required content from authorized supplementary content

▪️ ensure consistency across policies, actions, targets, and metrics (PATM)

▪️ demonstrate clear IRO‑to‑PATM linkages

▪️ avoid narrative dilution

▪️ be audit‑ready at the datapoint level

The era of promotional ESG storytelling is over. ESRS demands decision‑useful information.

If your first ESRS report is due in FY2027, remember: early reporters will already be on their fourth cycle. Building processes, collecting data, and aligning teams takes time. Waiting until 2027 means falling years behind.

🌿 A well‑structured, machine‑readable sustainability statement strengthens governance, accelerates internal learning, reveals strategic blind spots, and positions your organization for the EU’s dual green and digital transition.

Guided digital ESRS end-to-end templates

👉 Contact us if you want to use our guided digital ESRS end-to-end templates to get a head start.