Leading sustainable finance authorities and investor associations are mounting a concerted pushback against proposed rules that would allow large non-EU corporations operating within the European Union to adhere to weaker sustainability disclosure standards than their domestic counterparts.
The European Platform on Sustainable Finance (PSF)—an expert group mandated by the European Commission to guide the development of sustainable finance policies—alongside the European Sustainable and Responsible Investment Association (Eurosif), have issued robust formal statements demanding the removal of a controversial "mixed approach" currently embedded in draft EU reporting regulations.
The friction centers on a consultation initiated by the European Financial Reporting Advisory Group (EFRAG) concerning its Exposure Draft of the European Sustainability Reporting Standards for certain non-EU undertakings, known as ESRS-40a. This draft outlines the proposed sustainability reporting obligations for large multinational corporations based outside the European Union that fall within the scope of the landmark Corporate Sustainability Reporting Directive (CSRD).
The CSRD represents a monumental shift in corporate accountability, setting strict rules and frameworks for companies to disclose material sustainability-related impacts, opportunities, and risks. While the broader directive began applying to initial cohorts of companies at the start of 2024, its provisions also mandate that large non-EU entities operating substantially within the EU single market must eventually provide comprehensive sustainability disclosures aligned with the ESRS third-country undertaking framework. Under current schedules, these reporting requirements are slated to begin in 2029, evaluating performance over the 2028 financial year.
However, when EFRAG released the proposed ESRS-40a standards, the draft shifted significantly from the foundational philosophy of the CSRD. Notably, the framework narrowed reporting requirements to focus exclusively on corporate impacts, stripping away the broader assessment of sustainability-related risks and opportunities that defines the standards applied to domestic European firms.
Compounding these changes, the exposure draft introduced a contentious "mixed approach" for non-EU enterprises reporting on non-climate impacts. Under this mechanism, eligible foreign companies would be permitted to choose whether they report impacts on a comprehensive global basis or restrict their disclosures to "EU-related impacts." If they select the latter, they would only be required to account for the impacts of products or services sold within the EU or the direct consequences of corporate activities conducted physically inside European borders.
Crucially, the inclusion of this mixed approach did not stem from EFRAG’s independent technical judgment. Internal documentation revealed that EFRAG members expressed profound reservations about the framework from the outset, noting explicitly in the drafting process that the provision was included strictly due to an explicit request by the European Commission.
In a comprehensive "Basis for Conclusions" document published alongside the exposure draft, EFRAG detailed the extensive misgivings voiced by its own members. Chief among these was the warning that the mixed approach would severely undermine the establishment of a level playing field between EU corporations and their international competitors. Furthermore, members cautioned that allowing different scopes for different topics would impair the overall understandability of corporate disclosures, while creating profound operational uncertainty regarding the technical feasibility of isolating purely "EU-related impacts" from global operations.
Perhaps most damningly, EFRAG members warned that the mixed approach invited corporate abuse. They highlighted a substantial risk that relevant information would be lost, opening the door to greenwashing—particularly concerning human rights violations and environmental degradation, the latter of which inherently transcends artificial geographic boundaries.
Echoing and amplifying these internal warnings, the recent statements from the PSF and Eurosif condemn the mixed approach as a direct threat to the integrity of Europe’s sustainable finance architecture. The PSF warned that the framework would weaken comparability across markets, manufacture an uneven playing field for transparency, and drastically diminish the overall usefulness and reliability of corporate sustainability data. The group added that the policy could paradoxically increase compliance complexity and reporting costs, obscure severe environmental and human rights abuses occurring outside European jurisdictions, and generate severe usability hurdles for institutional investors attempting to parse foreign market data.
Eurosif echoed these exact sentiments in its consultation response, emphasizing that the mixed approach risks producing incomplete and potentially misleading information for financial markets. The association pointed out that investors would be forced to absorb additional costs to independently fill persistent information gaps, while fragmented reporting standards would create widespread consistency and usability challenges.
Beyond the mixed approach, both the PSF and Eurosif trained their sights on another major omission within ESRS-40a: the complete exclusion of EU Taxonomy-related disclosures. The expert groups warned that omitting these requirements would create severe operational bottlenecks for financial market participants, who rely heavily on Taxonomy alignment data to satisfy their own stringent regulatory disclosure obligations under European law. To mitigate this, both organizations strongly recommended that EFRAG revise the framework to enable non-EU companies to report Taxonomy-related information on a voluntary basis, preserving data flow into European capital markets.
