New EU laws mandate companies to report climate vulnerability by 2026

The time has come for new EU laws mandate companies to not only make a business case for sustainability but also to focus on a new campaign for (climate) transparency.

While investors already appreciate the strong correlation between good sustainability performance and good financial planning, the European Union is driving home this point by introducing forceful legislation that compels a more complete and open assessment of companies’ climate exposure.

Starting in 2026, more types of businesses will be mandated to disclose how climate change affects their businesses and the extent to which their operations contribute to climate risks, a huge step forward for corporate climate accountability.

The CSRD is in the Spotlight

This is accounted for by the Corporate Sustainability Reporting Directive (CSRD), which has been effective from January 2024. While the first reports for some large firms date back to financial year 2024 (reports published in 2025), the number grows significantly in number in 2026 (for FY 25) and will include a much larger sample of firms.

That means all big firms (of a certain level of employees, balance sheet, or revenue) operating in the EU. Queensland Listed Small and Medium-sized Enterprises (SMEs) will also report from the 2027 calendar year with a 2-year deferral power.

The ultimate objective of the CSRD is to bring sustainability reporting on par with financial reporting. It requires wide-reaching reporting on environmental, social and governance information (ESG), beyond that which was previously covered by the Non-Financial Reporting Directive (NFRD).

“Double Materiality” and Climate Risks

Central to the CSRD and particularly pertinent in the climate vulnerability context is the notion of “double materiality”. This forces companies to report in two places:

• Impact Materiality: The influence of the company’s books and records on the environment/people (e.g., its carbon emissions, pollination).
• Materiality for Financial Considerations: The company’s exposure to material financial risks and opportunities for how sustainability issues, such as climate change.

Under this structure, companies are to identify and assess their exposure to different climate risks, namely:

• Physical risks: These are the direct effects of climate change, including acute catastrophes like floods, wildfires and extreme heat, as well as more chronic changes like sea-level rise and altered precipitation patterns. Businesses will also have to consider how those could impact their assets, operations and supply chains.
• Transition risks: These are related to the move toward a low-carbon economy, including policy changes (e.g., carbon pricing, tighter emissions regulations), technology developments (e.g., outdated high-carbon assets), market forces (e.g., consumer preferences favouring sustainable products) and reputational considerations.
• Streamlining Disclosures: European Sustainability Reporting Standards (ESRS) With a proposal to establish an EU non-financial reporting directive written in the sand, a new system is in the makings for mandatory European climate, environmental and social disclosures (ESG, sustainability report). Copyright 2021 Eagle Alpha This report was produced by Eagle Alpha, a data and analytics firm that provides investors early access to market-moving insights.

In order to have a level playing field and a fair comparison, companies under the CSRD should report in accordance with European Sustainability Reporting Standards (ESRS).

Developed by the European Financial Reporting Advisory Group (EFRAG), these’ve detailed standards which provide a comprehensive guidance for reporting on a broad set of ESG topics, with specific requirements for climate-related disclosures (ESRS E1 – Climate Change).

Companies will have to decide their climate transition plans, targets for reducing emissions (including “Scope 3” emissions emanating from their entire value chain) and strategies for building resilience to the physical effects of climate change.

And that will take proactive data collection and scenario analysis, with transparent disclosure of climate-related governance, strategy, risk management and performance metrics.

Driving Transparency and Resilience

The EU New Mandate aims to offer market participants, including investors, consumers, companies, and policymakers, transparent, comparable, and robust indicators to measure companies’ sustainability performance and their resilience to climate risks.

It aims to avoid “greenwashing” and direct investment into genuinely sustainable economic activities while drawing in line with the wider objectives of the European Green Deal and the EU Taxonomy for sustainable finance.

While implementation will require substantial effort and investment from the business community, it should encourage greater responsibility and innovation to adapt to and mitigate the impacts of climate change and help support the construction of a more resilient and sustainable European economy.