A regular briefing for the alternative asset management industry.
Reforms to the EU's Corporate Sustainability Reporting Directive (CSRD, which mandates sustainability disclosures) and Corporate Sustainability Due Diligence Directive (CS3D, which requires companies to mitigate adverse impacts) are all but agreed. The European Parliament approved the final text of the amended laws at the end of 2025, and the European Council is expected to give the formal go-ahead shortly. As we explain in our detailed briefing, the EU's dramatic changes to these key regulations are remarkable.
The sustainability omnibus, one of several simplification initiatives launched last year, goes further than the Commission's original proposals – and even those initial suggestions, published in February 2025, were considered dramatic. The push to "simplify" – or, more accurately, to deregulate – followed a political backlash against rules that would have imposed very significant additional burdens on businesses inside and outside the EU.
Now, far fewer companies will have to comply – and those that remain in scope will have a lot less work to do.
But it is unfortunate that the review of these laws – which were trumpeted as a key part of the EU's Green Deal – appears to have been mostly driven by burden reduction. Policymakers have not clearly restated the anticipated benefits, nor given a coherent explanation of how these (revised) regulations can be expected to achieve those outcomes.
That's a shame because there is a need for a credible and explicit theory of change to support novel regulatory interventions of this type. Such a theory would help with a redesign of the laws and allow for future evaluation of their effectiveness.
Impact investors are very familiar with the need for a theory of change – in essence, a detailed explanation of how and why a given intervention will lead to (or at least contribute to) a specified outcome, ideally drawing on causal evidence.
Such an approach would first require policymakers to specifically describe the changes they are aiming for. Clearly, the desired outcome of CSRD is not merely more disclosure. Indeed, the objectives of the original law were rather broadly stated in the 2021 impact assessment. They included channelling capital to more sustainable companies, and "strengthening the social contract between companies and citizens" by making companies more accountable for their impacts.
The EU has a legally binding net zero target, and wants to reduce environmental degradation and adverse human rights impacts. It also clearly needs to build more competitive and successful companies, equipped to deal with the significant environmental and social challenges ahead of us – so it clearly needs businesses to address those risks and exploit emerging opportunities.
Lawmakers must still explain – specifically and, ideally, using available evidence – how requiring public disclosure will help reach these important policy goals. Good answers to this question are lacking – but the answers are crucial because they will dictate what kind of law(s) will have most success, and should also help to build buy-in.
For instance, if the hope is that financially driven public market investors will read the reports and push companies to change their behaviour, that would seem to suggest that requirements for publicly listed companies should differ from their privately-held counterparts. It would also suggest a single materiality lens, so that companies only highlight financially material issues – an approach adopted by the International Sustainability Standards Board (ISSB) in its disclosure standards.
But the EU has rejected that single materiality approach, perhaps expecting that stakeholders – including investors, but also employees, customers, NGOs and others – will put commercial pressure on businesses to alter their behaviour (to "make them more accountable", as the Commission put it) even when not clearly in their financial interests to do so. That is certainly a plausible channel for real world changes, but it seems unlikely that hundreds of datapoints buried in a report that is aimed primarily at shareholders is the best way to exploit it.
