Sustainability compliance: Finding growth opportunities amongst red tape
Mandatory sustainability compliance is on every board agenda. Rapid regulatory changes are impacting business operations, revenue and efficiency targets, and reporting obligations. Together with investor, consumer, and sustainability commitment pressures, business leaders recognise the need to shift their priorities and transform how their organisations operate.
While sustainability compliance is often viewed as an administrative burden and a costly exercise, it can unlock new ways to improve operational efficiencies and implement smart solutions, particularly around complex value chains in large organisations. It can also accelerate not just marginal improvements but breakthrough innovation around product design, procurement, logistics and packaging and should be seen as an opportunity to lower risk while simultaneously driving competitive advantage.
Anticipating the impact of regulatory change on operations and finance
Sustainability policies and regulations, such as the European Green Deal (EGD) or the UK’s Environment Act affect everything from materials, transportation, and energy to waste generation. As legislation evolves and varies across geographies, organisations need to respond to global and local policies in their strategy. One of the biggest challenges is to anticipate how regulatory change will impact operations and finances.
Here are five new or forthcoming EU regulations, their impact and opportunities:
1. The upcoming Carbon Border Adjustment Mechanism (CBAM) will set a price to embed carbon emissions generated in the production of carbon intensive products imported into the EU, such as cement, iron and steel. From October 2023 importers will have to measure and report on their emissions, and from 2026 onwards, importers of these products will be required to buy CBAM certificates based on EU carbon prices. These compliance updates will lead to higher investor pressures around the potential cost of emissions, but it will also accelerate the assessment of a product’s carbon footprint. Moving away from a view of CBAM being ‘just a new tax’, it can be an opportunity to redesign value chains of multinational corporations. Organisations should evaluate the extent of CBAM impact on its operations, review the data, and quantify the CBAM cost and compliance. This will enable organisations to identify alternative sources that could lead to cost efficiency.
2. Specific targets have been proposed for renewable energy use in transport, heating and cooling, buildings, and industry for implementation of energy saving obligations between 2021 and 2030. Examples of these targets include 40 percent overall share of energy from renewable sources, a new benchmark of a 1.1 percent annual increase in renewables use for heating and cooling, and a 49 percent renewable energy target to be used in commercial buildings. These targets will require organisations to assess and make changes related to the use of energy in their own operations and their value chain. Here the opportunity lies in cost benefit, where green energy technology already pays for itself, leading to efficiency gains in addition to decarbonisation impact.
3. Extended Producer Responsibility (EPR) regulations across countries may have significant impact on waste generated and product margins. Companies will need to implement EPR schemes and cover costs for collection, transport, and treatment of waste. If well implemented, EPR can be a tool to improve product design and improve the lifecycle of materials, enhancing recyclability and reuse.
4. The EU Packaging and Packaging Waste Directive (PPWD) sets out recyclability, reuse and refill targets for 2030 and 2040. Organisations will be required to reduce their packaging waste, set up Deposit Return Schemes for all single-use plastic and metal beverage containers up to 3 litres by 2029. They also need to re-think packaging formats that will be banned, such as mini hotel toiletries and single-use takeaway packaging. Engaging with industry peers, trade associations and other third parties to exchange knowledge, best practice and reduce the burden of individual responses to the same challenges will be key to ensure organisations are well prepared. Alternative single-use plastic packaging solutions, such as PulPac PA’s patented ‘dry molded fiber’ product and packaging solution, can significantly reduce the use of plastics and water, cutting carbon emissions and helping organisations reach key PPWD targets.
5. The Combined Transport Directive aims to set restrictions on length of road leg as part of a combined transport journey. Other pieces of regulation aim to increase the use of rail freight and waterways transport in Europe, such as the NAIDES III and the Rail Freight Corridor. The key impact for organisations will inevitably be less reliance on fossil fuel-based fleets in the future. This represents an opportunity for organisations to collaboratively explore new solutions for decarbonisation, including transitioning their fleets to electric vehicles (EV) which presents a clear path to zero emissions. An optimised fleet running on green energy, delivered through a flexible and phased approach, can also achieve long-term cost reduction.
Assessment and accountability within value chains
Sustainability regulations will transform how organisations understand and interact with their supplier base. Policies such as EU Corporate Sustainability Due Diligence, the German Supply Chain Act, and the UK Environment Act require companies to learn where and how products are sourced and manufactured, and actively report on human rights, working conditions, and land use.
A thorough assessment of supplier base brings the opportunity to optimise contracts, review relationships, ensure risk management, and remove those who don’t comply. A ‘compliance chain’ can then be established, ensuring each supplier across the value chain is contractually accountable for compliance, and in that way sharing the responsibility with their clients.
Support for sustainable growth
It is worth highlighting that regulatory change brings favourable conditions to invest in organisations operating in the green space, with expected higher demand for their products, services, and technology. It is also an opportunity for organisations to invest in clean energy and green assets since most organisations can benefit from government grants and subsidies to drive sustainable growth. A good example of this is the EU Green Industrial Plan which aims to facilitate open and fair trade in green transition, simplifying the regulatory framework and providing faster access to funding.
By using legislation as a positive driver for change, organisations can power operational efficiency and drive innovation. To lower risk and ensure operational safety, technology can be used to seek transparency and visibility across supply chains, supported by governmental grants and initiatives to accelerate green transition. And of course, organisations that use compliance to demonstrate authenticity around sustainable goals will create greater credibility with substantiated green claims in their back pocket.