When Simplification Undermines Comparability: The Strategic Question Behind Europe’s New ESRS for Third-Country Companies

Sustainability reporting is entering a new phase

The global sustainability reporting landscape is no longer defined by the absence of standards. What is becoming more visible today is not a lack of rules, but the increasing overlap and interaction between different reporting frameworks, regulatory scopes and interpretations of materiality. Companies are no longer asking whether they should report sustainability information, but how they should navigate multiple, sometimes competing, expectations at the same time.

Over the past several years, the European Union has built one of the most ambitious corporate sustainability reporting architectures globally. Through the Corporate Sustainability Reporting Directive and the European Sustainability Reporting Standards, sustainability information has moved beyond being a voluntary communication tool. It is now embedded in the infrastructure of accountability, capital allocation and long-term economic decision-making.

Against this background, the current discussion on the proposed ESRS for certain third-country undertakings is not a narrow technical adjustment. It raises a broader question about the direction of sustainability reporting itself.

At the centre of the debate is a seemingly simple question: how much sustainability information should a non-EU company with significant activity in Europe be required to disclose? Yet the more important issue sits underneath it. The real question is whether sustainability reporting can be simplified without weakening the comparability and decision-usefulness that gave it its original purpose.

The issue is not whether regulation should be proportionate. That is widely accepted. The real tension lies in how proportionality is achieved. It can either improve the coherence of reporting systems, or it can gradually create different and incompatible views of corporate sustainability performance depending on where a company is headquartered. That distinction is not technical. It is structural.

From global accountability to an EU-related reporting perimeter

The emerging framework for third-country undertakings introduces what is often described as a mixed reporting approach. In practice, this means that certain non-EU companies may focus their sustainability disclosures primarily on activities connected to the European Union, while still retaining some flexibility for broader reporting in specific areas such as climate.

At first glance, this approach appears pragmatic. A multinational company headquartered outside the EU may operate across many jurisdictions, and requiring a fully global sustainability statement could be seen as disproportionate when the legal trigger is its presence in the European market.

However, the operational reality of multinational business does not align neatly with regulatory geography. Sustainability impacts are rarely confined to a single region. Supply chains are globally distributed, procurement decisions are often centralised, and environmental and social risks frequently emerge several layers away from direct operations. Even when a product is sold in Europe, its upstream impacts may be entirely outside the EU, while its strategic decisions are made at group level.

This creates a fundamental tension. When reporting is limited to an EU-related perimeter, companies are not necessarily reporting less complexity. They are often required to translate global systems into artificial regional boundaries that do not exist in their internal management structures.

In that sense, the burden does not disappear. It shifts. Instead of collecting information, companies must increasingly interpret and allocate it.

Comparability is not a secondary benefit of reporting

One of the most significant concerns raised by the proposed approach is its impact on comparability. Sustainability reporting only becomes economically meaningful when users can compare companies on a consistent basis. Without that, disclosure risks becoming descriptive rather than decision-relevant.

Consider two companies operating in the same European market. One is headquartered in the EU and applies full ESRS, reporting sustainability impacts across its global operations. The other is a non-EU company reporting primarily on EU-related activities under a narrower perimeter. Both may compete directly, serve the same customers and access the same financial markets.

Yet their sustainability statements may reflect fundamentally different scopes of reality. One report may capture a global footprint, while the other reflects a regional subset of activities. The result is not simply a difference in detail, but a difference in what is being measured in the first place.

This creates what can be described as an analytical imbalance. A company with broader disclosure may appear to have a larger environmental or social impact simply because more of its operations are visible. A company with narrower reporting may appear more efficient or less exposed, even if its global footprint is comparable or larger.

The issue is therefore not the volume of information. It is the comparability of meaning behind that information. This is why comparability should not be treated as an additional feature of sustainability reporting. It is one of its core functions. Without it, investors cannot distinguish performance from reporting scope, banks cannot benchmark risk consistently, and regulators cannot reliably interpret differences between companies.

A level playing field requires more than equal access to the market

The idea of a level playing field is often used to justify regulatory adjustments for third-country companies. However, a level playing field cannot be defined only by the cost of compliance or the ease of reporting obligations.

It must also consider the symmetry of information available to market participants. If one group of companies discloses global sustainability impacts while another reports only a regional subset, the regulatory burden may be lower for the latter. But the analytical burden shifts elsewhere.

Investors, lenders and analysts are then required to reconstruct a global picture from fragmented sources. They may need to combine regulatory filings, voluntary disclosures and external datasets, often relying on assumptions to fill gaps. This does not reduce complexity in the system. It redistributes it.

From a market perspective, the key question is not only how much it costs to produce a report, but how effectively that report reduces uncertainty for decision-makers. If simplification increases the effort required to interpret information, then the system has not necessarily become simpler. It has become differently complex.

Sustainability impacts do not always respect geographical boundaries

The challenge of defining “EU-related” impacts becomes particularly evident when looking at specific sustainability topics. Some elements of reporting can be relatively clearly localised. Operational emissions from an EU facility, water usage at a specific site or employment data within a subsidiary can often be assigned to a geographic perimeter with reasonable precision.

However, many of the most material sustainability issues do not follow this structure. A global procurement policy may create labour risks across multiple countries. Biodiversity impacts may arise from raw materials sourced through complex supply chains. A product manufactured outside Europe may generate its most significant environmental impact long before it reaches the EU market. Centralised digital infrastructure may serve customers across jurisdictions without a clear regional boundary.

In these cases, attempting to separate EU-related from non-EU-related impacts is not a neutral exercise. It requires assumptions, allocation methods and judgement calls that may differ significantly between companies.

This introduces three important risks. First, companies may interpret the boundary of “EU-related” impacts differently. Second, similar activities may be allocated using different methodologies. Third, assurance providers may struggle to verify whether the resulting disclosures provide a faithful representation of reality.

These are not minor technical issues. They directly affect the reliability and comparability of the reporting system.

Assurance becomes more difficult when the boundary is judgement-based

Assurance is often presented as the mechanism that ensures credibility in sustainability reporting. However, assurance can only operate effectively when the underlying reporting structure is coherent.

When reporting boundaries depend heavily on managerial judgement, allocation assumptions or indirect estimations, assurance shifts from verifying data to evaluating interpretation. The question is no longer only whether a number is correct, but whether the right portion of the business has been included in the first place.

This is particularly challenging for sustainability metrics that rely on allocation keys or estimations. Even if calculations are technically accurate, the resulting figures may not be comparable if different companies apply different underlying assumptions.

In this context, assurance does not eliminate complexity. It reflects it. A reporting system with unclear boundaries will inevitably produce more complex assurance processes, not simpler ones.

The materiality gap may be even more significant than the perimeter gap

Another important dimension of the proposed framework is its approach to materiality. Full ESRS is built on the concept of double materiality, which considers both the impact of a company on society and the environment, and the impact of sustainability factors on the company’s financial performance.

The proposed framework for third-country undertakings is expected to place greater emphasis on impact materiality. While this aligns with its regulatory intent, it also changes the type of information available to users.

A report focused primarily on impacts may provide strong visibility into external effects, but it may offer less insight into financial resilience, risk exposure and future performance under different sustainability scenarios. For banks and investors, this distinction is increasingly important.

Climate risk, resource constraints, regulatory transitions and social pressures are not only external impacts. They are also financial variables that influence valuation, credit risk and long-term viability. Removing or limiting this perspective may result in a narrower understanding of corporate sustainability performance.

This does not mean that impact materiality and financial materiality are in conflict. They answer different questions. One focuses on external effects, the other on financial consequences. For large multinational companies, separating them too strictly may reduce the strategic usefulness of reporting.

Interoperability must mean more than avoiding duplicate disclosures

The relationship between ESRS and the ISSB standards is central to the broader sustainability reporting landscape. Significant progress has already been made in improving interoperability between ESRS and IFRS S1 and S2, which is an important step toward reducing unnecessary duplication.

However, interoperability cannot be limited to aligning individual data points. True interoperability requires consistency in the underlying structure of reporting systems. This includes definitions of materiality, reporting boundaries, value chain assumptions, measurement methodologies and the relationship between sustainability and financial reporting.

A company may comply with multiple frameworks without duplicating disclosures and still produce information that is difficult to reconcile. This is why interoperability should not be measured only by efficiency for preparers, but also by clarity for users.

From a Clymflex perspective, interoperability is meaningful only when it improves decision-usefulness, not when it simply reduces reporting effort.

Why this debate matters to banks and financial institutions

The implications of fragmented sustainability reporting extend well beyond corporate reporting teams. Banks and financial institutions increasingly rely on sustainability data to assess credit risk, evaluate transition pathways, measure portfolio alignment and meet regulatory requirements.

When companies report under different perimeters and materiality frameworks, financial institutions are forced to rely more heavily on estimations, proxies and external datasets. This reduces the comparability of risk assessments across borrowers and sectors.

In practice, this means that two companies operating in the same industry may appear different not because of their underlying performance, but because of how their sustainability information is structured. For lenders, this creates uncertainty in credit analysis and sustainable finance decision-making.

A sustainability-linked loan or transition finance instrument is only as reliable as the data that supports it. If that data is not comparable, financial institutions must build additional layers of interpretation, which increases complexity rather than reducing it.

Simplification should improve decision-usefulness, not just reduce volume

There is a clear need to simplify sustainability reporting. The early implementation of ESRS has shown that complexity can create significant administrative burden and operational challenges. However, simplification should not be understood as reducing information alone.

A meaningful simplification process should remove duplication, clarify definitions, improve consistency in materiality assessments, align overlapping metrics and strengthen digital reporting structures. At the same time, it should preserve the information necessary for meaningful comparison and decision-making.

The effectiveness of a reporting standard should not be measured by how much it reduces disclosure volume, but by how well it improves the quality of information available to users. A shorter report is not necessarily a better report. It is only better if it preserves clarity, comparability and relevance.

The Clymflex perspective: building a global data core

For multinational companies, the most sustainable approach is not to build separate reporting systems for each regulatory framework. Instead, a unified internal structure is needed that can support multiple external requirements without fragmenting the underlying data.

At Clymflex, this begins with a global data core that defines consistent methodologies, ownership structures and control mechanisms for sustainability information. On top of this, companies can build a materiality framework that distinguishes between impact and financial dimensions while maintaining their interconnection.

A regulatory mapping layer then allows the same underlying data to be used across ESRS, ISSB, GRI and other frameworks. This is supported by a control and assurance structure that ensures consistency and traceability, and a decision-use layer that connects sustainability information to strategic and financial decision-making.

This approach allows companies to respond to different regulatory requirements without losing internal coherence. The principle is simple: reporting may be local, but understanding must remain global.

Conclusion: a narrower report should not create a narrower understanding

The move toward more proportionate sustainability reporting is both necessary and justified. However, proportionality should not come at the cost of comparability or coherence.

A multinational company’s sustainability impact does not stop at the border of the reporting jurisdiction. While regulation may define reporting boundaries, business reality does not follow the same lines.

The challenge for the next phase of sustainability reporting is therefore not only to simplify disclosure, but to ensure that simplification does not fragment understanding. The most effective systems will be those that reduce unnecessary complexity while preserving the ability to compare, interpret and act on information.

Ultimately, the goal of sustainability reporting is not to produce less information, but to produce better understanding.