Embedding sustainability in practice – how companies will need to adapt to successfully address sustainability-related regulation

The transition to Net Zero presents companies with a host of challenges as they adapt to the physical, regulatory and commercial risks and opportunities that a low-carbon economy will bring. These include significant volumes of new regulation, pressure from investors, customers and activists, and stringent disclosure requirements.

A company’s organisational purpose, vision and values will need to align with its Net Zero transition plan and support the transformation required. Boards and senior management are likely to find themselves weighing commercial considerations alongside sustainability factors and commitments, requiring different approaches to assessing value and measuring performance.

The regulatory environment is evolving rapidly, with a multitude of new requirements and expectations that are not straightforward to implement. Identifying and tracking these regulations is a challenge in itself, but as companies do so they also need to embed changes in a way that ensures compliance is future-proofed against evolving and maturing market practice and regulatory expectations. Much of the emerging sustainability regulation is not a “one and done” exercise, and businesses’ systems and processes will require constant attention.

Change is required across all levels of an organisation, from governance frameworks to board and senior management roles and responsibilities, risk management and compliance frameworks and operating models.

Some practical steps that successful companies are taking to drive this internal transformation include the following.

Organisational culture and purpose: Embedding sustainability across an organisation does not happen without a change in culture and mindset, and requires senior sponsorship to demonstrate the importance to the business and set the tone from the top. This can be supported by clarity on how the sustainability strategy aligns with corporate purpose and values.

Governance framework: to embed sustainability into their day-to-day activities, businesses will need to review and update their governance frameworks to reflect sustainability strategies and priorities, and build these into their existing structures. Some companies are creating new board and executive-level sustainability committees to drive greater focus on strategic direction and progress against plans, and to ensure clear ownership.

Roles and responsibilities: all areas of an organisation are impacted by the sustainability agenda. Reviewing and redefining roles and responsibilities drives accountability and minimises the risk of inefficiency and confusion. This includes ensuring appropriate division of responsibility between the board and senior management, clarity on decision-making powers, and the creation of mechanisms to provide effective oversight of delivery.

Objectives and incentives: businesses should also consider how to embed sustainability objectives into personal and business-level performance management and incentive structures in order to drive the necessary focus. When calibrated correctly these support boards to hold managers to account for the delivery of the sustainability strategy. Alongside this, appropriate management information is required to effectively support oversight of progress.

Product governance: updating product governance frameworks to effectively mitigate greenwashing risks requires more than simply drafting a new product approval policy. Instead, sustainability factors should be embedded into the end-to-end product lifecycle, including target market, product design, product approval authorities (across business and compliance areas), and post-launch product monitoring (supported by relevant KPIs and KRIs).

Risk management framework: sustainability risk management should be integrated within an organisation’s existing risk framework and taxonomy, including appropriate sustainability risk appetite and tolerances as well as consistent processes for identifying, quantifying and mitigating sustainability risks. Appropriate integration to the existing risk framework is essential to enable the organisation to weigh commercial decisions on the basis of a robust picture of the overall risk position.

Compliance: The compliance function can play a key role as a strategic partner to the business, given the stage of sustainability development and combination of evolving regulatory requirements and market standards. Companies should consider the operating model of their compliance function in order to support the needs of the wider organisation. This may include ensuring compliance has sufficient skills and experience to advise and challenge the business (which may be at the cutting edge of new products and services), or to consider a regulatory engagement strategy to understand and, where possible, contribute to supervisory approaches as these develop alongside market practice.

These challenges – and the steps taken by organisations to address them – are interconnected, and as a result, a holistic approach is required. For example, a board’s ability to make informed decisions on whether commercial strategy aligns with sustainability commitments requires (among other things) comparable and effective internal management information and metrics on the business’s activities and risks. This in turn is dependent on sustainability being embedded effectively within the risk management framework, with a clear internal standard for monitoring and measuring sustainability factors across different products, services and activities.

Business leaders should take steps to embed sustainability across key areas of their organisation – including their governance framework, risk management and compliance functions – with a view to ensuring the successful delivery of their sustainability strategies and Net Zero plans.