What do businesses need to know about policy and regulations in sustainability? - The EU example
03 June 2024 – Dr Martin Porter, Executive Chair, CISL Europe, discusses the crucial need for sustainable business to be directed by public policy and for business to embrace its role in activating change for a sustainable future.
As we have learnt more about the urgency and scale of the challenge of moving to a genuinely sustainable development model, it has become increasingly clear that the transition involved needs to be directed by public policies, not left to individuals or pre-existing market forces and actors alone. The EU’s experience is a prime example of this in practice.
Since the 1990s, national and international public policies have been put in place to establish common scientific understanding and collective goals for nations to deliver a more sustainable economy. These policies also aim to frame the general rules by which markets operate and, depending on the state involved, the respective roles of citizens and public authorities. Advancements in the regulatory landscape shape how the private and public sectors interact across the world and change how regulations and markets are understood and developed.
Why does it matter?
This is an historic moment. If previous revolutions in human development were caused and driven by technological advances, the transformation required now is being led by scientific understanding and public policies that have set a mission to drive profound and rapid innovation of technology and our social and economic systems. Markets, and the businesses and investors operating in them, are responding to the obligations and signals set by policy and regulation, and doing so in ways that are driving a deep structural transformation in which each of us is an active participant.
“Markets, and the businesses and investors operating in them, are responding to the obligations and signals set by policy and regulation, and doing so in ways that are driving a deep structural transformation in which each of us is an active participant.”
How has public policy influenced business across the EU?
For much of the past 30 years at least, the EU has been at the forefront of the new thinking, policy and regulatory approaches, often putting in place regulations that set a template for other parts of the world and which also illustrate the evolution in global policy development
Public policy’s early approach to environmental protection from the 1970s and 1980s was often directed towards a point source of pollution and was of a ‘command and control’ nature, setting detailed emission or presence limits of pollutants, which required business to develop and use innovative technologies to continue to operate. Sometimes criticised for restricting certain activities, this approach also drove innovation – catalytic convertors for cars, for example, were a response to such regulation and quickly became a new market opportunity, enabling competitive advantage by companies who invested in them earlier on a global basis.
The challenge of implementation.
As the EU continues to face significant political and economic challenges, it has sought to further promote the market-based approach internationally to reduce differences between markets and has established a Carbon Border Adjustment Mechanism (CBAM) to protect domestic producers from unfair competition from companies based in states without equivalent regimes. The impact of this approach on businesses is significant and has prompted consideration of how the role of public intervention to drive the transition should be understood and further developed.
Coming in the wake of the landmark ‘Paris Agreement’ on climate change, the evolution of the European Green Deal since its inception in 2019 illustrates this perfectly. Its success as a leading, comprehensive legislative programme, a resilient strategic compass for the EU’s climate and sustainability transition in the face of the Covid and Ukraine crises, and an adaptive ‘growth strategy’ that has incorporated responses to growing international competitive challenges from China and the US, is widely recognised.
But as recent protests by farmers bring some European cities to a standstill, it’s clear the deal is also becoming a lightning rod for wider concerns around economic insecurity and the cost of living. Not to mention worries about inequality and whether the rules are too onerous. As a result of this, competitiveness and industrial policy have risen quickly up the political agenda, and what Commissioner Hoekstra recently called a ’false narrative’ that pits regulation on climate action as anti-competitive.
The EU's 2040 climate target, like that for 2050, will continue to drive a profound structural transformation of the bloc and requires an equally significant change to the orthodox paradigm for its economic strategy. The approach of 'competitive sustainability' is key to understanding how a measure of competitiveness is needed in the new global context in which the Inflation Reduction Act in the USA and an aggressive industrial strategy from China have changed the game.
Businesses' role in the sustainable transition.
In this context, the way in which businesses engage with the policy and regulatory process is crucial. The European Corporate Leaders Group, the pre-eminent cross-sectoral alliance of such companies, is currently setting out its business agenda for the new EU institutions. This agenda considers how more ambitious and clearer climate, biodiversity and nature targets are essential for policy predictability and investment planning and how smart Single Market regulations that continue to create demand for innovative climate neutral products and services need a greater focus on enabling conditions and supply-side measures by the EU.
The new EU agenda reflects a new understanding of the relationship between public policy and the private sector and between market and society more broadly, as the necessity and speed of their transition are clearer than ever. The challenge—and the opportunity—have never been greater for the EU and the world, so one can only hope that it is successful.
It is imperative that businesses learn to navigate the regulatory environment to harness early mover opportunities, build resilience and accelerate the sustainable transformation. To learn more about the role of business in sustainably enrol on the 8-week 'Business and Sustainability Management' online course. If you are a business leader operating at a strategic level consider joining our 'Business and Sustainability Programme'.
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