The sustainability reporting landscape in the European Union (EU) has been nothing short of a rollercoaster in recent months, marked by abrupt regulatory shifts, uncertainty, and protracted implementation delays.
Meanwhile, outside the EU, the International Sustainability Standards Board (ISSB) adoption rate continues to accelerate, now exceeding 30 countries worldwide.
Although efforts are ongoing to achieve interoperability and alignment between these regimes, the objectives of the ISSB and ESRS are fundamentally different.
While the ISSB is investor-focused, management-led, and solely focused on financial materiality, by contrast, the ESRS are stakeholder-led and adopt a broader consideration of double materiality (both impact and financial).
For global companies falling within the ambit of both regimes, divergent outcomes are inevitable and counterproductive.
Recent ESRS updates published by the European Financial Reporting Advisory Group (EFRAG) are currently out for public consultation and propose, inter alia, to make the reporting of anticipated financial effects of material sustainability risks voluntary, regardless of entity size.
Emmanuel Faber, ISSB chair, recently commented: “No country adopting the international standards exempted itself [from this requirement], because anticipated financial effects are what create the link to financing the economy. For the EU, as for others, that link is vital to competitiveness and to financing the transition.”
This view suggests that the proposed shift risks weakening the credibility and comparability of EU disclosures, particularly in the eyes of global investors. By making forward-looking financial impact disclosures optional, the EU may inadvertently undermine the very transparency and accountability needed to mobilise capital for the green transition — and fall out of step with international expectations.
Lastly, for those falling outside the ESRS reporting scope entirely, EFRAG’s modular Voluntary Sustainability Reporting Standard for non-listed Small and Medium-sized Entities (VSME) is the default option.
Originally designed for entities with less than 250 employees, it is the new proposed baseline for value chain information requests. VSME affords up to a tenfold reduction in reported data points versus current ESRS, representing a consistent, minimally viable disclosure to meet market expectations.
KPMG is already seeing growing interest in the VSME Standard from medium-sized Irish corporates seeking a proportionate and practical approach to sustainability reporting.
While corporates await reporting clarity, many are ploughing ahead with other no-regret activities focused on ensuring climate resilience in the face of increasing climate and societal pressures.
This momentum reflects a broader shift in priorities, as organisations recognise the importance of building long-term resilience – for example, in the Global Risks Report 2025, conflict, misinformation, and severe weather events top the list of immediate concerns.
Equally, within the financial markets, starting in the second half of 2026, the European Central Bank will introduce a "climate factor" to its collateral framework to reduce the value of collateral from corporates that are more exposed to climate-related transition risks.
This signals a broader shift in how financial institutions assess creditworthiness, and corporates should expect growing pressure from banks and investors to demonstrate robust climate risk assessments and transition planning as a prerequisite for access to capital.
And so, for organisations caught in the crosshairs of competing political priorities, near-term focus on exploiting points of commonality between reporting regimes and demonstrating tangible resilience to climate risk provides a competitive edge to meet mounting expectations of investors, financiers, and regulators.
If you are still within the scope of the Corporate Sustainability Reporting Directive (CSRD) (more than 1,000 employees):
KPMG Sustainable Futures is a specialised, cross-functional team of experts committed to assisting corporate, financial, and public sector clients with planning and implementing programs focused on sustainability, decarbonisation, and long-term value creation.
We can support you through:
If you have any queries related to developing your sustainability reporting strategy or would like to explore how it could benefit your organisation, please contact Russell Smyth of our Sustainable Futures team. We’d be delighted to hear from you.
