Article by Dr. Max Jungmann
As we begin 2024, sustainability continues to be a pivotal concern for businesses worldwide. The imperative to address environmental, social, and governance aspects as part of corporate strategies, cultures, and processes, has reached new heights. This year, important shifts in regulations, coupled with promising trends, are set to shape the landscape of sustainability for businesses.
The Regulatory Landscape
2024 heralds a wave of new sustainability regulations, affecting both large companies and Small and Medium-Sized Enterprises (SMEs). Key among these is the implementation of stricter sustainability reporting standards. The EU Corporate Sustainability Reporting Directive (CSRD) demands large corporations that currently fall under the Non-Financial Reporting Directive to publish a sustainability report documenting their sustainability activities for the 2024 financial year according to the European Sustainability Reporting Standards (ESRS). Other companies that meet at least two of the following criteria will have to publish a report in 2026, disclosing data on the 2025 financial year: a) total assets: at least 25 million euros, b) net revenue: at least 50 million euros , and c) average number of employees during the financial year: at least 250. To meet the ESRS, the materiality analysis will become crucial, as the double materiality standard needs to be applied and the outcome will decide on which disclosure items will be relevant for the respective business.
In terms of risk and supply chain management, the EU Corporate Sustainability Due Diligence Directive (CSDDD) will lead to new or updated national regulation on supply chain due diligence, such as the German Lieferkettensorgfaltspflichtengesetz (LkSG). The directive outlines the obligations, scope, penalties, and liabilities, targeting companies with over 500 employees and a net worldwide turnover exceeding €150 million. Affected companies for instance need to establish risk management systems to monitor and evaluate their suppliers regarding human rights and environmental standards.
Moreover, the Carbon Border Adjustment Mechanism (CBAM) impacts businesses by mandating reporting of embedded greenhouse gas emissions for certain imports, aligning the carbon price of imports with domestic production, and initiating a transitional phase for compliance with the new rules. The EU's Nature Restoration Law establishes continent-wide targets and actions aimed at restoring degraded ecosystems, safeguarding biodiversity, and mitigating climate change impacts. These measures will seek to address Europe's declining nature by targeting specific habitats and species, covering at least 20% of the EU's land and sea areas by 2030 and ultimately encompassing all ecosystems in need of restoration by 2050. This significantly impacts businesses by introducing stringent targets for ecosystem restoration, which might require changes in land use, agricultural practices, and resource management.
Trends and Opportunities
Amidst the regulatory landscape, positive trends and opportunities are emerging, offering a silver lining for businesses embracing sustainability. One notable development is the declining cost of renewable energy generation. Advancements in technology and increased market competition are driving down prices, making renewables a more economically viable option. This presents a prime opportunity for companies to transition to cleaner energy sources, simultaneously reducing their carbon footprint and operational costs.
Additionally, circular economy practices are gaining momentum. Businesses are rethinking traditional linear production models, embracing circularity by minimizing waste and maximizing resource efficiency. Circular initiatives not only contribute to sustainability but also open doors for innovative business models and partnerships, fostering a more resilient and competitive market.
Moreover, leveraging sustainability initiatives can fortify businesses in a VUCA world. In times of volatility and uncertainty, sustainable practices offer a stable foundation. Resilient supply chains, optimized resource management, and diversified energy sources not only mitigate risks posed by environmental disruptions but also enhance adaptability to unforeseen market shifts. Companies embracing sustainability as a core strategy tend to exhibit greater agility, preparedness, and innovation. Through sustainability-driven innovation, businesses can harness the power of emerging technologies and novel business models, ensuring relevance and competitiveness in an ever-evolving landscape.
In conclusion, 2024 stands as a defining year for sustainability in the private sector. The convergence of increasing regulations and emerging opportunities urges businesses to act now if they want to benefit from these changes, rather than being exnovated. Embracing these changes is not merely a compliance issue but an opportunity to drive innovation, resilience, and responsible growth. As we navigate this transformative year, integrating sustainability into business strategies will not only benefit the environment but also position companies as leaders in a rapidly evolving market.