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Sustainability
Compliance cost or stabilizing economic force? Why CFOs should consider what the CSRD means for global trade
While some firms may look to exploit regulatory arbitrage in response to the Corporate Sustainability Reporting Directive (CSRD), long-term trends point to regulatory alignment and technology advances making EU sustainability reporting rules a force for trade stability, suggest IMD’s Salvatore Cantale and Christos Cabolis.
While many CFOs will be focusing on the impact of the Corporate Sustainability Reporting Directive (CSRD) on non-financial reporting, they must keep sight of its broader economic and trade implications.
The directive requires companies of all sizes to collect and disclose data on various sustainability factors, with a strong emphasis on greenhouse gas (GHG) emissions. Many will release their first CSRD-compliant reports in 2025, marking a critical shift in corporate transparency.
While it primarily affects EU-based firms, the directive’s influence extends worldwide to cover multinational corporations with significant European operations. It will also impose indirect reporting obligations on non-EU suppliers to European firms, particularly through Scope 3 emissions disclosures.
When we consider the implications of this for companies and their CFOs, two contrasting scenarios emerge:
- A static view, in which high compliance costs deter engagement with the EU market.
- A dynamic view, in which regulatory convergence and technological advances under the CSRD drive efficiency and stability – just as the General Data Protection Regulation (GDPR) has reshaped global data standards.
One large multinational that falls under the scope of the CSRD estimates that it has spent $18m on automating its carbon-emissions data reporting and expects to spend another $50m-$60m over the coming years to comply fully with the CSRD.
Scenario 1
The static view: Regulation as a trade barrier
The cost of compliance
In the short term, the debate around CSRD focuses on complexity and compliance costs. CSRD compliance will no doubt raise operating costs, though the extent will vary by company size, sector, and existing sustainability practices.
One large multinational that falls under the scope of the CSRD estimates that it has spent $18m on automating its carbon-emissions data reporting and expects to spend another $50m-$60m over the coming years to comply fully with the CSRD.
Debate over complexity and cost – as well as the impact on small and medium-sized enterprises (SMEs) – has led to discussions about simplifying sustainability regulations. The President of the European Commission, Ursula von der Leyen, has committed to reducing reporting obligations by at least 25% in the first half of 2025. However, one report has suggested that these efforts will simply result in only larger companies falling within the scope of the CSRD.
However, it is important to note that this is characterized as a simplification, and streamlining effort and compliance costs will still be a factor. In this static scenario, these costs could create a competitive gap over time. Companies that focus solely on non-EU markets may avoid the burden, while those already aligned with high ESG standards may gain an advantage. Eventually, this divergence could reshape global trade patterns, with firms either adapting to EU rules or deciding to specialize in markets with lower regulatory barriers.
“Trump could conceivably push this agenda even further, framing the CSRD as an excessive burden on US firms operating in Europe, putting them at a competitive disadvantage.”
The Trump effect
The re-election of Donald Trump to the White House will exacerbate the impact of lower regulatory barriers in various parts of the world. The Trump administration has already actively pushed back against sustainability policies, pulling the US out of the Paris Climate Agreement, and vowing to roll back green investment incentives.
Trump could conceivably push this agenda even further, framing the CSRD as an excessive burden on US firms operating in Europe, putting them at a competitive disadvantage. He may even, as in the past, threaten retaliatory measures, similar to past disputes over digital taxation and auto tariffs. This could put US multinationals in a difficult position, simultaneously under pressure from the US government and EU regulators.
Addressing the short-term challenge
For non-EU businesses and their CFOs, the key decision in the short term is whether compliance costs outweigh the strategic value of trading in the EU market.
Some will be in the “sweet spot,” with low compliance costs (for example, if they already have a clear view of their Scope 3 emissions) and the European market contributing a significant portion of their global revenue. Others will be in a more problematic position, where costs are high, and Europe makes only a small contribution to global revenue.
However, this short-term calculation is only part of the overall equation. Companies focused on long-term value creation must also consider the long-term implications of the CSRD.
Scenario 2
The dynamic picture: The CSRD as a transformative force
Regulatory convergence and competitive advantage
While the short-term impact of the CSRD may deter firms from entering or remaining in the EU market, the directive could drive global regulatory alignment. The EU has a history of exporting its regulatory frameworks – the so-called “Brussels Effect” – as seen with GDPR, which set new global standards for data privacy.
Despite the US leaning towards deregulation, other regions, such as China, ASEAN, and Latin America, may follow the EU’s lead on sustainability. In this case, non-EU firms that align early with CSRD standards may gain a competitive edge, positioning themselves as preferred suppliers in multiple markets. In this way, CSRD compliance could develop from a regulatory obligation into a strategic advantage.
Automated reporting and real-time ESG data collection may simplify the process of meeting CSRD requirements, making sustainability reporting a more manageable prospect, even for smaller firms.
Technology as a driver of lower compliance costs
Advances in AI, blockchain, and supply chain tracking could help businesses cut compliance costs over time. Automated reporting and real-time ESG data collection may simplify the process of meeting CSRD requirements, making sustainability reporting a more manageable prospect, even for smaller firms.
For example, AI can analyze vast emissions and energy use datasets, while Generative AI (GenAI) can extract key information from reports and contracts, streamlining sustainability disclosures and dramatically reducing the burden on workers.
Regulation as a stabilizing influence
Today, companies must manage significant geopolitical tensions. Trade relationships are shifting, with new tariffs, sanctions, and political realignments affecting global commerce. In contrast with deregulation and short-term policy swings, consistent regulations can provide a long-term, structured framework for sustainability reporting. Moreover, companies that embrace CSRD compliance may find themselves better equipped to adapt to future regulatory shifts elsewhere.
By viewing compliance as a baseline cost of doing business in global markets, companies could use the CSRD as the foundation for broader adaptability, making them more resilient and agile in the face of future regulatory and market changes.
Over a longer horizon, the directive could reshape global trade by driving regulatory convergence, encouraging investment in sustainable practices, and enhancing resilience in an uncertain world.
Conclusion
In the short term, the CSRD presents clear challenges, increasing compliance costs and potentially deterring trade with Europe. But over a longer horizon, the directive could reshape global trade by driving regulatory convergence, encouraging investment in sustainable practices, and enhancing resilience in an uncertain world. By viewing CSRD through a trade lens, CFOs can realize its potential to create new opportunities – both in Europe and beyond.
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