Sustainability Strategy in the Age of Regulation: Don’t Lose the Plot

Key Points

• Clear strategic direction is critical for a company to achieve consistent progress toward near- and long-term sustainability objectives.
• Leadership must take steps to carefully navigate the complex intersection between business priorities, regulatory obligations, and stakeholder expectations to ensure they are developing a coherent strategy that prioritizes the most significant strategic opportunities to generate positive impact and address harm to people and the environment.

The sustainability landscape is rapidly evolving, driven in part by landmark legislation like the Corporate Sustainability Due Diligence Directive (CSDDD), among others. Regulation acts as a forcing mechanism, raising the floor for action on sustainability across companies by compelling businesses to use rigorous, best-practice methodologies to identify, act on, and disclose numerous topics and data points. This is a good thing. But it brings new compliance risks associated with undertaking historically voluntary activities in a regulatory context and driving limited resources toward those activities (and often away from other priorities).

Business leaders can focus on three key areas to effectively navigate the complex intersection between corporate strategy, regulatory obligations, and stakeholder expectations: pragmatic compliance risk management, careful prioritization, and proactive opportunity identification. 

1. Take a pragmatic approach to compliance 

While BSR does not provide legal advice, it is safe to say that there are new and heightened risks associated with selectively disclosing and acting on certain sustainability issues while deprioritizing others. Companies are exposed to scrutiny, fines, and potential litigation related to the due diligence they conduct, the thresholds they set, and the accuracy of the information they present. Adding complexity: these regulations are new, they vary in scope and ambition by jurisdiction, and our collective understanding of what constitutes a reasonable effort or “good judgment”, let alone leading practice, is still emerging.

Expert judgement is critical in right-sizing your approach today and continuously improving practices over time. Effective balance of compliance and strategic risk requires stronger collaboration between functions and engagement with relevant external advisors. Companies must leverage the expertise of sustainability professionals with direct experience overseeing sustainability strategies and implementing the prior voluntary standards alongside newly engaged accounting and legal professionals to understand what is right for them. For example, sustainability teams and audit/risk/compliance teams should work closely together to make sure that they deploy consistent evaluation criteria and have a unified understanding of an issue, as they address the compliance and the impact element of the same topic. They can also work together to determine the amount of data that is sufficient to underpin judgments today and how to lay the groundwork for what will be needed over time. Robust governance is essential to support this cross-functional collaboration and ensure that appropriate expertise is adequately represented in decision-making. 

In addition, companies must ensure that the relationship between existing sustainability strategy and relevant regulatory requirements is clear and easily understood. Where possible, it is important to reference sustainability terminology, definitions, KPIs, and metrics from the standards rather than creating your own. 

2. Carefully prioritize what to do with limited resources 

Not all topics warrant the same level of attention. There is a risk that excessive focus on collecting and reporting information on non-strategic issues (both from an impact and financial perspective) may divert attention and resources from key strategic priorities. If too many things are material, it can be difficult to act with purpose. 

So, how can companies effectively determine material topics for disclosure, prioritize impacts for mitigation and choose focus areas for long-term strategy? BSR recommends a methodical approach that pairs the regulatory requirements with good business sense. Meaningfully aligning with the spirit and the letter of these regulations can help companies prioritize their resources on issues that are core to how companies do business, providing a foundation for building business resilience and achieving impact.

Many factors contribute to strategic prioritization, some but not all of which are explicitly driven by mandatory requirements. Financial and impact materiality assessments, human rights salience and impact assessments, climate and nature assessments, and risk and scenario analysis all have a role to play in determining strategic priorities. So too does a deep understanding of a company’s business model, key points of leverage, and financial positioning. As a first step, harmonizing methodologies across various assessments (e.g., establishing uniform criteria for assessing similar impacts or establishing a unified stakeholder engagement strategy) ensures that compliance needs are met and well-established sustainability frameworks inform strategic decision-making.

It is also critically important to take a step back and examine the intersections between topics. While the regulatory frameworks encourage companies to break down information into highly granular detail, thoughtful aggregation of key insights to identify cross-cutting solutions provides the greatest strategic value. For example, a focused initiative to reduce single-use plastics might spark innovative business opportunities with financial and operational benefits as well as benefits to the environment up and downstream. Careful consideration of these intersection points will help to pinpoint a handful of realistic and highly impactful initiatives for a company to rally around rather than a laundry list of disparate actions lacking sufficient attention. 

3. Don’t forget about the opportunities

While regulations like the CSRD call for the identification and disclosure of impacts, risks, and opportunities, in practice many compliance-focused efforts are predominantly concerned with negative impacts and business risks associated with business as usual. Nevertheless, opportunities for innovation remain a critical element of strategy. New models, products, and services that can address broader societal challenges like the energy transition or healthcare for underserved populations are desperately needed, and identifying and addressing critical needs is where businesses have an opportunity to shine.

To start, companies can set themselves up for success by looking for ways to surface opportunities across stakeholder engagement opportunities and assessment work, including where appropriate in environmental and social due diligence (e.g., human rights impact assessments) and reporting.

The regulatory frameworks provide guardrails for how companies act on sustainability but do not go so far as to prescribe a company’s ambition, nor specific performance targets. Realizing potential opportunities therefore requires relevant teams (e.g., sustainability, product innovation, marketing) to proactively explore the future operating environment and have a mandate to pursue objectives beyond minimum compliance, sometimes with more uncertain or longer-term benefits. Trends assessment and scenario planning can be useful complements to backward looking analytical tools. Embedding sustainability considerations in regular interactions with external stakeholders and in decision-making tools (e.g., product innovation check lists) can help to ensure opportunities are surfaced in real time, when they are most strategically relevant and decision useful. 

The rise in mandatory requirements presents both challenges and opportunities for businesses. By pragmatically managing compliance risks, carefully prioritizing objectives, and proactively embracing sustainability-related opportunities, companies can successfully navigate this intersection and drive meaningful progress toward a more sustainable future. 

BSR’s multidisciplinary team takes a comprehensive approach to sustainability strategy and regulatory compliance, helping companies to develop customized approaches that are right for their unique circumstances. If you’d like further information, and to discuss what’s right for your organization, please don’t hesitate to reach out to us. 

This article was originally published at the BSR website "Sustainability Insights" and is written by Anna Zubets-Anderson, Beth Richmond, Margot Brent, Adam Fishman, and Paloma Muñoz Quick at BSR.