Many people in the world of corporate sustainability have been asking variations of the same question over the past weeks. What does this all mean, anyway? From the Trump transition team’s reported plan to end the federal Clean Vehicle Tax Credit in 2025 to the exit of the Securities and Exchange Commission (SEC) Chair who spearheaded the agency’s Climate Disclosure Rules, it would certainly appear that the tide is shifting on corporate sustainability compliance.
Even in Europe, which had been leading the world on corporate sustainability-related policy reforms, we’re starting to see some hurdles emerging. Most notably, the European Commission (EC) recently proposed delays to the start date for the EU Deforestation Regulation (EUDR), and EC president Ursula von der Leyen recently made a comment during a press conference that the EU may consider consolidating three of its most significant sustainability instruments.
Although, so far, there has been no official follow up to these comments, von der Leyen’s remarks do suggest that overlaps between the “triangle” of the Corporate Sustainability Due Diligence Directive (CS3D), the Corporate Sustainability Reporting Directive (CSRD), and the EU Taxonomy Regulation would be identified using an “omnibus” regulatory approach. The goal of the project would be to reduce the reporting burden. This could open all three to further scrutiny and maybe even potential nips and tucks—which may delay implementation.
It might be tempting, against this backdrop of post-election shuffling of cabinet positions and apparent policy walk-backs, to think that the big businesses who’ve been developing robust sustainability reporting and compliance initiatives will simply put them on hold. It’s not quite as simple as that. In fact, there are several big reasons why—even if corporate sustainability requirements are dialed back considerably under a new U.S. administration—most companies will continue to invest in sustainability.
Looking Beyond the Hype
There is no question, based on the track record of the previous Trump presidency, when nearly 100 different environmental and climate rules were pared back, that federal policy in the U.S. when it comes to sustainability and environmental, social and governance (ESG) issues, will shift. How exactly those shifts will manifest themselves in practice, however, remains to be seen, and some of those changes may even end up having silver linings.
Similarly, in Europe, the delay of the EUDR and purported omnibus approach to the CS3D, CSRD, and EU Taxonomy have spurred widespread speculation that the EU is suddenly backing down on sustainability. However, one could also argue that these steps are being pursued to make sure these mandates are effective and deliver long-term results. In her comments introducing an omnibus approach, von der Leyen explained that it is focused on “making things easier for our companies,” and removing overly complex and costly regulatory burdens.
Here are some other variables to think about as we all weigh the potential impacts of the changes that will come to corporate sustainability in 2025.
Sustainability Risk is Business Risk
One concrete, irrefutable fact that has come out of the last decade of sustainability and ESG-related scrutiny is that businesses have come to recognize that sustainability risks are business risks. As I’ve written previously, ESG issues have become material to investors. M&A deals are routinely abandoned when acquirers have ESG concerns about target companies, individual investors are factoring ESG into investment decisions, and consumers are selecting products based on their sustainability profiles.
Whether it’s exposure to volatile weather events, over-reliance on certain natural resources, health and safety of employees, or instability in global supply chains, the risk metrics that go into tracking and reporting sustainability all have a quantifiable cost associated with them. As more companies have begun to look more closely at these risks, they’ve come to understand that they are more operationally sound when they track and manage them carefully, and their stakeholders reward that effort.
State-Level Regulation is Still a Big Factor
While sweeping federal regulations tend to get the most media attention, it’s often the more intricate U.S. state-level regulations that are more complicated to manage for large corporations. In practice, most large businesses that operate on a multistate or multinational basis will typically set their sustainability practices to comply with the most stringent single market in which they operate, often California, Washington, or New York.
In fact, a recent Enhesa analysis found that, through the end of September 2024, there were 409 active bills pending in state legislatures throughout the U.S. focused on various aspects of corporate sustainability. Of those, 166 individual bills were focused on PFAS. That’s just one chemical family. Multiply that across all of the various chemical, air, water and other environmental legislation making its way into state-level compliance requirements at any given point in time and it becomes clear that companies will still need to keep tabs on relevant and potentially material sustainability topics and state level requirements, even if the federal government is not.
Global Accounting Standards Aren’t Going Away
Another major factor influencing the way multinational corporations approach to sustainability reporting has been the sustainability reporting standards developed by the International Financial Reporting Standards Foundation’s (IFRS) International Sustainability Standards Board (ISSB). These standards, which have now been adopted by some 30 jurisdictions representing 57% of global GDP, have introduced climate disclosure requirements for businesses around the globe. Importantly, as I’ve reported previously, the ISSB standards were developed following the same generally accepted principles used to establish the accounting standards employed by the world’s largest businesses, and many business have already incorporated the approach into their everyday operations. Between October 2023 and March 2024, more than 1,000 companies referenced the ISSB in their reports.
“Investors are seeking sustainability-related financial information provided alongside financial statements to provide a comprehensive financial reporting package,” a speaker at the Beijing International Sustainability Conference explained. “These reports—which can effectively reflect a company’s sustainability-related risks and opportunities as well as insights into management performance—will benefit capital markets by providing investors with decision-useful information for investments and resource allocation.”
It Will Cost More to Pivot Away from Sustainability
Companies have spent a great deal of money retooling, setting up new reporting processes and analytics, and reorienting their operations to meet a wide range of sustainability regulatory requirements—many of which are still imminent. Undoing that effort at this stage in the game could do more harm than good.
In fact, the Alliance for Automotive Innovation, an organization representing 42 automobile manufacturers, globally, recently wrote a letter to President-elect Trump, which suggests that ending electric vehicle incentives would harm the auto industry. “To remain successful and competitive, the auto industry needs a stable and predictable regulatory environment,” the letter states. “These incentives help ensure the U.S. continues to lead in manufacturing critical to our national and economic security.”
Stability in a Sea of Uncertainty
The situation in the auto industry illustrates a hugely important point about the need for regulatory stability when it comes to developing a sustainable business. The biggest challenge businesses often face when dealing with any type of regulatory compliance is not meeting the reporting requirements or tweaking their business practices to adjust to new rules—it’s navigating the constant pace of change across different jurisdictions and different political regimes. For most businesses, the least volatile path will be to stay the course on sustainability, not out of a moral or political motivation, but because it just makes business sense.
Article Credit: forbes