EFRAG: Why EU Firms Struggle with Sustainability Reports

European companies have produced sustainability reports averaging 115 pages in their first year under new EU disclosure rules, with the longest running to 440 pages and the shortest just 25 pages, according to analysis by the European Financial Reporting Advisory Group (EFRAG).

EFRAG examined 656 sustainability statements from companies required to report under the Corporate Sustainability Reporting Directive for 2024. 

The directive mandates large companies to disclose environmental, social and governance information using European Sustainability Reporting Standards.

Financial institutions produced longer reports than non-financial companies, averaging 140 pages compared with 110 pages. 

The difference stems partly from EU Taxonomy reporting requirements that tend to be longer for financial institutions versus non-financial companies.

Only 25% of companies produced statements with fewer than 70 pages. The analysis found limited correlation between report length and either the number of material topics disclosed or company size, suggesting other factors drive variation in statement length.

Disclosure patterns emerge across sectors

The analysis reveals that 98% of companies identified climate change as material to their business, while 99% reported on workforce issues and 93% on business conduct. These three topics dominated disclosures across all sectors.

However, companies showed selectivity in other areas. Only 10% of preparers identified all ten topical standards as material, while 25% selected four or fewer standards.

Six standards were deemed material by at least 60% of companies: climate change, own workforce, business conduct, consumers and end-users, circular economy, and workers in the value chain.

Financial institutions and non-financial companies differed in their materiality assessments. Circular economy issues were material for 65% of non-financial companies but only 30% of financial institutions. Workers in the value chain mattered to 70% of non-financial firms but just 35% of financial companies.

Six sub-topics were rarely considered material by fewer than 5% of companies: pollution of living organisms and food resources, microplastics, communities' civil and political rights, rights of indigenous peoples, biodiversity-animal welfare, and rights of indigenous peoples in the consumer context.

Climate targets vary in scope and ambition

More than half of companies declared having a transition plan for climate change mitigation, though disclosure quality varied substantially. Northern and Western European companies showed higher adoption rates, with the Netherlands at 73%, Sweden at 69% and Denmark at 69%.

Around 70% of preparers reported having near-term targets for scope 1 and 2 emissions compatible with limiting warming to 1.5°C. However, only 40% of these extended targets to include scope 3 emissions covering their value chains.

External validation through the Science-Based Targets Initiative covered 60% of companies with climate targets. One third still lacked clear near-term scope 1 and 2 targets, while 16% reported targets not compatible with 1.5°C scenarios.

Internal carbon pricing remained uncommon, with only 20% of companies using such mechanisms. Adoption was highest in carbon-intensive sectors: 60% in mining, around 50% in electricity and gas, and 30% in transport and storage.

Human rights and biodiversity reporting develops

Biodiversity metrics appeared in 30% of reports, averaging around four metrics per company. Construction companies showed 60% disclosure rates, electricity and gas reached 62%, and real estate achieved 64%.

Country variations were significant, with France leading at 49% disclosure, followed by Sweden at 44%, Austria at 44% and the Netherlands at 39%. Italy and Germany showed lower adoption at 18% and 23% respectively.

Most biodiversity metrics were entity-specific, tailored to individual company operations. Non-financial firms tracked endangered species in operating areas and habitat restoration efforts. Financial institutions measured investment exclusions based on biodiversity impact and engagement activities with portfolio companies.

Human rights reporting showed mixed patterns. Over 90% of companies reported compliance with minimum wage standards for their own employees, though few distinguished between European Economic Area and non-EEA regions.

Analysis of a subset of 50 companies found that 81% reported discrimination incidents within their own operations, with high variability in numbers. While 78% disclosed information about severe human rights incidents in own operations, only 5% reported actual incidents occurring.

Stakeholder engagement focuses on business relationships

Companies engaged primarily with business-related stakeholders during materiality assessments. Internal stakeholders featured in 97% of assessments, followed by customers at around 70%, suppliers at around 65% and investors at around 60%.

Broader societal stakeholders received less attention. Authorities participated in 36% of assessments, non-governmental organisations in 33%, communities in 30%, industry unions in 22%, academia in 14% and trade unions in 11%.

The pattern reflects companies' tendency to prioritise stakeholders with direct business relationships over civil society groups, though some firms achieved balanced engagement across both categories.

Regional reporting patterns showed consistency within countries, suggesting local factors influence disclosure practices beyond regulatory requirements. Southern EU countries including Spain, France and Italy reported more material topical standards than Nordic peers such as Norway, Finland and Denmark.