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Sustainability
As sustainability reporting rules are diluted, the real test for CFOs begins
Even as sustainability reporting rules are diluted, investors are using AI to turn nonfinancial disclosures and data into valuation insights. Florian Hoos examines what this means for CFOs and why companies cannot rely on extensive disclosures to obscure weak strategy.
Following political agreement in late 2025, the EU’s Omnibus I simplification package entered into force in early 2026, significantly narrowing the scope of sustainability reporting and due diligence requirements. By weakening elements of both the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), Omnibus I reduced both the scope and ambition of recent reforms. Combined with the broader ESG “backlash” in the US, this means the direction of travel on sustainability reporting has become less certain.
The response from companies has been uneven. While some have continued sustainability efforts, they are often less visible. Others have scaled back or dropped initiatives altogether.
The split is revealing. Programs tied to real economic risk or opportunity tend to endure; more peripheral efforts are the first to be cut. Once removed, they are not easily rebuilt.
This points to a broader shift in sustainability strategy. As I explored in a recent article, the more fundamental shift is not political but economic. Sustainability is becoming more economically grounded, as companies move from values-based commitments toward value-based decision-making.
For CFOs, this creates a more immediate challenge. Over the past two years, sustainability reporting has expanded rapidly, generating a significant increase in data, processes, and disclosure requirements. But more information has not necessarily led to better decisions. In fact, in many cases, it has had the opposite effect.
At the center of the problem is a drift in how materiality is defined.
When materiality loses meaning
At the center of the problem is a drift in how materiality is defined.
In principle, materiality should isolate the small number of sustainability factors that affect a company strategically. In practice, it has become a defensive exercise. Faced with new requirements, companies have erred on the side of inclusion, prioritizing completeness over relevance.
Once disclosed, topics are rarely removed. Narrowing the list of factors requires justification, and few organizations are willing to revisit earlier judgment calls. Predictably, this results in a cumulative expansion of what is deemed “material,” regardless of its relevance to value.
This is where the finance function must step in to enforce discipline. Materiality should not be about covering every base. Rather, it is about what can be excluded without losing sight of performance.
Risk frameworks can fail to capture the upside
Part of the problem resides with the tools that companies use. Many organizations have folded sustainability into enterprise risk management. While this is a sensible starting point, risk frameworks are designed to limit downside exposure. This means they are less effective at identifying opportunities.
Sustainability is not just about risk. It is also about pinpointing likely sources of future value. A good example of potential opportunity cost is auto companies that treated the shift to electric mobility primarily as a regulatory and cost challenge, rather than a strategic opening.
For CFOs, the challenge is to apply financial discipline without basing all decisions on risk avoidance.
Traditional organizational design has exacerbated the issue.
Split ownership = weaker outcomes
Traditional organizational design has exacerbated the issue.
Sustainability reporting is often split between finance and dedicated ESG or sustainability teams, which frequently results in duplication and blurred accountability. In some cases, the focus shifts to who owns sustainability reporting, rather than whether it is influencing decisions or performance. Moreover, sustainability is typically reported alongside core performance, rather than embedded within it. That separation reinforces the idea that it is optional.
A more effective approach is integration. Sustainability should sit within existing reporting and governance structures. The aim is not to build new systems, but to make current ones more informative.
Markets are catching up while companies lag
Investors are becoming more adept at turning sustainability data into financial analysis, using disclosed metrics such as emissions or resource use to model costs, risks, and future cash flows.
At the same time, advances in AI are making it easier to interrogate large volumes of sustainability data. Data that once overwhelmed users can now be analyzed and compared at speed. Because AI is making large and complex sustainability disclosures easier to analyze, volume is no longer an effective shield.
Regulation still matters, but its role is often overstated. Disclosure can highlight which issues may be important; it does not make them so. They only become financially relevant when they affect costs, liabilities, or demand. Recent work on “monetary impact valuation” – the translation of sustainability into the language of financial statements – points to one possible next step. The approach still faces significant practical challenges. But if it proves robust, as colleagues and I have examined in Nature Sustainability, it could make sustainability disclosures far more useful to investors.The shift is clear: sustainability is moving from narrative to valuation.
Disclosure is not strategy
As scrutiny intensifies, there is a risk that companies will treat disclosure as a proxy for strategy. But while regulation determines what must be reported, it should not determine what drives decisions. Visibility is not the same as relevance. If a disclosed factor does not affect value, it should not shape strategy.
For CFOs, the task is to keep those lines clear. Reporting must meet regulatory requirements, whereas strategy must remain anchored in performance and capital allocation.
CFOs are central to this shift.
Making discipline matter
With less regulatory pressure, there may be a temptation to disengage. But, as we have seen, what is required is not less discipline, but more focused, directed discipline.
CFOs are central to this shift. Their role is not to expand the list of sustainability issues, but to identify those that genuinely matter, integrate them into strategy, and reflect those decisions in capital allocation. That also means accepting uncertainty as a necessary factor in engaging with opportunity. Some investments will take time to become material; others may not deliver at all. In that sense, judgment becomes critical, not just measurement.
The companies that benefit will be those that treat sustainability not as a reporting exercise, but as part of how they allocate capital and assess performance. In the end, the advantage will not come from reporting more. Instead, it will come from focusing on what matters.
Authors
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