Authored By: Aditi Anil
University of Amsterdam
Introduction
In recent years, environmental and social risks have increasingly been reframed as financial risks, with major corporations facing legal scrutiny over their environmental impact and sustainability disclosures.[1] An increase in high-profile climate litigation and investor pressure has altered how corporate responsibility is understood, raising the question of whether sustainability remains a voluntary ethical commitment or if it has become a legally enforceable obligation.
Environmental, Social and Governance (ESG) factors have emerged over the past two decades as an investment-oriented framework for integrating sustainability considerations into corporate and financial decision-making.[2] Adherence to these ESG pillars is vital in improving stakeholder trust, managing climate, environmental and governance risks, and enhancing competitive advantage. However, a failure to disclose ESG activities could result in businesses making ill-advised investments and adversely affecting the environment and their workforce.[3]
This article aims to address the following research question: ‘Has the European Union’s ESG regulatory framework transformed corporate sustainability from a voluntary initiative into a legally enforceable obligation?’ This article argues that while the EU has increased its efforts to improve sustainability-related disclosure by enforcing various ESG frameworks, important questions remain about whether these measures have effectively led to substantive changes in corporate behavior or have primarily enhanced transparency and procedural compliance. The article proceeds as follows: Section II explains how disclosure transformed from voluntary CSR to mandatory ESG Governance, Section III illustrates the various EU ESG regulatory frameworks, and Section IV critically evaluates the effectiveness of these regulations.
History of Sustainability Disclosure
Before the development of the European Union’s current ESG framework, corporate sustainability was mainly governed by voluntary Corporate Social Responsibility (CSR) initiatives. It was formalized by Howard R. Bowen’s Social Responsibilities of the Businessman (1953), who described CSR as being a normative framework grounded in ethics. It was based on the idea that corporations have responsibilities beyond making profits, but the implementation was limited to being voluntary.[4] During this period, firms mainly relied on a range of voluntary and soft law instruments, including the United Nations Global Compact,[5] the Global Reporting Initiative (GRI)[6] and the OECD Guidelines for Multinational Enterprises.[7] Despite their integral role in standardising sustainability principles at the international level, their lack of binding force led to significant limitations.
For instance, research shows that voluntary CSR reporting led to self-selection bias and credibility issues as companies would only disclose positive information and use inconsistent reporting formats, resulting in weak comparability across firms and countries and limited credibility for investors.[8] This classic information asymmetry problem was one of the strongest motivations for enforcing the EU directive (2014/95/EU), as it aimed to create standardised, comparable non-financial information across countries.[9] Additionally, selective disclosure can also result in greenwashing, which involves companies only disclosing positive sustainability outcomes to present themselves as more environmentally responsible than they actually are.[10] Moreover, because these disclosures were voluntary and not legally binding, no formal sanctions were imposed for non-disclosure.
Beyond these limitations, the shift towards the EU’s ESG regulations was driven by the establishment of the European Green Deal, which involved achieving climate neutrality by 2050. To facilitate this, the EU enforced the European Green Deal Investment Plan, which involved increasing disclosure by financial institutions on the sustainability of investments. Thus, the ESG framework was established as a broader sustainable finance strategy to persuade investment decisions and facilitate the transition to a climate-neutral economy.[11]
EU ESG Regulatory Frameworks
The European Union has created a comprehensive ESG legislative framework to increase corporate accountability and harmonize sustainability reporting in response to the limitations identified above of the voluntary sustainability disclosures. These frameworks include the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), the EU Taxonomy Regulation, the Sustainable Finance Disclosure Regulation (SFDR), and the Non-Financial Reporting Directive.
The Corporate Sustainability Reporting Directive (CSRD) is an EU legislation that was established to replace and expand upon the Non-Financial Reporting Directive to impose mandatory sustainability reporting obligations for a wider range of companies. For instance, unlike the previous voluntary CSR framework, Article 19(a) and 29(a) of the CSRD establish that companies, including individual large undertakings and consolidated groups, must disclose ESG requirements in line with the European Sustainability Reporting Standards (ESRS).[12] These articles also enforce the principle of double materiality, which states that companies are obliged to report how sustainability issues affect their financial performance and how their activities affect the environment and people. Additionally, it amends Article 34 of the Accounting Directive (Directive 2013/34/EU), which requires companies to undergo external assurance, enhancing the credibility of the disclosure.[13] These articles illustrate how, unlike voluntary CRS disclosures, compliance with these reporting standards is a legal mandate.
The Corporate Sustainability Due Diligence Directive (CSDDD) was established to move beyond disclosure requirements by enforcing various obligations on corporate conduct. For example, Article 5 of the CSDDD requires Member States to ensure that companies conduct human rights and environmental due diligence.[14] Companies are required to achieve this by identifying, preventing, and mitigating human rights and environmental impacts that arise from their own operations, subsidiaries, and chains of activities, as it is established under Articles 8 to 11 of the CSDDD.[15] Article 22 of the CSDDD also required companies to adopt and implement a climate transition plan for climate change mitigation proposed by the Paris Agreement.[16] In contrast to voluntary CSR disclosures that are exempt from penalties, the CSDDD has implemented Article 27, which stipulates that companies may be subject to penalties, including administrative fines.[17]
The EU Taxonomy Regulation was enforced to establish a legally binding classification system through which companies must evaluate the environmental sustainability of their economic operations.[18] This is done through the enforcement of six environmental goals, which include climate protection, adaptation to climate change, sustainable use and preservation of water and marine resources, shift to a circular economy, prevention and reduction of environmental pollution, and preservation and restoration of biodiversity and ecosystems. The fundamental idea behind the taxonomy regulation is that an activity is deemed taxonomy capable if it helps achieve at least one of the six objectives. It must also be taxonomy- compliant if it serves as a bridge to a climate-friendly solution or makes it possible for other activities to achieve the taxonomy’s environmental objectives. Thus, the framework ultimately upholds investor trust as it helps them make informed decisions about sustainable investments.[19]
Finally, the Sustainable Finance Disclosure Regulation (SDFR) imposes mandatory sustainability disclosure obligations on investment firms to disclose on their websites, documents, and reports on the sustainability of their investments.[20] This rule requires a large number of financial market participants to provide basic disclosures on how they handle sustainability risks to the market. This regulation mainly impacts financial actors such as banks, insurance providers, pension funds, and consultants. Ultimately, the main goal of the SFDR is to increase financial market transparency so that financial institutions may incorporate sustainability into their operations and investors can make educated judgments.[21]
Critical Analysis: The Effectiveness of EU ESG Regulations
Although the EU has extensively introduced various instruments to enhance sustainability disclosures, the effectiveness of these measures remains subject to debate. This section critically evaluates whether these legally binding obligations have actually transformed corporate behaviour or simply expanded regulatory compliance.
Has the EU ESG Framework Changed Corporate Behaviour or Merely Increased Reporting Obligations?
Under the previous voluntary CSR model, companies were heavily criticized for only disclosing information that would satisfy societal expectations and lead to decoupling, which represents the gap between formal transparency and actual reporting practice. Ultimately, leading to a false impression of sustainability adherence. Moreover, based on the analyzed reports, 41% of the negative events were not disclosed at all. Critics labelled this no disclosure as hypocrisy, as instead of fully avoiding the topic, companies would instead mask the issue by emphasizing policies that were established to eradicate such events from happening.[22]
However, the enforcement of mandatory disclosure under the EU legal frameworks was praised for narrowing the gap between reported and real ESG performance.[23] This is because of the various legally binding sustainability reporting obligations that were imposed under the CSRD and CSDDD, which require companies to conduct human rights and environmental due diligence. The implementation of these legally binding requirements has prompted businesses to make large investments in ESG compliance. This is mostly because corporations are forced to comply with the mandatory implementation, which creates “coercive isomorphic institutional pressure” and reduces decoupling significantly more than voluntary disclosure. [24] This shows a behavioral mechanism that stems from legal and reputational consequences rather than merely disclosure.
Nevertheless, mandatory disclosure has also been critiqued for exhibiting a wider disclosure-performance gap as companies continue to produce extensive sustainability reports while continuing environmentally harmful activities. This is exemplified through empirical findings that illustrate the increase in disclosure quantity has not resulted in a proportionate increase in sustainability performance. This indicates that the mandatory disclosure is symbolic rather than enhancing substantive transparency. [25] Moreover, mandatory reporting has been criticized for not fulfilling Recital 3 of the EU Directive 2014/95, which aims to improve businesses’ sustainability performance to bring about a shift towards a sustainable economy. Therefore, even if businesses disclose poor performance transparently, this does not achieve the directive’s overarching goal of assisting organizations in becoming more sustainable.[26]
While the EU has transformed ESG from being a voluntary disclosure into a legal framework, compliance with reporting and due diligence requirements may not always ensure significant gains. There, it is still debatable to what degree these responsibilities actually alter corporate behavior.
Is ESG Truly Legally Enforceable in Practice?
The EU’s ESG framework has strengthened the legal enforceability of corporate sustainability by replacing voluntary commitments with binding legal obligations. For instance, the CSRD and CSDDD employ mandatory measurements that companies must adhere to under national law. Failure to adhere to these rules could result in national authorities investigating and imposing sanctions. This is exemplified under Article 27 of the CSDDD, which illustrates that Member States are required to enforce effective, proportionate and dissuasive penalties that are up to 5% of a company’s worldwide net turnover, creating significant financial incentives for compliance.[27] Moreover, the CSRD’s enforcement of necessary assurance significantly enhances quality and dependability, which eventually causes businesses to take compliance seriously despite the possibility of enforcement risks.[28]
Nevertheless, the existence of legal obligations does not necessarily guarantee effective enforcement in practice. Although the Directives establish common minimum standards, national authorities are primarily responsible for enforcing them, resulting in varying consistency of oversight across Member States. This was illustrated in a recent systematic MDPI review that stated that enforcement across the Member States significantly varies, and it can be partly attributed to the lack of resources and expertise. This same review further argues that it is difficult to enhance sustainable reporting with only regulation and the absence of enforcement and common standards. This is ultimately attributed to the limited regulatory capacity and expertise of the parties involved.[29] Another limitation of the enforceability of ESG is that monitoring global supply chains is difficult. This is because many companies do not have a complete picture of their entire supply chain, even when supply chain risk management and monitoring are successfully implemented. This is due to the lack of available data on global firm-level production networks, making it challenging to assess compliance and regulatory effectiveness.[30] Therefore, although the EU has strengthened the legal enforceability of sustainability disclosures, the effectiveness of the framework will ultimately depend on the consistency of its implementation.
Conclusion
Corporate sustainability has undergone a major transition in its legal framework due to the employment the European Union’s ESG regulatory framework. Historically, a voluntary governance and investment concept based on the Corporate Social Responsibility (CSR) and ESG has gradually been incorporated into legally binding frameworks that govern sustainable financing, corporate reporting, and due diligence. The implementation of various regulations such as the CSRD, CSDDD, Taxonomy Regulation and SFDR has resulted in the enhancement of sustainability disclosure by integrating both environmental and social components into financial decision-making.
These frameworks have provided numerous advantages, such as improving transparency and accountability, reducing greenwashing, creating legally enforceable obligations, and improving investor confidence. However, critical analysis of these obligations has also demonstrated that the effectiveness of this legal transformation remains contested. This is because their actual impact is largely dependent on the ability to monitor intricate and dispersed global supply chains, legislative uniformity among Member States, and enforcement capabilities.
Ultimately, despite its drawbacks, the implementation of these legal frameworks showcases an important step towards the development of the European Union’s legal framework for sustainability. The main question for the next stage of EU ESG regulation is not whether or not businesses must report and perform due diligence, but rather whether or not these requirements significantly alter how companies function in reality.
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Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting [2022] OJ L322/15
Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending Directive (EU) 2019/1937 and Regulation (EU) 2023/2859 [2024] OJ L1760
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[1] Victor Cardenas, ‘Financial climate risk: A review of recent advances and key challenges’ (2024) arXiv preprint arXiv:2404.07331< https://arxiv.org/abs/2404.07331> accessed 01 July 2026.
[2] Corinna Irina Ketterling, ‘From voluntary CSR to binding ESG frameworks: a legal perspective on sustainability disclosure standards’ (2026) Future Business Journal 95, 1<https://doi.org/10.1186/s43093-026-00813-w> accessed 01 July 2026
[3] Siti Hirdayu Mohd Radzi, Nadiah Abd Hamid and Rina Fadhilah Ismail, ‘An Overview Of Environmental, Social And Governance (ESG) And Company Performance’ International Conference in Technology, Humanities and Management (2023) 1112 <DOI:10.15405/epsbs.2023.11.90> accessed 01 July 2026.
[4] Corinna Irina Ketterling, ‘From voluntary CSR to binding ESG frameworks: a legal perspective on sustainability disclosure standards’ (2026) Future Business Journal 95,3 <https://doi.org/10.1186/s43093-026-00813-w> accessed 01 July 2026
[5] United Nations Global Compact, ‘What is the UN Global Compact’ (UN Global Compact) <https://unglobalcompact.org/what-is-gc> accessed 01 July 2026
[6] Global Reporting Initiative, ‘GRI- Home’ (Global Reporting Initiative) <https://www.globalreporting.org/> accessed 01 July 2026.
[7] OECD, ‘Responsible Business Conduct’ (OECD) <https://www.oecd.org/corporate/mne/> accessed 01 July 2026.
[8] Jiyeon Kim and Wooyoung Yang, ‘ESG performance in the regulatory transformation era: a systematic thematic review (2020–2024)’ (2025) 6,19 Frontiers in Sustainability 1680398 <https://doi.org/10.3389/frsus.2025.1680398> accessed on 01 July 2026.
[9] Akrum Helfaya, Rebecca Morris and Ahmed Aboud, ‘Investigating the Factors That Determine the ESG Disclosure Practices in Europe’ (2023) 15(6) Sustainability 5508,5
[10] Yue Wu and others, ‘Bad Greenwshing, Good Greenwashing: Corporate Social Responsibility and Information Transparency’ (2020) 66(7) Management Science 3095, 3106.
[11] Klaus Rainer Kirchhoff, Sönke Niefünd and Julian von Pressentin, ‘ESG: Sustainability as a Strategic Success Factor’ (2024) Springer 17-18
[12] Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting [2022] OJ L322/15, art 19a and 29a
[13] Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC [2013] OJ L182/19, art 34
[14] Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending Directive (EU) 2019/1937 and Regulation (EU) 2023/2859 [2024] OJ L1760, art 5
[15] Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending Directive (EU) 2019/1937 and Regulation (EU) 2023/2859 [2024] OJ L1760, art 8-11
[16] Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending Directive (EU) 2019/1937 and Regulation (EU) 2023/2859 [2024] OJ L1760, art 22
[17] Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending Directive (EU) 2019/1937 and Regulation (EU) 2023/2859 [2024] OJ L1760, art 27
[18] Klaus Rainer Kirchhoff, Sönke Niefünd and Julian von Pressentin, ‘ESG: Sustainability as a Strategic Success Factor’ (2024) Springer 20
[19] Klaus Rainer Kirchhoff, Sönke Niefünd and Julian von Pressentin, ‘ESG: Sustainability as a Strategic Success Factor’ (2024) Springer 21-23
[20] Klaus Rainer Kirchhoff, Sönke Niefünd and Julian von Pressentin, ‘ESG: Sustainability as a Strategic Success Factor’ (2024) Springer 20
[21] Klaus Rainer Kirchhoff, Sönke Niefünd and Julian von Pressentin, ‘ESG: Sustainability as a Strategic Success Factor’ (2024) Springer 23-25
[22] Maria Roszkowska-Menkes, Maria Aluchna and Bogumił Kamiński, ‘True transparency or mere decoupling? The study of selective disclosure in sustainability reporting’ (2024) 98 Critical Perspectives on Accounting 102700,4- 11
[23] Ahmed Aboud, Ahmed Saleh and Yasser Eliwa, ‘Does mandating ESG reporting reduce ESG decoupling? Evidence from the European Union’s Directive 2014/95’ (2024) 33(2) Business Strategy and the Environment 1305, 1306
[24] Ahmed Aboud, Ahmed Saleh and Yasser Eliwa, ‘Does mandating ESG reporting reduce ESG decoupling? Evidence from the European Union’s Directive 2014/95’ (2024) 33(2) Business Strategy and the Environment 1305, 1308
[25] Ammarah Tariq, ‘Mandatory sustainability reporting and the disclosure-performance gap: insights from the EU directive’ (2025) 33(7) Meditari Accountancy Research 536,560-561
[26] Ammarah Tariq, ‘Mandatory sustainability reporting and the disclosure-performance gap: insights from the EU directive’ (2025) 33(7) Meditari Accountancy Research 536,561
[27] Silvia Ciacchi, ‘The newly-adopted Corporate Sustainability Due Diligence Directive: an overview of the lawmaking process and analysis of the final text’ (2024) 25 ERA Forum 29, 42.
[28] Paola Di Tullio, Matteo La Torre and Michele Rea, ‘Sustainability reporting regulation: hypes, myths and reflections’ (2026) 64(7) Management Decision 2857, 2864
[29] Theodoros Papafloratos and Theodora Pantazi, ‘A Systematic Review of the Effects of Mandatory Corporate Sustainability Reporting. Sustainability’ (2025) 17(12) Sustainability 5336, 14.
[30] Jan Hurt and others, ‘Supply Chain Due Diligence Risk Assessment for the EU: A Network Approach to Estimate Expected Effectiveness of the Planned EU Directive’ (arXiv, 12 December 2023) arXiv:2311.15971v2, 3-5
