Are Climate Reporting Requirements Hurting European Competitiveness?

Recent months have witnessed a significant push on both sides of the Atlantic to roll back regulations, notably environmental ones, which are increasingly viewed as a burden for economic competitiveness.  

Notably, while calling for bold strategies to boost green investments, the Draghi report has also recommended simplifying and streamlining key EU environmental regulations, such as the Corporate Sustainability Reporting Directive (CSRDⁱ), which mandates environmental, social, and governance (ESG) disclosures for relatively large firms and financial institutions. 

In line with these recommendations and bolstered by the new political composition of the EU Parliament, the EU Commission proposed the first Omnibus package of sustainability rules in February 2025, aiming to simplify and reduce EU sustainability reporting requirementsⁱⁱ.  

The amendments proposed could reduce the companies in scope of CSRD by 80%. Strong opposition to these amendments has emerged. For example, a group of 240 researchers, primarily economists, has argued that the package is counterproductive:   

Contrary to the usual rhetoric that opposes regulation and competitiveness, such a deregulation drive will not help the EU build its strategic autonomy nor resolve any other major issues we face. 

Companies will not gain competitiveness by turning a blind eye to ecological upheavals that threaten both their business models and society as a whole […] The European Commission must therefore maintain its course toward the transition and not give in to the siren call of outdated policies. 

However, there is little to no evidence on the potential trade-offs—or lack thereof—between the environmental ambitions of the CSRD and its impact on economic competitiveness.  

As a result, the debate remains largely theoretical and ideological. While this is understandable to some extent, insofar as the need to avoid environmental catastrophes may at times require to constrain economic activity, this does not enable sound evidence-based policy to take place. 

Against this backdrop, we have empirically examined the effects of mandatory sustainability reporting on the portfolios of institutional investors and its impact on the carbon emissions, trade dynamics, and the economic and financial performance of French manufacturing firms most exposed to the regulation as borrowers in financial markets. 

The underlying rationale of our study is that, as investors gain access to detailed information on the polluting behavior of firms in their portfolios, they may seek to protect themselves and their investments from exposure to climate risks, leading to shifts in capital allocation or increased scrutiny that affect the cost and availability of this form of external finance.  

France, being the first country to mandate such granular disclosure from investors through a law passed ten years ago, provides a case study with historical depth, making it relevant to assess the medium-term impacts of such regulations. 

We find evidence of potential trade-offs between environmental outcomes and economic competitiveness.  

On the environmental side, a 10-percentage point increase in the ratio of bond debt to total debt, the preferred measure of exposure to the regulation (i.e. the degree of reliance on the type of affected external financing), is associated with a statistically significant 5.84% reduction in firm-level imported carbon emissions relative to less bond-reliant firms.  

However, this exposure is also associated with relative declines in firm size and trade activity. These effects are primarily driven by the more financially constrained firms, suggesting that heightened investor scrutiny may limit access to external financing for firms within their portfolios and disrupt the daily business operations of these affected firms. 

Rather than leading to a natural weakening of environmental action—which could increase physical risks for all firms due to the worsening of climate change—our study can serve as a valuable tool to explore potential policies that would mitigate the negative economic impacts of the regulation on exposed firms while preserving its environmental ambition.  

For instance, the implementation of an EU Carbon Border Adjustment Mechanism (CBAM) could offset some of the carbon leakage potentially caused by the CSRD, particularly if investors shift their focus to regions with less scrutiny on carbon-intensive firms.  

How to Mitigate the Trade Off 

Additionally, the EU could seek to develop different financial mechanisms aimed at offsetting the negative impacts highlighted by the study, thereby ensuring that investors continue supporting carbon-intensive firms committed to transitioning to more sustainable business models rather than divesting from them.  

In practice, this could be done by setting up a fund to guarantee investors’ loans and bonds for manufacturing firms seeking to improve their environmental practices.  

Alternatively, some have suggested that the European Central Bank (ECB) could offer favorable refinancing conditions to counterparties committed to invest in the low-carbon transition, notably through differentiated interest rates (as suggested by French President Emmanuel Macron) or through their collateral framework. 

The study reveals that while environmental ambition and economic competitiveness do not always align—contrary to overly optimistic visions of the transition—abandoning environmental goals in the name of competitiveness is not only a failure in light of the essential need to mitigate climate change but also a politically shortsighted approach. 

Solutions such as the ones mentioned above exist to maximize both environmental and economic outcomes in light of specific constraints and trade-offs. In the case of the CSRD discussed here, policy should aim to create additional channels of external finance that enhance environmental sustainability while supporting firms' short-term needs. 

ⁱ The report also called for weakening other regulations such as the Corporate Sustainability Due Diligence Directive (CSDDD), which aims to foster sustainable and responsible corporate practices across global value chains (e.g. by helping detecting forced labor in foreign companies supplying EU firms) 

ⁱⁱ The proposal is still under discussion, but the regulation may ultimately apply to a much smaller pool of firms. For example, this could be achieved by revising the minimum number of employees required for a firm to fall under the regulation, potentially increasing it from the current threshold of 250 employees to 1,000 employees. The Omnibus proposal also addresses other segments of the EU Green Deal not discussed here, such as the EU Taxonomy Regulation and the Carbon Border Adjustment Mechanism.