The words regulation and opportunity don’t typically appear in the same sentence, but the scale and depth of new sustainability rules can offer forward-thinking businesses the chance to gain advantage. Put simply, the new rules mean that companies will need to build new measurement, reporting and governance capabilities. But, for those willing to look beyond a box-ticking approach and put sustainability at the heart of their operating model, there will also be significant opportunities.
If those opportunities don’t seem obvious yet, let me first explain the challenges that new green regulation presents for businesses, then describe how companies can reframe them, using the compliance process as a way of exploring new and profitable options.
A year of change
You have probably already heard 2021 being described as a pivotal year for climate change, especially in the UK, with the COP26 taking place in Glasgow in November and Boris Johnson eager to turn his ten-point plan for a green industrial revolution into reality. It’s also the year when the wider public got the message that, far from being a distant event, climate change is happening right now. Figures from the Royal Meteorological Society, published in July and widely reported in the media, showed that the impacts are already being felt across the UK. Globally, temperatures are already 1.1 degrees centigrade above pre-industrial levels. That’s nearly three-quarters of the way towards the 1.5 degree-centigrade average temperature rise that scientists have long been warning risks catastrophic impacts.
Yet, despite the higher public profile being afforded to the environment and climate change, a slew of oncoming sustainability regulation risks slipping under the radar. Such is its volume that there is not enough space here to list it all, so instead let’s take one notable example, the EU Corporate Sustainability Reporting Directive. For those thinking that Brexit means it won’t apply, then think again. Not only will it impact anyone trading with or operating within the EU, but it will almost certainly set the tone for domestic legislation, which currently shows little sign of divergence from EU environmental policy.
What the new regulation means
The new directive marks a major step change in corporate reporting, yet implementation is expected to take place over a timescale of less than two years. It also extends the reach of current regulation, bringing nearly all listed companies into its orbit. Yet it is probably the sheer scope of the regulation that presents the biggest challenge for businesses, which are largely unprepared. They will be required to disclose more sustainability-related information than ever before, potentially including information about their business models, strategy and supply chains that some executives may believe is sensitive or provides commercial advantage. In addition, this information will be far more rigorously assured than is common practice, akin to the level of the companies’ external financial auditor, over time. Clear and universal standards will be put in place, allowing like-for-like comparison between peers.
As a result, the days of companies disclosing the sustainability information that they wish to against the metrics they choose will soon be over. So too will be the ability to largely ignore and/or fail to report sustainability risks, from those, for example, around climate change impacts on current operations, to human rights within supply chains. To put it crudely, there will be no place to hide.
Seeing the opportunity
It’s easy and, completely understandable, to look at the new regulations and break them into a number of compliance challenges: build a way to measure a new non-financial KPI here, apply a new reporting standard or layer of governance there. Yet, while that approach will slowly, possibly painfully and undoubtedly expensively put you on the road towards compliance, what will you have got back in return? Another layer of complexity and an ERP system possibly buckling under the weight of add-ons and customisation?
As in many aspects of business, taking the big picture view may be a better play, in terms of both driving the compliance process and realising broader business benefits. Taking that approach, businesses should examine what, fundamentally, the regulation is asking them to do. In essence, it is posing questions about the resilience of a company’s business model and its strategy in the face of sustainability-related risks.
Start seeing regulation like that and it becomes clear that the lens required is a long-term view of your business, built around the needs, not only of regulators but customers, staff, suppliers and indeed society. We’ve seen this shift happen with everything from big oil companies to retail giants. The environment-related risks for a company that is, for example, extracting fossil fuels or supplying low-cost fast fashion are unlikely to be addressed by better compliance process – rethink of the business model is required.
“As in many aspects of business, taking the big picture view may be a better play, in terms of both driving the compliance process and realising broader business benefits.”
Investors and consumers get onboard
If that was the stick, then here’s the carrot. For those willing to make the leap before they get pushed, the opportunities and rewards can really stack up as investors and consumers are actively looking to invest in, or buy from, sustainability-driven companies.
Our 2020 survey of institutional investors found that 98% assess ESG factors and that 75% said that climate change risks would cause them to re-evaluate or change their investment decisions. In terms of consumers, the EY Future Consumer Index reveals that while over half (54%) bought sustainable products, more than a third (34%) plan to step up their spending in this area. Both globally and in the UK, climate change (45% and 46% respectively) is of most concern overall for consumers.
If sustainability has in the past suffered from what Gillian Tett of the FT described as an “alphabet soup of standards” the tide is turning. At EY, we are so determined to help our clients address this problem that we have been working with our rivals in the Big Four – and alongside the World Economic Forum – to develop a set of common ESG reporting standards.
The link between ESG and ERP
But you may well be thinking, what does this have to do with my ERP system? The simple and possibly glib answer is ‘everything’, although that probably merits expansion. Clearly, the better and more real-time the non-financial data you have flowing through your system, the better and more sustainable your decision making will be. And with your business model retuned to run on long-term value, you will be ready to take advantage of what’s ahead, not eke out what’s left from legacy models or systems. But there’s another angle that perhaps speaks more directly to the decisions that businesses must make around ERP investment.
The reality is that many companies are already placing huge ‘bets’ on the future, spending millions if not billions on digital transformation and its accompanying ERP system upgrades or new builds. Yet, given high levels of market uncertainty and disruption, that future is far from clear.
In contrast, few have so far been willing to spend anything like as much on ‘green transformation’ even though – thanks to national and international climate agreements, plus the increasingly precise ESG demands of investors and regulators –that future is far more transparent.
So, with the stick of new regulations and the carrot of a better and more sustainable business, it’s clear to me where the big ERP bets should be placed: on green.
Matthew is a partner at EY, leading its climate change and sustainability practice across the UK&I. All views are his own.