Why CSRD double materiality assessments are bound to fail
Double materiality assessments will keep producing misalignment because key concepts – materiality, risk, impact and fairness – are fluid and open to interpretation. ...
Sustainability
Follow the money: Why sustainability is not dead, just smarter
The war on woke has not killed sustainability – it has stripped out the noise and left the issues that were always going to matter.
Rapid read:
- The political assault on ESG in the US and softening of regulation in the EU have not eliminated the business case for managing sustainability risks and opportunities – they have exposed companies that confused compliance with strategy.
- Sustainability as a label may be in retreat, but its constituent parts – emissions, water stress, resource constraints, talent, and supply chain integrity – are being embedded more deeply into core business operations.
- Investors continue to apply a risk-return logic to sustainability factors, with AI making it easier to identify, quantify, and price these risks into valuations.
The war on woke in the US and dilution of regulation in the EU
The past two years have brought a sharp political and regulatory retrenchment on sustainability. In the US, the Trump administration’s withdrawal from the Paris Agreement, attempts to roll back the Inflation Reduction Act, and its campaign against diversity, equity, and inclusion (DE&I) programs sent an unmistakable signal to corporate America. In Europe, the EU’s 2025 Omnibus package – a sweeping revision of its corporate sustainability rulebook – significantly weakened both the Corporate Sustainability Reporting Directive (CSRD), which requires large companies to disclose sustainability data, and the Corporate Sustainability Due Diligence Directive (CSDDD), which requires them to identify and address sustainability risks in their supply chains.
The changes cut the number of companies obliged to report under CSRD by approximately 85%, raised the CSDDD threshold to companies with more than 5,000 employees and €1.5bn in turnover, and removed the requirement for mandatory Climate Transition Plans entirely.
Against this backdrop, companies’ responses have ranged from the continuation of activities with reduced visibility – sometimes called ‘greenhushing’ – to outright abandonment of programs never properly integrated into strategy. The latter is the more dangerous path. Sustainability programs that cannot justify themselves in financial terms deserve scrutiny. But those anchored in genuine risk and opportunity analysis are not compliance overhead; they are strategic infrastructure. Cutting them as a knee-jerk reaction to a political cycle – rather than via a strategic reassessment – is a decision that is often expensive to reverse.
Beyond the headlines, more fundamental forces are at work. High interest rates, geopolitical fragmentation, and the collapse of easy capital have forced a shift from values-based to value-based decision-making – and that shift is clarifying which sustainability topics were always financially material and which were not.
Regulatory fines versus reporting obligations – an important distinction
Not all sustainability regulations carry the same consequences, and conflating the two has been a source of significant corporate misjudgment.
Mandatory reporting requirements – such as CSRD and CSDDD – require disclosure of data across a range of topics. Fines for non-reporting or misreporting exist, but precedents and enforcement in the early years have been limited. The real CSRD exposure is market-driven: sustainability data published in machine-readable format on the EU’s European Single Access Point will enable direct comparison across companies, and investors are already building the tools to use it.
Hard regulatory requirements are different in kind. EU fleet emission standards impose direct, escalating financial penalties on automakers exceeding CO2 thresholds – those fines are paid by the manufacturer. Getting the wrong side of greenwashing and green claims rules can result in fines of up to 4% of annual turnover, confiscation of revenues from misleading claims, and exclusion from public procurement for up to 12 months.
The Omnibus rollback reduces reporting scope. It does not reduce these harder exposures. Leaders who conflate the two will be caught out.
Corporate sustainability is ‘dis-integrating’, but businesses are embedding its constituent parts
The fact that some corporates are retreating from sustainability as a unified concept is not, in itself, bad news.
For too long, companies approached the topic as a single agenda item – generating reports covering 40 or more ‘material’ topics, few of which were connected to genuine business risks or opportunities. No company is going to manage 45 topics strategically. If you had a clear idea of the topics in the sustainability universe that matter for long-term survival, you would not go back and forth every time the regulatory wind changes.
What is happening now is a pressure test. The constituent elements of sustainability are being assessed for their actual value and relevance to the business, its stakeholders, and its regulators. What passes the test is being integrated more deeply into strategy while the rest is being discarded. Agriculture companies are learning that water stress and soil degradation are not peripheral concerns but existential ones. Tech firms are discovering that talent well-being determines whether their best AI engineers stay or leave. The label may be changing; the underlying logic is not.
My colleague Julia Binder, IMD Professor of Business Transformation, reflected on what she heard at this year’s WEF in Davos: ‘What once sat under a clearly labelled sustainability agenda is now being reframed through the language of resilience, resource efficiency, security of supply, and material transformation.’ The vocabulary is changing; the business logic is not.
Greenwashing, greenhushing, pinkwashing, pinkhushing
The regulatory retreat on disclosure obligations has happened in parallel with a tightening of the rules on what companies are permitted to claim – a paradox that has wrong-footed many teams responsible for public reporting of sustainability content and data. Here are some of the pitfalls for reporting, each with a distinct risk profile.
Greenwashing – making unsubstantiated or misleading environmental claims – is now directly regulated and carries hard financial penalties.
Greenhushing is its inverse: quietly continuing sustainability programs while scrubbing public references to them. It reduces greenwashing risk but can create its own exposure if investors or regulators discover undisclosed material information.
Greenrinsing – setting ambitious public targets and quietly abandoning them – is similarly exposed.
Pinkwashing and pinkhushing follow the same logic on social claims: overstating commitment to LGBTQ+ inclusion or gender equality or erasing such commitments to avoid scrutiny in hostile markets.
None of these positions is safe. Legal and compliance teams are increasingly required to calibrate what can be claimed in which jurisdiction – because what is permissible in one market may trigger regulatory action or reputational damage in another. This is a nightmare for companies that bid for contracts from the US public sector, as many states have passed anti-DE&I laws, while at the same time doing business in the EU, where positive DE&I efforts boost the chance of winning bids in certain countries.
The only defensible position is a well-documented, evidence-based materiality framework, with claims that match evidence and communications calibrated to the regulatory environment in each market.
Despite the political noise, institutional investors have not changed their underlying analysis.
Follow the money – what investors want business to focus and report on
Despite the political noise, institutional investors have not changed their underlying analysis. In 2025, Deutsche Bank reported its strongest year for sustainable finance since 2021, with ESG investment volumes reaching €98bn and CEO Christian Sewing citing ‘renewed demand from our clients.’  In the same vein, HSBC announced that it mobilized more than $102bn in sustainable finance and investment in 2025 – an all-time record for the bank.
In Asia, Hong Kong’s Monetary Authority expanded its Sustainable Finance Taxonomy in January 2026 to include climate transition categories, more than doubling the number of covered economic activities. The taxonomy defines which loans, bonds, and investments qualify as sustainable under Hong Kong rules – meaning banks and asset managers operating in the region must assess whether the companies they finance meet those criteria. For businesses seeking Asian capital, having credible transition plans is now a financing condition, not a reporting preference.
Investors apply a risk-return logic. If transition risks and physical risks can be quantified, investors and lenders will price them in – regardless of what regulators require. Who is still providing affordable commercial insurance for properties in wildfire-prone areas in California? The insurers have already answered that question.
As AI refines the quantification of these risks, ESG factors will increasingly drive valuations through market mechanisms rather than mere regulatory pressure or fear of sanctions. Even in the US, a significant majority of the largest corporations are now prioritizing double materiality – with recent data showing  68% of major firms reaching high readiness – because institutional investors demand the same rigorous data transparency provided by their European-listed competitors.
The shift is from broad ‘impact’ metrics – the kind of compliance-driven reporting produced in abundance – to operational resilience indicators that link sustainability directly to margin protection. Leaders who can express sustainability performance in the language of business and finance will have a meaningful advantage in capital markets. The latter comes with challenges – as my colleagues and I recently expressed, but it is one promising way forward.
This approach also serves as a hedge against regulatory flip-flopping and regional political volatility.
How to get things done in this new sustainability paradigm
Sustainability is increasingly becoming the red thread running through businesses, functions, and geographies. Companies that delegate it to a standalone sustainability team – or to external consultants with a commercial interest in broad, audit-safe reporting – consistently underperform those that embed it as a business resilience activity. The starting point is a rigorous double materiality assessment: identifying the handful of topics where financial risk and societal impact overlap for the specific business. That output then ideally feeds directly into enterprise risk management, business reviews, and capital allocation decisions.
This approach also serves as a hedge against regulatory flip-flopping and regional political volatility. A company that has identified – for sound strategic reasons – that water is a material issue for its agricultural operations does not abandon water management because thresholds obliging it to apply CSDDD have taken it out of scope. It has its own reasons to act, and those reasons survive any change in the regulatory environment.
Ragn-Sells, a Swedish waste management company that transformed itself around planetary boundaries in 2015, was presenting circular economy innovations at the UN within three years – not because it was required to, but because the strategic logic was compelling.
For SMEs, the temptation to walk away is particularly dangerous. The EU Omnibus rollback exempts most small and medium-sized businesses from direct CSRD obligations. However, it does not remove them from the sustainability requirements of their large customers’ supply chains, nor from public procurement criteria that embed sustainability standards, or from greenwashing liability. SMEs that wait for a regulatory push will find their competitors have already taken their place, as my colleagues and I recently argued.
Five takeaways for business leaders
- Resist the temptation to equate regulatory retreat with strategic irrelevance. The EU rollback reduces reporting obligations; it does not change the physical risks, investor expectations, or market dynamics that sustainability factors create for your business.
- Use double materiality to identify your handful of truly strategic risks and opportunities. Focus measurement, governance, and capital on the issues where financial and impact materiality overlap for your specific business. A total of 40 material topics, with a top-right quadrant of your materiality matrix with 15 or more topics, is not realistic.
- So-called ‘non-financial’ issues are financial issues. Managing them well opens doors – to capital, talent, and markets. Ignoring them or managing them poorly penalizes your company through regulatory fines, insurance costs, and supply chain exclusion.
- Invest in strategically relevant sustainability topics during periods of regulatory loosening rather than cutting back. Stress-test your plans against both tightening and loosening scenarios and use periods of political uncertainty to build the capability you will need when the cycle turns.
- Embed sustainability in core governance, not in a standalone function. Leaders with genuine sustainability knowledge must own the agenda. Cross-functional collaboration, board-level ownership, and internal audit involvement are essential to building programs that are both credible and durable.
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