Framing sustainability reporting and due diligence as costly burdens that can hinder competitiveness is misleading — the reality is much more nuanced
The European Commission’s proposed changes to key sustainability regulations, referred to as the omnibus proposal, remains a robust topic of argument among supporters and detractors.
This effort was originally undertaken because companies argued that the reporting requirements for the European Union’s Corporate Sustainability Reporting Directive (CSRD) and its Corporate Sustainability Due Diligence Directive (CSDDD) were too onerous and in need of simplification. Furthermore, supporters of the omnibus discussions argued that CSRD and CSDDD in their original form placed significant compliance costs on companies unnecessarily and reduced the competitiveness of the European Market. Indeed, supporters of the omnibus contended that EU region companies were hindered in their ability to compete with other companies around the world, especially in the wake of the deregulation movement in the United States under the new presidential administration.
Critical views of the omnibus proposal vary widely, but agreement among the vocal chorus of dissenters is emerging. “The main issue at the heart of the EU’s omnibus discussion is not the intention to simplify,” stated says Andreas Rasche, Professor of Business in Society & Associate Dean at Copenhagen Business School in recent post, adding that streamlining regulations can indeed facilitate better alignment and implementation. “The narrative that reporting and due diligence are a costly burden that hinders competitiveness is misleading and misguided. This inaccurate perception is the root of the problem, rather than the desire for simplification itself.”
Likewise, Carol Adams, chair of the Global Sustainability Standards Board and emeritus professor of accounting at Durham University Business School, emphasizes that the omnibus proposal not only hinders green growth but also compromise potential long-term value creation. “While appeasing those advocating for less regulation, and reduced transparency, may seem appealing in the short term, history shows that taking the perceived easy path could come with significant long-term costs and lost opportunities.”
Limitations of cost narrative
In a recent Clarity podcast with the Thomson Reuters Institute, Rasche contends that a false narrative has created circumstances in which simplification processes became deregulatory measures. By highlighting the cost narrative, critics of regulatory measures construct an inaccurate binary choice between obtaining dependable sustainability information and remaining competitive in the market. In reality, there is limited evidence to support the claim that reducing reporting costs will lead to increased competitiveness, mostly because costs depend on a broader set of factors, such as talent and labor.
Further, compliance costs tend to decrease over time as companies develop routines, overcome initial setup costs, and industry experts establish best practices. Therefore, from a cost perspective, rolling back regulations shortly after implementation doesn’t make sense. A more effective approach would be to focus on the value of sustainability reporting and due diligence, rather than getting bogged down in a flawed cost narrative.
Post-omnibus: How to build a stronger value narrative
Sustainability is key to both business and societal progress, but many companies struggle to demonstrate the financial benefits of their sustainability initiatives. To address this, the NYU Stern Center for Sustainable Business created the Return on Sustainability Investment (ROSI) methodology. This approach connects sustainability efforts with financial outcomes and provides a stronger business case for existing and future sustainability projects, according to Tensie Whelan, Director of NYU Stern Center for Sustainable Business.
By quantifying the comprehensive range of costs and benefits, including intangible factors, the ROSI framework enables organizations to drive sustainable growth and create long-term value — and history demonstrates positive aspects for reporting.
For instance, the alignment of financial reporting that started decades ago still provides benefits in the present, Adam explains. Europe embarked on a significant journey to align financial reporting regulation across member states, and the leadership position that Europe took helped address the many differences in financial reporting practices across jurisdictions. From there, the aim of fostering cross-border investments, bolstering economic integration and access to capital, and reducing the costs of reporting across multiple markets was moved forward.
Further, collecting and analyzing environmental, social & governance (ESG) information creates value in many ways within the ROSI framework. And doing so helps to price externalities and can support capital allocation to enhance a firm’s understanding of key strategic risks, such as the risk of value chain disruption, says Rasche.
Finding the path to value
How reporting and due diligence interact with firm-level value creation depends on how a company defines and creates value. There is no silver bullet. The point is that an improved value narrative around the CSRD and CSDDD and more broadly, sustainability should be used to shape the rationale (the Why) that underlies firms’ engagement with such regulations.
However, transitioning from a focus on costs to a focus on value does not mean blindly relying on the business case for sustainability. The false choice between implementing ambitious sustainability regulations and maintaining competitiveness remains short-sighted. Indeed, there are tangible benefits to sustainability. For example, making sustainability part of a company’s DNA could involve amending the required elements of capital project investment to include an explanation of how the project helps to fulfill the company’s purpose, vision, and values while reducing costs for employee attrition.
Given the ongoing discussion of the omnibus proposals and likely future negotiations around regulatory requirements, companies should take several concrete actions, including:
Embed sustainability into core business operations — It is crucial to understand where in the operations the lenses of sustainability are or could be trained upon, such as areas of risk management and financial workflows. The ROSI framework and industry-specific work in the health, apparel, and food and agriculture fields, for example, offers a valuable framework to positively and meaningfully create value and enhance competitiveness.
Identify the financial channels of product inputs with sustainability attributes — To understand how to integrate sustainability into the DNA of companies, it is essential to identify how sustainability can drive performance and enterprise value through traditional financial channels, such as revenue, expenses, assets, liabilities, and the cost of capital, all of which can help determine the value of a company.
The EU’s proposed omnibus package, aimed at simplifying reporting requirements, is based on a misleading narrative that prioritizes short-term cost savings over long-term value creation and competitiveness. Instead, companies should focus on the perceived costs of compliance and do the work necessary to analyze how sustainability can save costs, drive growth, create long-term value, and enhance competitiveness.
You can find out more about how organizations are handling the challenge of sustainability here
