The European Union’s sustainability reporting reforms are often presented as a trade-off. On one side are the expected benefits of more complete, reliable and comparable corporate information. On the other are the costs imposed on companies required to collect, verify and disclose large volumes of sustainability data. At the same time, sustainability reporting serves a broader set of stakeholders than financial reporting, and the standard-setting process can therefore embed societal objectives that do not necessarily coincide with equity investors’ information needs.
Recent debates surrounding the Corporate Sustainability Reporting Directive, or CSRD, and the European Sustainability Reporting Standards, or ESRS, have placed particular emphasis on the cost side of this trade-off. Policymakers have proposed narrowing the scope of the regulation, delaying implementation and simplifying reporting requirements in order to reduce compliance burdens.
But how do investors perceive these reforms?
In our recent study published in European Accounting Review, we examine stock market reactions to key events associated with the development and adoption of the ESRS. Unlike the earlier Non-Financial Reporting Directive, they introduce a common and detailed reporting framework covering environmental, social and governance issues. They also embed the principle of double materiality, requiring companies to report both how sustainability issues affect the firm and how the firm affects society and the environment.
Investors reacted positively on average
Across the four events, the average three-day cumulative abnormal return was 0.301%, equivalent to about EUR 17.8 million in market value for the average firm. This finding contrasts with some earlier evidence on broader non-financial disclosure mandates, where investors often reacted negatively. One possible explanation is that the ESRS do more than require additional disclosure: they introduce common standards that can make sustainability information easier to interpret and compare. But the average reaction is only part of the story.
The benefits are not distributed equally
We find stronger positive reactions for companies with lower-quality sustainability disclosure before the adoption of the standards. This is consistent with investors expecting greater improvements among firms whose previous reporting practices were relatively weak. We also find stronger reactions where existing sustainability reporting practices were more divergent, suggesting that investors anticipate greater benefits from standardisation when firms previously reported similar issues in inconsistent ways. Taken together, these findings suggest that mandatory sustainability reporting standards may be particularly valuable where voluntary reporting has been least effective.
Who gains—and who does not?
The market response was less positive for firms with poor environmental performance, consistent with investors anticipating greater reputational, operational or compliance costs as sustainability performance becomes more visible. By contrast, firms with stronger sustainability governance – including board-level sustainability committees and sustainability-linked managerial incentives – experienced more positive reactions, suggesting that investors viewes them to be better equipped to implement the new standards. Reactions were also weaker when firms’ sustainability disclosure appeared strong relative to their underlying environmental performance, consistent with greater perceived exposure to disclosure–performance gaps.
What does this mean for the current simplification debate?
The European policy debate has increasingly focused on reducing reporting complexity and administrative burdens. Some simplification may be justified, particularly where requirements generate costs without producing useful information.
Our additional analyses suggest a note of caution. We examine events associated with the weakening or delayed application of the ESRS and find negative market reactions. Although these analyses should be interpreted cautiously, they are consistent with investors viewing reduced regulatory stringency as lowering the expected benefits of the reporting regime.
This does not mean that every reporting requirement should be preserved. Nor does it imply that the ESRS will necessarily generate long-term benefits in practice. Our event-study design captures investor expectations around regulatory events, rather than the realised effects of the standards after several years of implementation. Reducing unnecessary compliance costs may benefit companies and investors. But weakening the features that improve information quality and comparability may remove precisely the benefits that investors appear to value.
The broader lesson
The broader lesson extends beyond the ESRS. Mandatory sustainability reporting may create capital-market benefits when it addresses weaknesses in voluntary reporting: incomplete information, inconsistent measurement and limited comparability across firms.
The key question is therefore not simply whether sustainability reporting should be mandatory or voluntary, but how reporting standards should be designed. For policymakers, the challenge is to distinguish requirements that create unnecessary costs from those that make sustainability information more informative and comparable for capital markets.
