Faculty of law blogs / UNIVERSITY OF OXFORD

ESG Disclosure Rules: New Developments as Potential Catalysts of the ‘Cascade Effect’


Paulo Câmara
Professor of Law at Universidade Católica Portuguesa in Lisbon (Portugal).


Time to read

3 Minutes

In 2023 we have entered a new cycle of sustainability reporting rules. European companies have started the adaptation process to comply with the Corporate Sustainability Reporting Directive (CSRD) while the European Commission has approved the first set of the level 2 measures that consist of the very important European Sustainability Reporting Standards (ESRS), following the proposal last year presented by EFRAG. In the meantime, the International Sustainability Standards Board (ISSB) issued its global IFRS S1 and IFRS S2 on sustainability disclosures. Finally, it is expected that the US Securities and Exchange Commission will adopt its final (and controversial) climate-related disclosure rule towards the year-end.

This new ESG (Environmental, Social, and Governance) reporting framework offers a unique opportunity for impact analysis. Progress in terms of ESG reporting rules will bring clear benefits to end-users of information (investors and stakeholders) in terms of transparency of non-financial performance by listed companies and other public interest entities. However, in respect to sustainability information, what mostly matters is the potential of transformation that these sustainability standards bring in terms of corporate sustainable business, aligned with the Sustainable Development Goals and the Paris Agreement.

In my recent article, I explore the concept of cascade effect as an assessment tool of the plethora of changes brought by ESG trends and by ESG regulation. I define the ‘cascade effect’ as the potential aptitude for companies to engage in ESG-based decisions and to systemically influence others to do so, including investors, investee companies and their respective supply chain and community. ESG-driven decisions affect several types of entities and their systemic impact (namely reflected in changes to companies’ policies, their board duties, their culture, and their actions) and it inspires other groups of entities in subsequent waves of influence. Institutional investors and consumers influence companies, the latter influence their supply chain, which in turn influences the community at large, namely investors and consumers. The concept of cascade effect therefore encapsules the potential and multifaceted systemic governance, operational, legal, and cultural changes derived from sustainable decisions.

At this juncture it is too early to assess the systemic impact of the new ESG reporting rules. In fact, they are not even yet into force. We will have to wait for another 2 to 4 years for a first assessment in terms of CSRD-induced systemic influences. However, looking specifically into the EU landscape there are three main factors that may negatively affect such cascade effect.

On the one hand, some relevant differences persist in terms of the ESRS,  Global Reporting Initiative (GRI) Standards, and IFRS S1 in relation to structure, concepts, and measurement bases of sustainability reporting. The key objective is interoperability—a code name for convergence and mutual acceptance of sustainability reporting standards, both at its inception and in any subsequent adaptation that sustainability reporting rules may eventually suffer. It is very important that the areas of intersection are gradually extended so that companies applying IFRS Sustainability Disclosure Standards, GRI Standards or ESRSs are certain that by applying one they comply with all of them. This requires continuous and extensive dialogue between standard-setters (EFRAG/ISSB/GRI).

The second critical point is adaptation by SMEs. It is well-known that the CSRD only applies to small and medium listed companies, and with some adaptations. On the one hand, the SME sustainability report may be limited to key indicators. On the other hand, there will be special sustainability reporting standards for small and medium-sized undertakings and SME value chain companies. Finally, for listed SME the CSRD will apply from the financial year starting on or after 1 January 2026 but will still be optional for financial years starting before 1 January 2028. However, SMEs are clearly lagging behind in terms of preparation and internal capacity of adaptation for the ESG-related challenges. Recent EC Recommendations on facilitating finance for the transition to a sustainable economy provide tailored indications namely to SME. However, these recommendations failed to provide essential guidance in terms of adaptation of internal reporting processes, quality assessment of data and structural changes. To fill this gap, SME governance codes would certainly make a difference.

Finally, the CSRD deals with companies’ disclosure duties and therefore solely applies to a small fraction of State-owned entities. However, as it has already been pointed out by several standard-setters, such as the International Public Sector Accounting Standards Board and the Chartered Institute of Public Finance and Accountancy (CIPFA), it would be also important to have disclosure of sustainability information imposed upon other public organisations. EU institutions, national central and local public entities should also follow the example of the private sector and start preparing reporting standards and data collection methods in respect to key sustainability indicators in the public sector. That approach would not only bring benefits in terms of operational and risk management, but it would also influence the ecosystem overall and therefore contribute to the ESG ‘cascade effect’.

In sum, there are some uncertainties and incompletions on how the sustainability reporting regime will play out in the EU. The next few years will then be decisive to understand if the cascade effect derived from new EU rules will be displayed in full scale or not.

Paulo Câmara is a Professor of Law at Universidade Católica Portuguesa in Lisbon (Portugal).



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