1. Inconsistencies in reporting and data gaps

Businesses, industries, and governments continue to encounter significant issues related to data gaps and inconsistencies, which hinder their ability to make informed decisions and accurately report on sustainability. To look at environment, social, governance (ESG) risks and possibilities, data must be reliable and comparable. However, the way things are done today shows that there are major challenges with making data available, making sure it is accurate, and making sure it is standardised.

One of the main reasons ESG reporting isn’t always the same is the lack of clear rules on what sustainability information should be shared. The International Sustainability Standards Board (ISSB) and the European Financial Reporting Advisory Group (EFRAG) are two global groups that are trying to make ESG disclosure practices more consistent. However, companies still use various frameworks, such as GRI, SASB, TCFD, and CDP, each with its own set of metrics and levels of detail. According to OECD research from 2023, these discrepancies often require corporations to provide information to paint them in a positive light, making it more challenging to assess investments and trust the investment ecosystem (OECD, 2024).

Additionally, as per UNEP FI and PRI research (2022), asset managers often have trouble analysing ESG concerns: they lack the required information, reports are late, and terminology is unclear.  For example, despite some improvement in climate-related discourses, indicators for biodiversity, pollution, and circularity are often not fully disclosed.

The consequence? As laid out in the World Economic Forum’s Global Risks Report (2024), when sustainability disclosures evolve, decision-makers are faced with a lot of data but without a clear narrative, making it harder for them to make sound policy and investment decisions.

Without standardised taxonomies and a digital infrastructure for data validation, the danger of inconsistent or incorrect disclosures increases. The EU’s ESRS XBRL Taxonomy project aims to fix this by making sustainability reporting more organised and easier for machines to interpret. The EU is trying to make it easier for companies to report on sustainability by making the process the same for everyone. It makes sure that disclosures are consistent, comparable, and machine-readable by using digital taxonomies and structured data formats. This helps cut down on mistakes and makes it easier for regulators, investors, and other interested parties to compare how well companies are doing when it comes to sustainability.

However, for XBRL to work well, it will need a lot of assistance from institutions and capacity-building across sectors, since many companies, especially small and medium-sized businesses and those based outside the EU, don’t have the internal processes and knowledge needed to use it.

2. Credibility concerns and greenwashing

The credibility of sustainable finance has been significantly diminished by greenwashing.

According to the Progress Report on Greenwashing (2023) of the European Supervisory Authorities (ESAs), greenwashing is defined as “a practice in which the underlying sustainability profile of an entity, a financial product, or services is not clearly and fairly reflected in sustainability-related statements, declarations, actions, or communications.” Greenwashing can occur at various points along the investment value chain, including fund labelling, product marketing, risk ratings, and corporate disclosures.

In financial markets, greenwashing distorts capital allocation and misleads investors in this manner, undermining the integrity of the broader ESG movement. The European Central Bank (ECB) has similarly warned that the misrepresentation of sustainability risks due to unchecked greenwashing may pose systemic risks to financial stability (ECB, 2023).

Notable cases, such as green bonds issued without transparent use-of-proceeds tracking and ESG-labelled funds with substantial holdings in high-carbon sectors, have drawn regulatory scrutiny. In its 2021 Final Report, the International Organization of Securities Commissions (IOSCO) emphasised that “the robustness of ESG claims is difficult to assess due to the lack of transparency in methodology and quality assurance among voluntary ESG rating providers and data firms”.

To address these challenges, several jurisdictions are advancing regulations aimed at curbing greenwashing. For example, the UK’s Financial Conduct Authority (FCA) has proposed Sustainability Disclosure Requirements (SDR), and the EU’s Sustainable Finance Disclosure Regulation (SFDR) classifies financial products under Articles 6, 8, and 9 based on the extent of sustainability integration. However, frequent ambiguities in interpretation limit the SFDR’s effectiveness.

Ultimately, in the absence of rigorous assurance mechanisms and robust regulatory oversight, the risk of greenwashing continues to erode stakeholder trust in sustainable finance.

3. Fragmentation of regulatory requirements

A new challenge has emerged as countries and regions compete to regulate sustainable finance: the fragmentation of regulatory and reporting frameworks, diminishing the effectiveness of sustainable finance initiatives.

The International Platform on Sustainable Finance (IPSF) has acknowledged the necessity of convergence among taxonomies, disclosure standards, and product classification systems. Nevertheless, there are still significant disparities in 2024. The EU Taxonomy, China’s Green Bond Endorsed Project Catalogue, the ASEAN Taxonomy, and the US SEC’s proposed climate disclosure rule each reflect distinct priorities, definitions, and thresholds.

According to a 2023 report by the Network for Greening the Financial System (NGFS), “a fragmented landscape in ESG disclosures can increase compliance costs, regulatory arbitrage, and pose difficulties for investors who aim to compare performance across jurisdictions.”

For instance, the ISSB’s IFRS S1 and S2 stress financial materiality, whereas the EU’s Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS) mandate sector-specific reporting and double materiality. Even though the difference in definition is small, it materialises in big differences in conduct, especially when it comes to social and governance issues or reporting on Scope 3 emissions. ISSB adopts an investor-focused approach, emphasising financial materiality, while ESRS applies double materiality – addressing both financial and impact materiality.

The fact that developing countries often lack the capacity to implement intricate ESG regulations further exacerbates the global compliance gap. Sustainability reporting may perpetuate disparities between developed and developing nations in the absence of alignment and support mechanisms, as cautioned by the United Nations Conference on Trade and Development (UNCTAD, 2023).

The effectiveness of international green investment projects is reduced because there is no standard way to organise data, digital systems, and verification processes, which also makes comparative studies more complicated.

4. Challenges faced by SMEs 

Small and medium-sized enterprises (SMEs) account for over 90% of businesses worldwide and play a critical role in global GDP and employment. However, they face significant challenges in adopting sustainability reporting practices and integrating Environmental, Social, and Governance (ESG) principles due to limited resources, expertise, and regulatory pressure.

a. Cost and capacity limitations

The 2023 OECD SME Outlook indicates that a significant number of SMEs are unable to comply with the increasingly intricate ESG reporting requirements due to insufficient financial and human capital. SMEs that operate on narrow margins frequently find that the perceived benefits are outweighed by the cost of sustainability data collection, software, external assurance, and compliance.

In contrast to large corporations that have the ability to deploy sustainability teams and consultants, the majority of SMEs rely on limited resources and encounter difficulty navigating the regulatory landscape. According to a 2023 survey conducted by the European Commission, over 60% of SMEs perceived the new requirements of the CSRD and ESRS as overly burdensome, citing a lack of clear guidance and resources to support implementation.

b. Restricted financing and incentives

Green finance instruments and ESG-linked loans frequently disregard small and medium-sized enterprises (SMEs) in favour of larger, higher-rated corporations. The SME Finance Forum (IFC) observes that the global SME finance imbalance is $5.2 trillion each year; ESG-related financing represents only a small fraction of the funding that SMEs are able to access.

Additionally, a significant number of sustainable finance taxonomies and product labels specifically cater to large infrastructure or energy transition initiatives. SMEs, particularly those in low- and middle-income countries, are unable to access concessional finance as a result of high thresholds, limited awareness, or the absence of relevant indicators to demonstrate impact.

c. Insufficient standards for fit-for-purpose

The one-size-fits-all nature of many ESG frameworks fails to adequately capture the operational reality of SMEs. Key performance indicators and disclosure formats frequently reflect the complexity and resource base of larger firms. Sustainability metrics must be reevaluated to account for the proportionality, materiality, and relevance of small businesses, as recommended by the International Trade Centre (ITC) in its 2023 SME Competitiveness Outlook.

Initiatives are underway to resolve this discrepancy. The EFRAG SME Sustainability Reporting Standard (ESRS for SMEs) is currently under development with the objective of consolidating disclosure requirements for smaller entities, with a particular emphasis on non-listed SMEs. Nevertheless, its adoption and integration into broader financial ecosystems are still progressing slowly.

d. Data collection challenges and the digital divide

The digital divide further exacerbates the reporting disparity. A significant number of SMEs lack access to digital instruments for the collection, management, and reporting of ESG data. Consequently, SMEs struggle to substantiate and communicate their impact, despite their motivation to improve sustainability.

Without scalable support programmes, public-private partnerships, or ESG-focused technical help, SMEs may be left behind in the shift to a sustainable economy, despite the central role which they play in local development and supply chains.

In search of comprehensive resolutions

Solving the problems listed above requires regulators, standard setters, financial institutions, and civil society working together. Standardising ESG and digitising sustainability reports, for instance, by using XBRL tags to make disclosures machine-readable, will greatly improve transparency and comparability; additionally, these measures will assist in filling data gaps and correcting errors, improving data quality by enforcing rules and enabling automated checks. Integrating external validations and establishing clear standards will collectively help identify missing elements, fix errors, and enhance trust in the data.

To mitigate the risks of greenwashing while making the market more open and clear, we need to set up independent verification systems, coherent science-based taxonomies, and better management of ESG rating agencies. Countries will also need to work together to set up systems that make sure reporting is consistent, data standards are comparable, and taxonomies are compatible so that different rules can be followed. This will make it easier for green investments to cross borders and speed up the creation of international rules. Finally, it is very important to give small and medium-sized businesses (SMEs) the best financial tools, reporting standards, and technical help in the move to a low-carbon, strong economy in ways that matter.

Expected impact of key policy initiatives on sustainable finance. Source: European Commission, EEA, Watershed, AP News, Climate Bonds Initiative, TNFD, Energy Shift Institute