The implementation of the Corporate Sustainability Reporting Directive (CSRD) was intended to usher in a new era of transparency for the European financial sector, yet early data from the first two reporting cycles suggest a significant disconnect between banking operations and social risk disclosures. Analysis of the 2025 and 2026 reporting periods reveals that while European banks are increasingly proficient at documenting climate-related risks and internal workforce metrics, they are systematically overlooking the social impacts inherent in their value chains. This "materiality gap" raises urgent questions about the coherence of ESG reporting and the ability of investors to accurately assess the human rights exposure of major financial institutions.
The Emergence of a Reporting Pattern: 2025-2026 Data Analysis
When the first wave of CSRD-aligned reports emerged in 2025, researchers and analysts closely monitored how the banking sector would navigate the complex requirements of the European Sustainability Reporting Standards (ESRS). An initial review of 74 banks within a dataset hosted by EFRAG (the European Financial Reporting Advisory Group), supplemented by an analysis of seven of Norway’s largest financial institutions, provided a baseline for the industry’s performance. The results showed a lopsided approach to materiality.
While more than 90 percent of the reports correctly identified climate change, the bank’s own workforce, business conduct, and consumer protections as material issues, the "S" in ESG—specifically social risks beyond the bank’s office walls—was notably absent. Workers in the value chain, categorized under the ESRS S2 standard, were deemed material by only 23 percent of filing banks. Similarly, affected communities, covered under ESRS S3, were recognized as material by only 24 percent of the sample.
As the second reporting cycle concluded in 2026, any hopes that these omissions were merely "teething problems" or first-year hurdles were largely extinguished. In a broader sample of approximately 90 banks, the trend remained stubbornly consistent: only 16 percent identified S2 (Value Chain Workers) as material, while 27 percent identified S3 (Affected Communities) as such. The sub-topic level data was even more striking, with only 12 percent of banks identifying working conditions in the value chain as a material risk, and a staggering zero percent acknowledging the rights of Indigenous peoples as a material concern for their business.
The Regulatory Framework: ESRS and the Mandate for Due Diligence
The failure to report on these social dimensions is difficult to reconcile with the very standards banks claim to uphold. Impact materiality under the ESRS is not an abstract concept; it is firmly anchored in established international due diligence frameworks. These include the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights (UNGPs).
Under these frameworks, a bank’s "direct link" to adverse impacts is a critical component of its risk profile. A financial institution lending at scale to sectors such as construction, agriculture, transport, shipping, and energy is, by definition, directly linked to the labor practices and community impacts of those clients. For instance, a bank financing a major infrastructure project is inherently exposed to the risks of forced labor in the supply chain or the displacement of local communities.
Furthermore, banks acting as distributors of global funds or asset managers are linked to the social impacts of the companies held within those portfolios. While a "direct link" is often perceived as a less severe form of involvement than "causing" or "contributing" to an impact, the UNGPs and OECD Guidelines still carry a clear expectation: the institution must use its leverage to mitigate impacts, escalate concerns when they persist, and consider exiting the relationship if no change occurs. Identifying an impact without a corresponding management plan does not constitute due diligence under international law or European standards.
Inconsistency in Disclosures: The "Double Life" of Banking Data
One of the most concerning aspects of the current reporting landscape is the internal inconsistency within the banks themselves. Many of the institutions failing to report social risks as material in their CSRD filings are simultaneously acknowledging these exact risks in other contexts.
A primary example can be found in Norway. The Norwegian Transparency Act (Åpenhetsloven) requires companies to produce a separate human rights due diligence statement. When these statements are read alongside the same banks’ CSRD-aligned annual reports, a startling contradiction emerges. Risks described as "immaterial" in the formal annual report—such as forced labor in the construction sector or safety violations in shipping—are often identified as "priority risks" in the Transparency Act disclosures.
This lack of coherence violates the spirit of the UNGPs, which require policy commitments to be embedded across the entire business and integrated into the functions capable of taking action. If a bank’s credit risk model identifies a client in the agricultural sector as "high risk" for social violations, but the bank’s sustainability report claims social risks in the value chain are immaterial, the institution is essentially operating with two different sets of facts. This discrepancy undermines the credibility of the reporting process and suggests that materiality assessments are being used to narrow the scope of accountability rather than to reflect the reality of the business model.
The Three-Fold Consequence of Omission
The persistent absence of S2 and S3 disclosures from annual reports has profound implications for the financial ecosystem, which can be categorized into three main areas of concern:
1. Incomplete Risk Representation for Investors
A sustainability statement that omits a bank’s most severe potential human rights connections cannot be considered a "faithful representation" of its business. For investors, this creates a dangerous blind spot. If a bank is heavily exposed to sectors with systemic labor issues but fails to report them, an investor cannot accurately price the social risk or the potential for regulatory and reputational blowback.
2. Failure in Risk Management and Governance
In the corporate world, what is defined as "immaterial" rarely receives significant oversight. If social risks are excluded from the materiality matrix, they are unlikely to reach the board’s agenda or receive dedicated resources for mitigation. This sits in direct conflict with the European Banking Authority’s (EBA) guidelines on the management of ESG risks. Since January 2026, large banks have been required to assess social risks against the OECD and UNGP frameworks. By excluding these from CSRD reports, banks may be setting themselves up for a collision with banking supervisors.
3. Erosion of Credibility with Clients and Suppliers
Banks increasingly require their own clients and suppliers to document responsible business conduct. When a bank demands that a small construction firm prove it has no forced labor in its supply chain, while the bank itself reports that such issues in its own value chain are "immaterial," it creates a perception of hypocrisy. This "do as I say, not as I do" approach makes it harder for the financial sector to drive the transition toward a more sustainable economy.
The Just Transition and the Green Finance Blind Spot
The reporting gap also extends into the realm of green and transition finance. As banks rapidly expand their "green books" to meet net-zero targets, they often overlook the social costs of the energy transition. The value chains for batteries, solar panels, and wind turbines are well-documented for carrying significant human rights risks, ranging from hazardous mining conditions to the violation of land rights.
The concept of a "Just Transition"—ensuring that the shift to a green economy does not come at the expense of workers and communities—remains largely a footnote in current climate finance frameworks. By failing to report on S2 and S3, banks are ignoring the social friction that could potentially derail green projects, such as community protests against wind farms on Indigenous lands or labor strikes in the renewable energy supply chain.
The Role of the Sustainability Omnibus and ESRS 1
Some industry voices have suggested that the European Union’s "Sustainability Omnibus" or the revisions to ESRS 1 have granted banks more discretion in what they report. However, legal experts and standard-setters argue this is a misinterpretation. While the revised ESRS 1 allows for a "top-down" approach—permitting a company to conclude on materiality based on its strategy and business model—this does not mean the threshold for reporting has been raised.
In fact, a sector-and-geography-based assessment should lead banks to the opposite conclusion. If a bank lends to sectors known for labor risks or operates in geographies with weak human rights protections, the top-down approach necessitates a focus on S2 and S3. The move toward less prescription in the standards places more weight on a bank’s reasoning and professional judgment, making the failure to report social risks even harder to justify.
Looking Ahead: Questions for Stakeholder Engagement
As the next reporting cycle approaches, investors, analysts, and supervisors are expected to take a more rigorous approach to questioning the banking sector’s materiality assessments. Experts suggest five key questions that should form the basis of future engagement:
- Methodological Consistency: How does the bank reconcile the social risks identified in its internal credit risk models with the "immaterial" findings in its CSRD report?
- Due Diligence Alignment: How has the bank applied the OECD and UNGP definitions of "severity" (scale, scope, and irremediability) to its value chain, and why were these not deemed material?
- Sectoral Exposure: Given the bank’s exposure to high-risk sectors like construction or energy, what specific evidence led to the conclusion that social risks are not material?
- Governance Oversight: To what extent does the board oversee social risks that have been deemed "immaterial" for reporting purposes?
- Just Transition Integration: How is the bank accounting for the human rights risks inherent in its green and transition finance portfolios?
The first two years of CSRD reporting have revealed a banking sector that is comfortable with environmental data but remains hesitant to embrace the full scope of its social responsibilities. As the regulatory landscape matures and the EBA’s guidelines take full effect, the window for "materiality-based" omissions is closing. For the European banking sector, the challenge of the coming years will be to align its public disclosures with the reality of its global impact, ensuring that the "Social" in ESG is no longer treated as an optional extra.
