The law has been a powerful tool for implementing and scaling the global sustainability transition by establishing standards, mandating changes, creating incentives, and resolving disputes. From environmental protection laws to mandatory sustainability reporting and due diligence requirements, legislative mechanisms continue to raise the bar for minimum expected social and environmental performance.
Legal frameworks establish, uphold, and promote sustainability accountability. Rights-based approaches, such as the right to clean air, provide a basis for legal action against violations. Regulatory authorities, such as national and regional environmental protection agencies, oversee environmental regulations and standards. Courts interpret and apply laws, resolve resource conflicts, and hold violators accountable. Where gaps exist, court rulings may also set precedents. Furthermore, legislation creates incentives for sustainable behavior, such as subsidies or tax breaks for implementing green technologies or fines and criminal charges for non-compliance.
Companies must comply with sustainability regulations or face penalties for non-compliance.
The punitive consequences are not limited to financial liability but include restricted market access and reputational damages. Nevertheless, the effectiveness of regulations in leading a just net-zero transition depends on how companies respond.
This article suggests a three-tiered approach for businesses navigating sustainability-driven compliance:
Immediate: Improve sustainability and compliance performance
The pragmatic steps to achieve minimum compliance and avoid penalties are foundational for compliance programs. Solid foundations will also deliver credible sustainability implementation that creates value.
Conduct regulatory mapping and compliance gap analysis. Identify applicable regulations and their requirements. Benchmark current practices against those requirements. Evaluating current practices will entail reviewing documents, contracts, policies, and processes. Make action plans to refine or build new processes based on the identified compliance gaps.
Enhance data collection and reporting. Establish a data governance framework with clear policies and roles to ensure the accuracy, consistency, and reliability of ESG data. Breaking down silos through enhanced cross-department communication to facilitate data sharing. Integrate sustainability data with financial reporting systems to effectively embed considerations of social and environmental impacts in financial decision-making. Enforce internal audits to ensure the integrity and accuracy of disclosures.
Invest in technology and digital tools. Enhance reporting and monitoring tools and processes to track progress and maintain accountability. Automate data validation with digital tools to reduce human errors. Leverage data analytics and traceability technologies like blockchain and IoT to enhance supply chain visibility and strengthen compliance efforts. Improve the granularity of data reported over time and monitor data quality metrics.
Leadership must support both incremental and transformative changes to move the needle.
Embedding sustainability into the core strategy drives growth through sustainable product innovation and operational efficiencies. However, top management buy-in is vital to incorporating environmental and social aspects into long-term plans.
Mid-term: Scale impact and addressing systems change
With the compliance foundations, businesses can scale their sustainability impact and tackle value-chain-wide challenges to drive broader systemic changes.
Transition to sustainable business models and value chains.
Audit and re-evaluate the value chain to identify key partners, risks, and data gaps. Mitigate non-compliance risks across the value chain and the organization’s ecosystem. Engage the upstream and downstream partners by sharing sustainability goals. Empower suppliers with resources for implementing sustainable practices. Reconfigure supply chains to prioritize sourcing locally. Work with suppliers with strong sustainability credentials. Redesign products and services according to circular economy principles.
Collaborate on sector-wide challenges and co-create solutions.
Share best practices and exchange knowledge to develop sector-wide solutions by working with industry peers, policymakers, initiatives, and associations. Participate and ensure representation in industry working groups to contribute towards shaping sustainable markets. Nurture demand for green alternatives with innovative sourcing strategies such as pooled procurement models and forward agreements. Co-invest in AI, carbon capture, and renewable energy technologies to enable more efficient resource use and create sustainable growth opportunities.
Foster active stakeholder engagement.
Collaborative restoration requires multi-stakeholder initiatives with diverse perspectives attuned to the local contexts. Prepare to partner with governments, NGOs, and communities to tackle systemic issues like resource depletion, poverty, and inequality. Nurture collaboration mechanisms with external stakeholders to ensure transparency and enable informed decision-making. Get proactive stakeholder engagement—through interviews, workshops, surveys, or focus groups—to align strategies with stakeholder priorities. Sustain engagement to maintain dialogue and accountability through regular updates, collaborative events, and feedback mechanisms.
At this point, resourcing oversight must be considered. Cross-functional sustainability committees and board- and executive-level strategic oversight have become standard practice. Growingly, the private sector hires public-sector engagement, government relations, and advocacy roles to internalize sustainability-related compliance. While these governance structures drive accountability, they are incremental fixes designed to exist within the current organization. As we redefine the role of businesses in society, the structure must address stakeholders’ concerns, not only of shareholders.
Long-term: Sustain transformative change and sustainable practices
Enduring long-term value creation in environmental and social impact requires adaptive systems to champion transformation, capitalize on emerging opportunities and risks, and foster social and technical innovation.
Build capacity and culture.Educate employees on sustainability themes, from leadership to operational teams. Promote sustainability fluency across all levels and business functions so employees understand and embrace their role in driving the transition. Institutionalize integrated thinking. Integrate sustainability into existing risk management and capital allocation frameworks. Train teams to manage compliance and integrate sustainability into decision-making.
Design agile organizations. Rethink current norms, processes, roles, and responsibilities. The new organization should value all types of capital (natural, manufactured, human, social) and can co-exist in collaborative modules with multi-stakeholders, such as private-public partnerships, community cooperatives, and transnational cooperation. Read Designing Next Institutions by Dark Matter Labs for details on institutions of the future.
Focus on material issues relevant to your industry and location.
Given the breadth of sustainability issues, strategic prioritization is essential for balancing compliance requirements with ambitious sustainability outcomes. A double materiality assessment is a critical tool for guiding this prioritization. It enables organizations to identify issues that are financially material to the business and impactful to society and the environment.
Refer to science, such as ecological limits, to address environmentally material topics in a way that enhances resilience. Early and sustained stakeholder engagement is pivotal in identifying socially material issues. Integrate diverse perspectives so that sustainability strategies are comprehensive and aligned with stakeholder expectations.
Anticipate policy evolution by observing social and environmental trends.
Regional variations in regulations demand that companies anticipate best practices and gaps in environmental and social guidelines. Rather than reactively keeping up with regulations, lead the industry with forward-thinking initiatives within the value chain to mitigate environmental risk while respecting human rights.
To stay ahead, corporate strategists and organizational designers need to reflect on what and how they are informing their strategy-building process. Here are some prompts:
Is strategy developed on autopilot? Are mega-trends adequately incorporated into sustainability strategy?
Do we have both the inside-out and outside-in perspectives on our business?
How often do we integrate insights from analysis of the evolving business environment (e.g., SWOT, PESTLE) into strategy?
Do we have the depth of knowledge to anticipate and respond to emerging social and environmental issues?
Does our organization structure and systems support our strategy in a way that captures and leverages external signals?
Get proactive! Legislation will eventually force companies that treat sustainability as a compliance exercise to change. Then, it might be too late. Alternatively, companies can shape and set the pace for regulatory changes by proactively leveraging sustainable practices and mindset as differentiating factors.