Regulation and Sustainability

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By Knowledge Hub

From a footnote in the annual report to an integral part of business strategy, the understanding of sustainability has changed dramatically since the 1960s. We ask: what next?

There isn’t a global agreement on corporate social or sustainability reporting requirements. However, much of the push behind the incorporation of sustainability into business operations is coming from the globalisation of supply chains, and mounting pressures from investors, asset owners, non-government organisations and the general public for companies to report on ESG risks. As a result, there are significant differences in how the US, the EU and Asia are developing frameworks, programmes and legislation to achieve the global shift to sustainability.

Europe – Money Talks

At the regional level, the European Union (EU) has a unified sustainability reporting, enforced through Directive 2014/85/EU. In January 2018, the European Commission (EC) laid out plans to cement sustainability into the European financial system. It suggested introducing a classification system of what is “sustainable” and measures to impose conditions on corporate reporting requirements and the duties asset managers had to investors.

China – Sustainability as an Economic Value-Add

Rapid economic growth has left China facing some of the most severe environmental issues on the planet. China views sustainability as an opportunity for its companies to develop innovative technologies that will allow the country to move up the value-added export chain. What is clear is that it wants a return on its environmental investments. By focusing on research and development, China hopes to lead the world in environmental technology.

However, China still must deal with with the social and economic pressures that have built up as the country has developed. Failing to address these sustainability issues could have serious future cost, reputation and growth consequences for businesses in China.

United States of America – The Market Rebel

President Donald Trump does not support climate change initiatives.  However, in June 2018 the US Senate rejected his proposal to cut renewable energy research budgets. This led individual states to develop their own projects without the need for federal regulation.

For example, California has set ambitious clean energy targets. Other states are pushing out polluters, promoting electric vehicles and pollution caps. Even where states are lacking, market forces are doing the heavy lifting.  Consumers are demanding change and businesses are being forced to respond.

In such a dynamic landscape, there are a few questions set to shape the conversation in the upcoming months:

Who is pushing for the incorporation of sustainability into business operations and ESG reporting?

While many of the world’s largest companies already follow voluntary reporting standards to report on extra financial metrics such as ESG risks, there is no global agreement on sustainability reporting requirements. The most powerful force in initiating these reportings are due to pressure from stakeholders – whether that be investors, asset owners, non-government organisations or the general public. The increased demand for transparency without a global unified agreement means that there are substantial differences in how countries are developing frameworks, legislation and programs in response. In order to respond to stakeholder pressure, companies should obtain meaningful feedback on their sustainability performance via reporting processes. This will also help to achieve the global shift toward sustainability.

Where are companies positioned in the push towards sustainability regulation?

Many of the world’s biggest businesses are calling for better – and more challenging – corporate ESG reporting to increase transparency with their stakeholders and to reap the benefits that it can bring to their strategy and long-term growth. This business-based call for policy change represents a significant shift in the corporate mindset, as corporations have committed to adopting the UN’s SDGs as well as signing the Paris agreement. The concept of sustainability is no longer seen as a bonus, but rather integral to a business’ operations.

How will regulation impact companies during their path to sustainable growth?

There is no question that regulation, particularly environmental regulation, can have a tremendous impact on a companies’ ambition toward long-term growth and marketplace success. Moreover, companies are generally unprepared when it comes to dealing with the potential impact that environmental, social or governance-based regulation will have on their business. Taking the necessary time and steps to anticipate sustainability regulation across all geographies where a company operates will lead to significant ROI, especially when it can be seen as an opportunity rather than a financial or administrative burden.

There is no doubt that regulation will continue to increase in different forms in various geographic regions, but the message is clear to businesses across the world: sustainability regulation plays a major role in driving superior business performance, and the opportunity that it presents is one that should be seized. By improving existing voluntary standards and practices, business, society and government can get closer to achieving a more sustainable future.

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