In the evolving global business landscape, compliance with stricter sustainability regulations to curb climate change is no longer a matter of if but when. As these regulations gain momentum worldwide, companies must anticipate and adapt to maintain their competitive edge and operational viability. This shift is not just a regional trend but a global movement, with the European Union (EU) leading the way and requiring its trade partners to do the same.
Take, for example, the EU’s legislation to curb e-waste, which compelled Apple to adopt USB-C chargers for all devices sold in the region. Apple’s subsequent adoption of USB-C chargers for all its new devices worldwide demonstrates a strategic adaptation to the most stringent regulations. This move derisks future compliance requirements across regional markets, while also streamlining production for enhanced operational efficiency.
As we’ve seen in other matters of policy, where the EU goes, the world tends to follow. The EU is the primary trade partner of over 80 counties, which must comply with EU trade regulations and policies.
The ambitious sustainability regulations we see today foreshadow widespread and rigorous regulations of tomorrow in the EU and, ultimately, the rest of the world. To reduce future risk, companies should create internal goals and procedures that align with EU carbon emissions, ESG, and sustainability regulations.
The EU’s pioneering legislation
Notable recent examples of the EU’s world-leading sustainability regulations include the Corporate Sustainability Reporting Directive (CSRD) and the Carbon Border Adjustment Mechanism (CBAM). CSRD applies to every company of a minimum size operating or selling in the EU market; the law will require SMEs to report annually. Even if your company doesn’t operate in Europe, global markets and supply chains make it likely that a partner, supplier, or other key stakeholder will be subject to the downstream impacts of major regulations.
The U.S. landscape: California leads the way
If there is an “EU of the United States” when it comes to climate and sustainability regulation, it’s California. The state has long been at the forefront of environmental and sustainability regulation and sets examples that other states follow. For instance, over 76 cities in California have adopted regulations that require or incentivize all-electric building construction. States like Massachusetts, New York, and Washington are considering similar measures, indicating a broader national trend toward stringent sustainability mandates. California’s landmark climate disclosure bills SB 253 and SB 261 are expected to cause similar ripples.
SB 253, the Climate Corporate Data Accountability Act, requires the disclosure of greenhouse gas emissions, including greenhouse gases across scopes 1, 2, and 3. Beginning in 2026, this applies to any company that does business in California with annual revenue over $1 billion. SB 261, the Climate-Related Financial Risk Act, mandates that companies doing business in California with annual revenues over $500 million produce biennial climate-related financial risk reports in accordance with the Task Force on Climate-Related Financial Disclosures (TCFD).
Understanding the Corporate Sustainability Reporting Directive (CSRD)
CSRD is the most ambitious disclosure regulation relating to corporate sustainability to date. It aims to enhance transparency and accountability in corporate sustainability practices across holistic environmental, social, and governance criteria. Predicated on double materiality, CSRD mandates that companies disclose detailed information on their operations’ environmental and social impacts deemed material by both financial and impact perspectives and integrate these considerations into their overall business strategies.
Key requirements of CSRD include demonstrating how sustainability is embedded in a company’s business model and strategy, outlining policies for managing environmental and social risks, and identifying sustainability-related risks and opportunities affecting financial performance. Companies must also set and manage sustainability goals and impacts throughout the value chain, report on the environmental and social impacts of their business activities and financial implications, and prioritize sustainability in supplier selection and management.
One critical aspect of CSRD is the emphasis on scope 3 emissions, which includes indirect GHG emissions from a company’s supply chain. This regulation necessitates robust data capture, enhanced accountability, and a commitment to reducing emissions. While smaller companies might not be required by the law to report emissions, if you supply goods to large companies covered by CSRD, then that company will need your emissions data for their sustainability and ESG reporting.
Companies must also ensure fair labor practices and good working conditions across their supply chains. Businesses can use the required reporting from CSRD for their existing sustainability reporting. While the CSRD encompasses a broader range of sustainability topics, its climate disclosure requirements set the gold standard for similar mandates across jurisdictions. Companies should view this law as a precursor to future disclosure requirements worldwide.
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Carbon Border Adjustment Mechanism (CBAM)
The CBAM aims to reduce carbon emissions and level the playing field for European manufacturers in hard-to-abate industries on the global stage. This regulation imposes fees on imported goods based on the greenhouse gases emitted during production, preventing countries with lax environmental regulations from gaining an unfair advantage in EU markets, where domestic producers must follow carbon reduction mandates.
The CBAM is currently in a transitional phase. Reporting requirements began in October 2023, and full enforcement is expected by 2026. During this period, companies importing goods into the EU must report on the embedded emissions of their products.
Even if your business does not currently have European supply chains or operations, understanding and preparing for CBAM compliance will help future-proof your business. Governments are increasingly implementing measures to bolster domestic manufacturing and onshoring, often by creating import and carbon tariffs. Companies that sell into international markets should anticipate similar disclosure requirements as policies aimed at accelerating national net-zero goals continue to evolve.
The global ripple effect around sustainability regulations
For major financial market participants and drivers, like the EU and California, they set regulatory standards that often ripple across the globe. CBAM and CSRD create a compliance push and a market pull toward sustainable supply chains. Stricter regulations around carbon emissions and sustainability practices will inevitably impact every type of company around the world.
To adapt, businesses must enhance supply chain visibility to track emissions and social practices, collaborate with suppliers to reduce environmental impact, improve social responsibility, and invest in sustainable practices throughout their entire value chain.
The road ahead for sustainability regulations
Sustainability requirements are only going to become more standardized, rigorous, and widespread. Today’s mandates are here to stay and will continue to expand. Capital markets agree: climate risk is financial risk, and regulatory bodies worldwide are moving from voluntary to mandatory disclosures to safeguard economic and societal stability.
By acting now and aligning with current and emerging sustainability regulations, your company can ensure compliance and drive competitive advantages while also leading the charge toward a more sustainable and resilient future.
Sources
1. European Parliament, “Long-awaited common charger for mobile devices will be a reality in 2024,” https://www.europarl.europa.eu/news/en/press-room/20220930IPR41928/long-awaited-common-charger-for-mobile-devices-will-be-a-reality-in-2024 Accessed June 14, 2024
2. Research FDI, “What You Need To Know About The EU Single Market,” https://researchfdi.com/resources/articles/what-you-need-to-know-about-the-eu-single-market/ Accessed June 14, 2024
3. European Commission, “Carbon Border Adjustment Mechanism,” https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en Accessed June 14, 2024
4. Sierra Club, “California's Cities Lead the Way on Pollution-Free Homes and Buildings,” https://www.sierraclub.org/articles/2021/07/californias-cities-lead-way-pollution-free-homes-and-buildings Accessed June 14, 2024
5. Institute for Energy Research, “An Overview of Natural Gas Bans in the U.S.,” https://www.instituteforenergyresearch.org/wp-content/uploads/2021/08/Natural-Gas-Ban-Report_Updated.pdf Accessed June 14, 2024
