Over 80% of companies say they are not ready for EU ESG regulations

New ESG regulations are coming into force in the EU, but the vast majority of companies feel underprepared to meet rising sustainability standards.

New research by S-RM, a global intelligence and cybersecurity consultancy, has revealed that as many as 84 percent of European corporations and 82 percent of regional investors are not confident in their ability to comply with the Sustainability Reporting Directive Corporate Sustainability Due Diligence Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), which was signed last week.

In fact, a survey by S-RM of 550 senior ESG decision makers in corporate organizations and 200 senior ESG decision makers in investment firms found that awareness and ability to manage ESG issues is “significantly lacking” across all companies. The data showed that 74 percent of companies believe they are not “fully mature” in addressing environmental, social impact or governance issues.

“Maturity was defined as having a clear strategy – there is a program in place, data is collected and reported on,” Natalie Stafford, director of ESG and sustainability at S-RM, told Sourcing Journal. “You feel like they know what their responsibilities are, they know what they want to do and they’re on track to get it.”

As it turns out, ESG leaders feel that their corporate toolkits and existing skill sets are woefully underdeveloped to meet the heightened standards they will now have to meet – especially when it comes to supply chain issues. It is worth noting that 77 percent of respondents do not currently include the concept of responsible supply chains in their ESG strategy.

“This was one of the biggest surprises when we collected the data,” given that “the supply chain is critical to ESG,” Stafford said. The problem may stem from the fractured, siled functionality that exists in many organizations.

Supply chain teams work separately from ESG teams, and both are often disconnected from legal teams tasked with ensuring compliance with laws and regulations. “This type of organizational structure has existed before (focused on) sustainability,” Stafford explained, “and we just don’t feel like it connects to the broader corporate purpose when it comes to ESG.”

With so much internal opacity, it is easier to understand how those tasked with ensuring ESG success can feel unaware. “Are these teams joining forces? Do they actually communicate requirements, transfer risk and add value to each other?” These are questions many people are probably starting to ask themselves, Stafford said.

“I think it’s certainly becoming clear in some companies that the way they initially shifted some of the responsibility – often onto legal teams – is just not working because it meant they took a very legalistic, very compliance-oriented approach. rules,” she added. “Which is fine if you only manage risk, but you also need to pay attention to generating value from ESG and sustainability.”

For example, Stafford said many companies use their legal sources to comply with laws such as the Uyghur Forced Labor Prevention Act (UFLPA). However, he believes that the only way companies can break the cycle of environmental and social management catch-up is to be proactive and incorporate ESG best practices into their operations as a business imperative.

She believes this evolution will likely begin to take shape in the coming years. Currently, environmental issues – the letter “E” in ESG – take considerable precedence over the letters “S” and “G”. SR-G’s research found that environmental impact continues to be a top concern for 39 percent of ESG leaders in corporations and 42 percent of ESG decision-makers at investment firms. In turn, about a quarter of both groups admitted that they had little or no awareness of social issues and challenges in their industries.

“The environmental side is the one that everyone we talk to thinks is the most developed – that’s where those budgets went,” Stafford said, noting that for some companies it may actually feel lighter. “I think the environmental side is easier to deal with to some extent; you set your goals, and those goals are generally quite distant. Your feet don’t actually hold the fire.

“It goes some way to explaining why you haven’t achieved your greenhouse gas emissions targets as quickly as we would like. If there’s bad press around it, you can deal with it,” she added. “But if you discover that you have slave labor in your supply chain… We’re talking about really emotive and evocative issues that are very difficult for companies to deal with if their reputations suffer.”

However, with the advent of CRSD and CRDDD, as well as the Global Reporting Initiative (GRI), the emphasis on social goals is likely to increase. Two fifths (40%) of respondents said they planned to increase spending on social activities. “Over the next five years, budget allocation is expected to change, with the share of social funding increasing by 1-2 percent, which doesn’t sound like much, but when you consider the scale of some budgets, it actually represents quite a bit of change. “

Stafford believes that much of this spending will go towards gathering external expertise, from audits to consultants and accreditations. “It recognizes that there may not be that expertise internally, and if, for example, an independent external body comes in and does a gap analysis of human rights policy or conducts human rights impact assessments in key locations, that gives (companies) a modicum of protection.”

For companies looking to develop long-term ESG strategies, an external perspective is often necessary. “It’s about figuring out what’s proportionate to the size of the company, the scale of the business, the scale of the risk, and building an approach that fits the situation the company is in,” Stafford said.

While the study focused primarily on European ESG policymakers, U.S. companies and investors are also concerned about EU regulations – more so, in fact, than any other ESG efforts undertaken in the country.

Twenty-two percent of U.S. investors and 24 percent of U.S. corporations surveyed said they were most concerned about CSRD, while 30 percent of U.S. investors and 16 percent of corporations said they were most concerned about CSDDD. In contrast, 0 percent of investors and just 3 percent of U.S. corporations said they were most concerned about the UFLPA, and 4 percent of investors and 6 percent of corporations said they were most concerned about climate-related disclosures by the SEC.

“Even those companies that are not directly in scope” – like US companies – “once they are in the value chain of any company in scope will have to comply with (EU rules) in any case,” Stafford explained. “If they can’t do everything that’s required, or if they don’t have the right modern slavery or human rights policies in place, or they don’t have the data to give to the company they’re sourcing for, they’re just not going to win the business.”

In some ways, “regulation is not even the most important factor” in enabling companies to advance on ESG – although many companies are certainly concerned about it. Stafford believes that investor pressure, as well as consumer pressure (particularly in industries like apparel) are really driving companies to make changes.

“It feels like this is just the way things are – it’s like a wave flowing through the corporate world,” she said. “It doesn’t end there, so either join us now and start getting your act together, or you’ll be left behind.”