Sustainability is rising in importance on the corporate agenda, particularly as global demands and compliance requirements for climate action and human rights have grown. Yet, integrating sustainability across an entire organization is challenging and uncertain. Insular tactics and limited communication and alignment across departments often hinder the formulation of comprehensive sustainability strategies.

At Clearyst, we've built our business on seeing the bigger picture - looking beyond short-term standards and program goals to realize the value potential of a more sustainable business. In this white paper, we outline the challenges facing sustainability as well as our unique point-of-view on the road ahead. We explore taking an approach that goes beyond considering sustainability as a compliance requirement but instead as a strategic imperative to create business value. At a time when budgets are tight and companies are focused on profitability, it may feel easier and cheaper to meet the minimum requirements. We argue this near-term focus is actually prohibitive, and instead we advocate that companies look beyond compliance and make the strategic investments necessary to execute.

Compliance: Necessary, But Not All-Encompassing for Sustainability

It’s no surprise that sustainability is still viewed by many companies as a “check-the-box” exercise. Sustainability and compliance have a long history of being tied together. Dating back to the US National Environmental Policy Act of 1969 - one of the earliest examples of environmental compliance - all the way to Japan’s Sustainability Disclosure Standards passed just a few weeks ago, legislation and regulation have always played a pivotal role in progressing more sustainable business practices.

But, what exactly is sustainability compliance? It encompasses various regulatory, industry, and voluntary frameworks that organizations must follow to meet environmental, social, and governance expectations. It can take a number of forms from environmental laws (e.g. US Clean Air Act, US Clean Water Act) and labor rights (e.g. EU Corporate Sustainability Due Diligence Directive, German Supply Chain Act) to industry-specific rules (e.g. EU Carbon Border Adjustment Mechanism, Extended Producer Responsibility) and voluntary or market-based reporting (e.g. Global Reporting Initiative, B Corp).

There are a several reasons meeting sustainability compliance standards is necessary: protecting people and planet, building consistent practices within industries, avoiding fines and legal action (if mandatory), and pushing forward improvements to meet increasing stakeholders demands, to name a few. But stopping at the minimum requirement threshold does not drive long-term impact, and instead leaves significant value on the table.

Where a Compliance-Only Approach to Sustainability Falls Short

Whether administered locally or internationally, compliance mandates drive organizations to follow a certain set of rules. Sustainability-focused ones, in particular, steer companies to consider their impact on the environment and society. Those who do not take steps to comply may face penalties, fines, or taxation.

Monetary fines for violating sustainability requirements are an effective way to attract attention. But with a foundation built on avoidance, these penalties illicit a reactive, short-term response from the organizations impacted. Compliance becomes a race to the minimum effort required rather than garnering the strategic engagement it warrants.

Take for example the European Union’s Green Claims Directive, which is expected to be finalized and adopted in mid-2025. It aims to prevent "greenwashing" by requiring companies to justify their environmental claims. The proposed fine for violation is equivalent to 4% of a company’s annual revenues - a financial risk with potential for significant disruption. Companies subject to this directive are then motivated to spend time and resources correcting potentially misleading claims rather than investing in sustainability improvements to supply chains and operations.

In the US, several states have also passed or are in the process of passing Extended Producer Responsibility (EPR) laws aimed at reducing the environmental impact of products and packaging. Companies doing business within these states are assigned responsibility for the end of life of products, with fines for non-compliance up to $50,000 per day (for more info, see our EPR blog). While efforts to avoid these financial penalties are essential, they should not be the sole focus.

Reporting to Sustainability Standards Gets the Ball Rolling, But Misguides Focus

Mandatory sustainability reporting can help organize information and provide relevant insights to various stakeholders, vendors, customers, and employees. Unfortunately, the task of reporting often ends up taking the majority of the time, resources, and investment by those tasked within an organization. Commitment to reporting frameworks - including CSRD, ISSB, GRI, CDP, etc. - and similar programs are important steps to reaching sustainability goals, but are not sustainability goals on their own.

For example, let’s look at the European Union’s Sustainability Reporting Directive. This one regulation, which makes companies more transparent and accountable about their environmental and social impact, contains 82 disclosures and 1,144 data points. Not to mention, these data points require traceability of invisible greenhouse gas emissions and transparency about human rights across global supply chains.

While it's almost certain an organization won’t need to report on all 1,144 data points, it illustrates the complexity and granularity necessary for sustainability mandates. Implementing systems to ensure the massive volume of data necessary is collected leads many to view it as a “check-the-box” exercise. Organizations end up focusing on the performative aspects of reporting in a way that appears thorough and detailed, but may not be beneficial in practice.

There is significant potential for sustainability compliance and reporting to be a confusing and resource-intensive process without a unified strategy in place, making it increasingly difficult to defend the business case. Instead of separating sustainability into its own department and function, integrate performance into the broader business strategy to understand the true impact.

How to Build Compliance into a Broader Sustainability Strategy

The upside of approaching and integrating sustainability standards and compliance as a strategic priority goes well beyond the financial and legal risks of non-compliance. Avoiding fines and meeting legal requirements is a necessary starting point, but to realize the most value, companies should look at integrating sustainability in the following ways.

1. Encourage cross-functional collaboration.

With significant resources and focus on calculating and reporting sustainability compliance metrics, the current state of sustainability data is that it is isolated and difficult to find in specific applications. Several departments are tasked with reporting on various criteria, and a lack of alignment can stymie progress.

Instead of opening up the potential for confusion, engage the relevant stakeholders across legal, sustainability, finance, and operations teams to gather input and ensure sustainability compliance is embedded into long-term business performance planning. Better yet, identify a point person with sustainability expertise in your organization and leverage software alongside them to increase efficiency over time. Well-executed compliance to sustainability regulations then becomes the baseline for strategic decision making, empowering organizations to directly align with the values of their internal and external stakeholders - providing a competitive advantage in an increasingly competitive and ever-changing market.

2. Align business and sustainability KPIs.

Be intentional about aligning sustainability metrics with broader business KPIs, using regulations as a springboard for ambitious sustainability targets. When sustainability goals align with financial, operational, and strategic objectives, they drive efficiency, innovation, and competitive advantage.

Examples:

Aligning key sustainability compliance and reporting metrics with core business performance outcomes not only results in the avoidance of fines and meeting of legal requirements, but also helps to drive positive financial and operational outcomes for the organization. It mitigates risk within the business against evolving regulations and market shifts, increases brand equity and reputation by meeting stakeholder expectations, and attracts capital and customer loyalty.

3. Leverage technology and data to manage and improve, not just report.

Per a February 2024 study by IBM, just 31% of executives said they are incorporating sustainability data and insights into operational improvements, while 14% say they do so with innovation initiatives. Meanwhile, spending on sustainability reporting outpaced that of sustainability innovation by 43%. In order to get the most return out of sustainability reporting, leverage technology to manage and identify areas for business performance improvement.

Examples:

• Manufacturing companies required to track energy, emissions, and resource consumption as a part of the EU’s Corporate Sustainability Reporting Directive (CSRD) can install low-cost, easy-to-use AI-powered sensors that will both gather data for reporting compliance, while also providing insights and recommendations on how to operate machinery more efficiently - generating savings and reducing emissions
• Retail and Apparel businesses required to verify transparency in sustainability claims and reduce greenwashing via the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) and Green Claims Directive can leverage supply chain traceability software to ensure ethical sourcing - allowing for premium pricing, strengthening brand trust, and expanding market share
• Footwear companies required to report on resource use and waste as part of the Global Reporting Initiative - particularly in Materials (GRI 301) & Waste (GRI 306) - can leverage virtual simulations in LCA tools or digital twins to test the performance of different materials prior to manufacturing; this helps reduce R&D costs and material waste while optimizing efficiencies in the production process

Keeping tabs on evolving sustainability requirements can become a huge burden. Investing in technology and automation becomes both necessary and justified in terms of ROI to the user.

Conclusion

Building a comprehensive sustainability strategy is a journey; it is not without challenges, but the rewards are immense. While it may feel easier in the short term to table the necessary investment and instead focus on minimum compliance requirements, it’s important to keep a long-term perspective in order to generate enterprise value from your sustainability initiatives. Break out of the sustainability silo and embrace a holistic approach to create lasting value for all stakeholders and pave the way for a truly sustainable future.

About Clearyst

At Clearyst, we provide clear value and impact through sustainability software, data, and advisory solutions. Companies like Nissin Foods, Fjällräven, Saf Gard, and Hit Promotional Products rely on Clearyst to solve various challenges, from compliance and reporting to supply chain and operational innovation. Reach out to learn more about how we can help your business generate value through sustainability.