Investor Perspectives on ESG Disclosure Reductions: Balancing Transparency and Competitiveness

Introduction

The past decade has seen an extraordinary surge in ESG (Environmental, Social, and Governance) disclosure mandates. But in 2025, the pendulum is swinging back. Regulators, particularly in the EU, are proposing to scale back certain ESG reporting requirements, citing concerns about competitiveness, reporting burdens, and small enterprise readiness.

This shift has sparked unease among investors who rely on ESG data to assess corporate risk, inform asset allocation, and hold companies accountable. As disclosure rules become more fragmented and optional, the risk landscape changes—not just for corporates, but for the investors who finance them. This article explores the regulatory rollback proposals, investor reactions, global regional divergence, and how boards can adapt their ESG governance strategies in response.

Understanding ESG Disclosure Rollbacks: What’s Changing?

The European Union's Corporate Sustainability Reporting Directive (CSRD), once hailed as a gold standard for ESG transparency, is facing revision. In May 2025, proposals surfaced to delay or dilute several of its requirements. These include the optional deferral of Scope 3 emissions disclosures, streamlined reporting for SMEs, and relaxed expectations around double materiality assessments.

One of the most contentious changes is the reduction of mandatory reporting on human rights and climate-related impacts. Legal scholars warn this could expose companies to greater litigation risks. If disclosures become less robust or inconsistent, gaps in public accountability could leave room for lawsuits from civil society groups, activist investors, or affected communities. According to a Reuters report, legal experts argue that weakening ESG mandates may actually increase legal uncertainty, not reduce it.

These proposed rollbacks reflect growing business pushback. Some industry groups argue the CSRD, in its original form, imposes excessive burdens on companies already navigating inflation, war-driven supply chain shocks, and AI disruption. In response, the European Commission is attempting to walk a fine line—appeasing business interests while not undermining its climate and social policy goals.

Globally, the picture is uneven. The U.S. SEC’s climate disclosure rule, though narrower than CSRD, is also being challenged in court. Meanwhile, the ISSB (International Sustainability Standards Board) continues pushing for baseline global reporting standards. This divergence complicates cross-border risk management, especially for multinational corporations and global investors seeking consistent ESG signals.

Why Investors Rely on ESG Disclosures for Risk Management

For institutional investors, ESG disclosures are not about virtue signaling—they are a critical component of risk management. Data on environmental exposure, labor practices, supply chain ethics, and governance structures help inform long-term financial analysis. A company’s ability to disclose comprehensively is often interpreted as a proxy for operational resilience and board-level awareness.

Investors increasingly use ESG data in screening models, scenario analyses, and stress testing. For example, pension funds in Europe and Australasia assess carbon emissions data to identify transition risk, while sovereign wealth funds monitor labor rights metrics to avoid reputational damage. ESG signals also guide proxy voting, stewardship engagement, and activist campaigns.

Importantly, ESG is no longer just about exclusion (e.g., divesting from fossil fuels). It has evolved into a more nuanced engagement approach. Investors want to stay invested in companies and guide them toward better outcomes. But without reliable data, this engagement loses its teeth. Inconsistent disclosures limit the ability to benchmark, track progress, and hold management accountable.

As noted by the European Fund and Asset Management Association (EFAMA), ESG transparency underpins capital market efficiency. Investors allocate billions based on sustainability metrics. Weakening disclosure rules injects ambiguity, reduces comparability, and increases exposure to hidden risks—especially in sectors like energy, mining, agriculture, and tech, where ESG controversies have significant financial consequences.

For asset owners with long-term liabilities—such as insurers, pension funds, and endowments—reduced ESG transparency could mean unknowingly taking on higher climate, reputational, or regulatory risks. As such, the call for consistent, high-quality disclosures is not just ideological—it is fiduciary.

Transparency vs. Competitiveness: The Regulatory Dilemma

Balancing transparency with competitiveness is the crux of today’s ESG debate. On one hand, excessive reporting can drain resources, especially for smaller companies. On the other, scaled-back transparency undermines market accountability, encourages selective reporting, and could erode investor trust.

Proponents of reduced ESG disclosure argue that global firms face overlapping and conflicting regulations. Reporting fatigue is a growing concern. For example, one European industrial firm estimates it must respond to over 300 ESG-related data requests per year. BusinessEurope, a pan-European industry group, advocates for a more "proportional" approach that considers sectoral nuances and SME capacities.

However, investors counter that transparency is foundational to trust. Selective or voluntary disclosures allow companies to cherry-pick positive data while ignoring systemic risks. This risks a return to the “greenwashing era,” where sustainability claims go unverified or unchallenged. As noted by Reuters, major investors are urging EU regulators not to dilute mandatory reporting, warning it could “deprive the market of material information needed to evaluate risk.”

Materiality is a key flashpoint. While businesses prefer “financial materiality” (only disclosing what affects enterprise value), investors and regulators increasingly push for “double materiality”—also reporting on the company’s impact on society and the environment. Critics of rollback fear this shift could weaken double materiality and lead to fragmented interpretations of risk.

There is also the question of enforcement. A lighter touch on reporting might ease compliance but weaken supervision. As seen in other regulatory domains, weak enforcement tends to breed complacency, eventually exposing the entire ecosystem to systemic risk. If ESG reporting becomes optional or inconsistent, so too does responsible capital allocation.

Regional Divergence: Australia, New Zealand, and ESG Resilience

While parts of Europe and the U.S. are debating ESG disclosure fatigue, Australia and New Zealand are doubling down. Despite the global pushback, both institutional investors and regulators in the region are reinforcing the importance of ESG risk visibility.

In Australia, ESG investment funds continued to attract inflows in Q1 2025, even as global ESG fund flows turned negative. The Australian Council of Superannuation Investors (ACSI) has taken a strong stance in favor of mandatory climate and human rights reporting. Similarly, the New Zealand government reaffirmed its commitment to climate-related disclosures through the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act, which remains in force for financial institutions and large corporates.

Why the divergence? Part of it is fiduciary. Super funds and long-term investors in Australasia have explicitly integrated ESG into their investment beliefs. Climate risk is treated not as a moral issue but as a financial inevitability. Cultural and legal factors also play a role. There is broader public acceptance of the idea that long-term financial performance is tied to environmental and social performance.

This resilience offers lessons. Voluntary disclosures, while useful, are no substitute for baseline comparability. Regulatory certainty helps investors plan, allocate, and engage constructively. Fragmented or weakening rules in one region may also divert capital toward jurisdictions perceived as more transparent and aligned with long-term stewardship principles.

As the global ESG landscape bifurcates, Australia and New Zealand show that robust disclosure frameworks can coexist with economic competitiveness—and that clarity, not complexity, builds investor confidence.

The Future of ESG Risk Governance: What Should Boards Do?

Boards play a pivotal role in navigating ESG disclosure uncertainty. Even if regulations weaken, investor expectations remain high. Proactive governance can bridge this gap. Leading companies are not waiting for mandates—they are embedding ESG into enterprise risk frameworks, internal controls, and boardroom agendas.

One priority is maintaining voluntary disclosures aligned with recognized standards, such as those from the Global Reporting Initiative (GRI) or CDSB. Another is scenario planning. Boards should test the resilience of their business models against climate shocks, biodiversity loss, and social unrest—even if disclosure isn’t compulsory.

Audit committees have a special role. With increasing scrutiny on “assurance” of sustainability data, boards should ensure ESG disclosures are subject to the same rigor as financial data. This may involve external assurance providers, internal audit integration, or third-party verification of ESG KPIs.

Governance structures also need to adapt. Companies are appointing ESG risk officers, creating board-level sustainability committees, and linking executive compensation to sustainability performance. These moves send strong signals to investors and rating agencies that ESG is treated as material.

Above all, boards must own the ESG narrative. In an era of increased investor activism, regulatory ambiguity, and public scrutiny, the ability to communicate a coherent, risk-aligned ESG strategy is not just good practice—it’s governance in action.

Conclusion

The tension between transparency and competitiveness is not going away. But as this article has shown, reducing ESG disclosure is not a free lunch. It can obscure risk, erode investor trust, and lead to unintended legal and financial consequences.

Investors are clear: they need consistent, comparable ESG data to manage risk and allocate capital responsibly. While reporting fatigue is real, the solution is smarter, not smaller, disclosure—grounded in materiality, guided by standards, and enforced with clarity.

For boards, the challenge is to lead—not just comply. In a fragmented regulatory world, governance must provide the consistency investors seek. Because in the end, ESG isn’t just about compliance—it’s about foresight, resilience, and sustainable value creation.