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The Sustainability Regulatory Horizon

Sustainability has been rising up the corporate agenda in recent years. Business leaders are recognising both their responsibility to build more sustainable companies and the commercial benefits of doing so, with consumers increasingly favouring corporations with stronger ethical credentials.

At the same time, international accords such as the Paris climate agreement, pressure from some of the world's biggest investors, the shareholder/stakeholder debate and concern among central banks over the impact of climate change on financial stability are creating further impetus for change.

While it would have been easy for sustainability to take a back seat in the rush to repair economies damaged by COVID-19, the pandemic has strengthened the resolve of governments and corporations to ‘build back better’. The EU’s recovery plan is designed to boost sustainable technologies and business models, while the election of Joe Biden is already re-establishing the US as a key player in the response to the global climate emergency.

Against this backdrop, regulators are devising ways to incentivise more sustainable practices. Measures have been introduced to drive higher sustainability standards via global trade agreements, corporate finance, M&A and supply-chain management, with further developments on the horizon.

Our teams have market-leading expertise across the full range of sustainability issues and can help you navigate this fast-evolving landscape with confidence.

How does sustainability regulation affect business?

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Regulators are playing a key role in accelerating the transition to a low-carbon future. Rules introduced in response to the Paris Agreement and the UN Sustainable Development Goals are influencing relative asset values, making some fossil fuel reserves uneconomic to exploit and driving investment towards transformational technologies such as hydrogen fuel cells. These measures provide another incentive for businesses to innovate (including by acquiring new technologies), with sustainable financing instruments – and in some cases state assistance – helping to provide the necessary capital.

Laws and regulations are also being used to protect human rights and the environment. Companies are now obliged to report what they are doing to identify human rights risks in their supply chains, and in some jurisdictions disclose the steps they are taking to address any issues they find. This places a premium on sophisticated due diligence, both to mitigate regulatory risk and to safeguard hard-won reputations. Cross-border trade, too, is in the spotlight thanks to protective regulations like the EU's planned carbon border adjustment mechanism – and because more free trade agreements now include ambitious sustainability provisions.

How can corporate leaders assess risk?

This fast-evolving landscape presents corporate leaders with a challenge. Not only do they have to track regulatory developments across the world, but they must also understand how different sets of rules with national and extraterritorial reach apply across jurisdictions. In addition, the lack of standardisation between the more than 400 mandatory and voluntary sustainability reporting systems requires careful judgement to ensure enough information is disclosed to counter accusations of greenwashing, but not so much that the business is exposed to additional risk.

And risk is not limited to specific sustainability regulations. Tackling global issues such as climate change requires collaboration, potentially between businesses in the same sector (horizontal collaboration). However, this type of co-operation is invariably limited by competition law, and in response some authorities (including the European Commission) are considering whether their antitrust frameworks can be adapted to boost progress towards climate goals without disrupting markets.