PERSPECTIVES

Compliance Sharpens the European Imperative for Sustainability (Part 1)

2021-09-09


European organizations rank nine percentage points higher than their US counterparts when it comes to incorporating environmental sustainability into their overall business strategies, according to our latest study; here’s why.

How future-fit is your organization for the raft of carbon regulations about to be inked by international policymakers? How would you remove 20% or 30% or even 50% of audited carbon from your product lines or extended value chain? Where would you start?

Scientists and activists have worried about climate change for decades, but there's been a marked change in global sentiment in the last few years — climate change is the biggest challenge facing the world economy. Corporations must now prepare for a raft of regulations that will transition societies toward net-zero emissions over the next 30 years as policymakers get serious about removing greenhouse gasses from the atmosphere. If we were marking the world's homework after the Paris Climate Concave (now six years ago), then a "D" would be a fair mark — not a disaster but plenty of room for improvement.

Policymakers prepare to turn the screw on carbon emissions, and COP 26 could be when it happens. The enormous burden will be on business and requires robust strategy to prepare.

Our recently published global study, “Green Rush: The Economic Imperative for Sustainability”, framed the issues in play with clear direction on why it matters and what you – and your organization -- should do about it. Our findings reveal that corporate-wide sustainability initiatives extend beyond the admirable ESG (environmental, social and corporate governance) reporting into fundamental analysis of carbon and different strategies on reducing it. But delving into the survey data reveals a significant gap between US and European respondents. European organizations rank nine percentage points higher than their US counterparts when it comes to incorporating environmental sustainability into their overall business strategies (see below).

Rising carbon pricing (a.k.a. carbon taxes)

Western countries are busy legislating for net-zero emissions, but the European Union is closing the legislative window even tighter. The region is codifying a net-zero ambition that's set only 14 years away. Germany has gone further with its Supreme Court (in a delightful twist on pay-later policies), putting the current government on the hook to protect future generations by mandating stronger legislation and enforcement around carbon and other environmental-related regulations.

One striking policy proposal from the European Union is a Carbon Border Adjustment Mechanism (CBAM), which explains philosophically how Europe and the US businesses will approach the climate change challenge: carrots and sticks. The stick is the European Union’s tendency to regulate its way through a challenge. Climate change's challenge will require some of the most draconian measures becoming law.

For instance, the CBAM proposes levying a fee on the carbon content of imports, forcing non-European countries that export to the European bloc to reduce emissions on goods and services and use the revenue to support The European Green Deal. Essentially CBAM is a tax on carbon that’s set to increase each year to incentivize companies to accelerate their carbon reduction plans — once fully implemented, it will raise $10 billion per year. In addition, the mechanism protects European enterprises from foreign competitors outside the bloc’s stringent climate targets: the implications for business inside and outside Europe are huge.

Take manufacturing: current calculations put manufacturing as one of the highest sources of greenhouse gasses of any sector worldwide, which means that any legislation such as CBAM will demand fast action to get ahead of emissions generated by product manufacturing. The first step will be to measure the carbon impact and then prepare and transition production processes accordingly. So, processes established and refined through by decades of industrial development must give way to low cost, lean manufacturing and lean carbon production.

Getting ahead of the compliance wave

Some enterprises see sustainability beyond meeting the legislative targets. Taken seriously, it goes beyond the corporate climate pledge to a broader consideration of ESG to guide business strategy, technology investment and operational execution.

The environmental aspect of business strategy is the most challenging to tackle, and one of the most famous examples is IKEA, the Swedish home goods maker whose flat-pack furniture has a massive carbon impact. The company recently disclosed plans to be 100% circular in the next few years; it's getting there by measuring/investigating global waste streams and building collaborations around more than 30 high-priority materials in woods, plastics, papers, metals and textiles, which have the fullest circular capabilities. They know what's coming with an eye on the next generation of customers and the emerging legislative landscape.

Our Green Rush study casts European sustainability goals and investments in technology ahead of their US counterparts. Based on our reading of global industry trends, European companies are about four years ahead of their US counterparts. Moreover, 54% of European companies say that it's an integral part of their overall business planning today, rising to 77% of companies by 2025. Today, over 25% of European businesses rate sustainability as highly important to their operations. European leaders understand where the (renewable) wind is blowing because they can see the legislative signals around them. But, according to our study, beyond the compliance wave, the business drivers in support of sustainability are universal.

Two-thirds of European firms believe sustainability initiatives will enhance their brands (70%), increase sales (68%) and increase profits (66%.) Interestingly. US companies appear to be focused on maximizing the benefits of any sustainability investment – particularly brand reputation, sales and profitability. This suggests that sustainability success needs to pay out in brand burnishing, sales growth and, of course, profitability.

We suspect that during the last few years many organizations took a tick-box approach to sustainability, particularly when filling out preferred supplier forms and responding to RFPs. These tick-box exercises are now morphing into a torrent of questions and corporate proof-points that demand a coordinated response ahead of a compliance wave. The EU commission has just announced the adoption of the Corporate Sustainability Reporting Directive, which significantly increases reporting requirements on sustainability information as it looks to reorientate investments toward more sustainable technologies and businesses. The pressure for environmental sustainability is moving up and down the value chain.

Over the next few weeks, we will explore this and other aspects of the Green Rush in Europe. We will assess the technology initiatives now underway, the art of the possible, and the challenges that corporations face when adopting low carbon practices. Finally, we will set out the steps that European firms need to take to be future fit for the compliance burden ahead and changing customer sentiment.

This article was written by Euan Davis, an AVP who leads Cognizant’s Center for the Future of Work in Europe, and Rouzbeh Amini, Senior Director – Head of Cognizant’s Sustainability Practice, EMEA.

To learn more about how to balance the principle priorities of people, planet and profits, read our "Green Rush” report, see the ESG section of our website, or contact us.