ESG will remain beyond 2025 - why the market should continue to demand transparency

Even if, to the relief of many, the European Union has been taking its foot off the gas since the beginning of the year: The market needs more transparency and comparability when it comes to ESG. Investors and analysts have a lot to gain if they no longer just let ESG data slide - but make more use of it and clearly identify deficits in data quality and regulation. This applies all the more to EU taxonomy.
 

Contribution by Dr. Wilhelm Mirow, Senior Consultant ESG/Sustainability,
and Jela Bölts , Consultant ESG/Sustainability, in the BondGuide magazine

The Spanish energy service provider Iberdrola issued its first green bond in accordance with the EU Green Bond Standard at the beginning of May. With an order book of EUR 3.7 billion, the bond was promptly oversubscribed fivefold and the coupon was reduced to 3.5%. At the same time, the ECB was critical of political plans to relax European ESG reporting requirements and warned of the associated risks for investors. Such news is quickly lost in the maelstrom of announcements about ESG headwinds from the US and regulatory overreach. Effective dissenting voices are needed - and this is where the capital market comes into play.

It has long been clear that something has to change. Every day, we transfer around EUR 1 billion from the EU for the import of fossil fuels, which are then burned. It's a pity about the money, especially as this causes huge ecological damage in the long term, with considerable costs once again. Legislators have long since set a different direction - climate neutrality by 2050 - and thus initiated a major transformation.

In such transformation processes, there are companies that flourish and those that sooner or later disappear from the market as a result. It is no coincidence that, according to a study by Accenture, the S&P 500 companies with consistently high ESG performance achieve on average 2.6 times higher returns on shares and 4.7 times higher returns on sales than the others.

To enable capital market participants to clearly identify which of these two categories of companies they are investing in, the EU has created tools to create transparency and comparability in ESG matters. Developing, understanding and applying these instruments is complicated and time-consuming.

Invitation to the capital market

It is therefore understandable that the European Commission has proposed comprehensive changes to the existing ESG regulations (Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD) and EU Taxonomy Regulation) as part of the so-called Omnibus Initiative with the aim of strengthening the competitiveness of European companies and reducing bureaucratic hurdles.

However, it would be fatal to deduce from the deceleration at regulatory level that ESG data is less relevant. Quite a few companies are primarily pursuing the goal of fulfilling regulatory obligations with the least possible effort with their ESG reporting instead of providing investors and other stakeholders with relevant information. As a result, data quality suffers - to the detriment of the capital market.

The appeal to the financial sector is therefore to communicate more clearly to both companies and politicians what relevance ESG information (could) have for the capital market and what improvements are needed in regulation and reporting to make better use of this information. After all, ESG data does not provide a moral assessment, but rather management-relevant information with financial materiality.

EU taxonomy in transition: progress with room for improvement

The EU taxonomy - the EU's central classification system for uniformly assessing economic activities in terms of their environmental sustainability - has also been dismissed by many as too complex and too bureaucratic. Unmotivated and without a uniform understanding, many companies would collect correspondingly useless data. The capital market has also taken a rather passive stance in this discussion to date.

It is now worth taking a second look. The EU taxonomy aims to steer capital flows towards sustainable activities on the basis of clear, verifiable criteria. Although there is still room for improvement, this steering effect is already evident. This is shown by a recent study by the EU Platform on Sustainable Finance. At the same time, according to a study by PwC, the ESG data situation has already improved noticeably - and this trend is continuing. The CSRD is accompanied by an audit of the taxonomy information by an auditor. This will further increase the informative value and reliability of the information.

The findings of these studies are clear: in order for the taxonomy to realize its potential, companies need more incentives and regulatory clarity. The capital market should work towards this - and not accept bureaucracy and complexity as an excuse for a lack of transparency.

ESG matures – time to help shape it

This also means that users should not be put off by the complexity of the EU taxonomy. The European legislator can certainly still streamline it. However, a certain degree of complexity is unavoidable with all accounting standards.

It is undisputed that ESG ratings are an important basis for evaluation. The EU taxonomy also offers enormous potential to increase their informative value using standardized key figures. It can provide clarity about the proportion of environmentally sustainable activities in the portfolio, about risks and about future viability. Investors should take advantage of this quality and then show how taxonomy data is used, particularly in broadly publicized products.

Conclusion

2025 is a turning point. Not because ESG is over - but because ESG is maturing. It is high time for the capital market to step out of the role of observer and emphasize the relevance of ESG in everyday investment decisions. ESG reporting is already providing valuable information today. Those who ignore it are investing with half the information.
 

Dr. Wilhelm Mirow is Senior Consultant for ESG/Sustainability at Kirchhoff Consult GmbH. In addition to a doctorate at ETH Zurich, he has eight years of experience in strategic communications for financial, technology and sustainability topics. His areas of expertise include CSRD/ESRS, IFRS/ISSB and ESG communication.

Jela Bölts is a consultant for ESG/Sustainability at Kirchhoff Consult GmbH. In addition to a Master's degree in Sustainable Marketing & Leadership, she has two years of experience in CSRD/ESRS reporting, ESG strategies, materiality analysis and EU taxonomy audits. Her areas of expertise include CSRD/ESRS and EU taxonomy.