ESG Compliance: From Voluntary Principles To Active Enforcement

For years, Environmental, Social and Governance (ESG) disclosures of companies (broadly referring to a company’s environmental impact, social practices and internal governance structure), were largely driven by reputational incentives and sustainable financing, showcasing a “green” or “responsible” corporate branding.

Today, they have transitioned from voluntary principles into a binding regulatory framework within the European Union. For companies operating within the EU market or with a reporting presence in the EU, ESG is no longer a policy or reputational consideration, but an active legal and compliance obligation affecting reporting, transactions and internal policies.

In 2026, the EU’s core sustainability reporting regime, the Corporate Sustainability Reporting Directive (Directive (EU) 2022/2464) (CSRD) is already being applied to the first wave of companies, with reporting already taking place and expanding in scope every year.

CSRDTimeline

The CSRD introduces a significantly more structured and comprehensive approach to how companies disclose ESG information as part of their annual reporting. It expands both on the number of companies required to report ESG information and the depth, structure, and auditability of these disclosures.

The reporting requirements are being introduced in stages, expanding over successive financial years:

• From financial year 2024 (reports published in 2025):
  
  Large public-interest entities already subject to the previous reporting regime have begun preparing and publishing CSRD-compliant reports.
  
  
• From financial year 2025 (reports published in 2026):
  
  All other large EU companies meeting the statutory thresholds are now entering their first reporting cycle under CSRD.
• From financial year 2026 (reports published in 2027):
  
  Listed small and medium-sized enterprises (SMEs) will enter the reporting framework, subject to transitional flexibility until 2028.

These disclosures should be incorporated within the companies’ annual management reports, placing sustainability information alongside financial reporting, subject to a comparable level of structure and scrutiny.

RegulatoryReporting

Under the CSRD, companies must prepare ESG disclosures in accordance with the European Sustainability Reporting Standards (ESRS), which establish mandatory disclosure requirements across environmental, social, and governance categories.

In practice, companies are now required to collect structured sustainability data from across their operations, apply formal materiality assessment methodologies to determine all necessary disclosures and produce standardised disclosures that allow for comparability across EU entities.

As a result, ESG requires proper record-keeping and alignment with the prescribed reporting standards.

ESGSubjecttoAudit-LevelAssurance

Another major development under CSRD is the introduction of assurance requirements, making ESG disclosures subject to external verification.

Independent auditors are now required to review sustainability disclosures, while inconsistencies between ESG and financial reporting may be identified during assurance procedures. Companies must therefore maintain sufficient internal controls, supporting documentation and reporting processes to substantiate ESG-related statements. Companies must therefore maintain internal controls to ensure that ESG information is accurate and properly supported.

ESG reporting now carries verification and liability risk, similar in nature to financial reporting obligations.

ESGasaDueDiligenceObligation

Alongside CSRD, the Corporate Sustainability Due Diligence Directive (2024/1760) (CSDDD) introduces a separate obligation which is focused on corporate conduct across operations and supply chains, particularly with regards to environmental and human rights risks.

Companies falling within scope will be expected to identify and assess potential adverse environmental and human rights impacts within their operations and business relationships, implement measures to prevent, mitigate or address those impacts where identified and implement formal due diligence policies, including complaint and reporting mechanisms.

This makes ESG a broader requirement affecting daily operations and urging companies to revise their supply chain contracts, introduce compliance clauses and map risk exposure across their internal structures and business partners.

GreenwashingScrutiny

Even before full CSRD maturity across all reporting entities, EU regulators are already actively scrutinising ESG-related claims, particularly where these may be misleading, exaggerated, or insufficiently substantiated. Statements such as “carbon neutral”, “sustainably sourced” or “environmentally friendly” are increasingly assessed not merely as marketing language, but as regulated claims requiring objective substantiation.

This scrutiny extends across sustainability claims appearing in corporate marketing materials, investor presentations, fundraising communications and annual reports.

ESG terminology that previously acted as branding language, is being increasingly treated as part of a company’s regulated disclosure content, subject to enforcement risk if inaccurate, unsubstantiated or misleading.

ESGActiveApplicationinTransactions,FinanceandGovernance

(a) M&A and Corporate Transactions

ESG considerations are now routinely integrated in legal due diligence in cross-border transactions. This can include the review of environmental compliance history, labour and governance risks, sustainability-related disclosures and supply-chain exposure.

(b) Financial Services Regulation (SFDR)

Under the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088) (SFDR), financial market participants are required to classify financial products based on sustainability characteristics, disclose ESGrelated risks and adverse impacts and provide transparency on ESG integration in investment decisions.

(c) Corporate Governance

Because ESG reporting forms part of the management report, responsibility now sits at board level. This creates governance liability, relating to the approval of sustainability disclosures, oversight of ESG risk management and coordination between financial and sustainability reporting functions.

PracticalTakeawayforCompanies

ESG regulation within the European Union is no longer prospective, but an active reporting and enforcement regime in which companies are required to report, be reviewed and adapt in real time, with a level of formality comparable to financial reporting.

Large public-interest entities are already within the CSRD reporting cycle, with many now preparing or publishing their first structured sustainability reports. Large private companies will enter the regime in the current and next reporting waves, while listed SMEs and smaller groups will follow. Even where a company is not yet directly within scope, ESG obligations may still arise indirectly through financing requirements and contractual expectations.

Companies are encouraged to assess early whether they fall within CSRD or other related frameworks and review their existing procedures, in light of the board-level responsibility and growing focus on accuracy. At Partikios Legal, we assist clients in navigating this transition, in a manner aligned with both legal requirements and practical business operations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.