When analysing data for our Vocabulary of Values piece, we stumbled upon something striking: in CEO letters from annual reports, European companies most closely associate sustainability with regulation, while their American counterparts link it to innovation.
“Over the past year, we have seen how AI can catalyze environmental progress in remarkable ways” Microsoft, 2024
“there is also a deep need for new research and development. Energy systems and supply chains provide the foundation of the global economy and must be treated with care” JP Morgan, 2023
“We are implementing advanced data management systems to ensure we can accurately report on all relevant sustainability metrics, guided by our double materiality assessment. These efforts position us to meet and exceed regulatory requirements while strengthening our sustainability commitments” SoftwareOne, 2024
This discovery got us thinking about corporate sustainability today: with all resources being funnelled into regulatory compliance, are we losing the ambitious, experimental, and exciting thinking that could drive real impact?
The Porter paradox
To be clear, at Salterbaxter, we’re big fans of regulation – when it’s done well. The irony of our discovery is that regulation can actually drive innovation. The Porter Hypothesis, developed by Harvard's Michael Porter, shows that well-designed and stringent environmental regulation can stimulate innovation (Scientific American). When done right, regulation creates clear standards, levels playing fields, and forces companies to innovate around constraints. Whilst over 30 years old, it has historically held true; for example, how fuel efficiency standards drove automotive innovation, or how the Montreal Protocol spurred alternatives to ozone-depleting substances.
But something's gone wrong
The EU's sustainability regulations were designed with the best intentions to drive accountability, transparency, and a level playing field. However, the implementation journey has been challenging. Regulations have been criticised for being overly prescriptive and rigid, which extinguishes rather than stokes innovation, and makes businesses hesitant to try new approaches.
Beyond this, previously finalised legislation has been reopened and adjusted, as evidenced by the recent 12-month delay to EUDR, CSDDD, and the simplifications proposed through the EU Omnibus (Irish Times). Companies are struggling with regulatory uncertainty, and the real challenge isn't regulation itself, but the difficulty in implementing such comprehensive and oft-evolving frameworks at pace.
The real cost
The numbers reveal the scale of the challenge. The EU's Omnibus proposals expect €6.4 billion in annual administrative cost savings just by limiting the scope of CSRD (ESG Today). This goes to show the extent of the cost to companies, many of whom had already begun processes to be CSRD-compliant before becoming exempt.
The human cost is equally telling: over half of corporate sustainability teams believe they are not adequately resourced to deliver against increasing reporting frameworks and disclosure requests (Edie). When teams and budgets are stretched so thin, there's little room for innovative thinking. Rather than using them to inform strategy and innovation, the precious insights gleaned from compliance processes get abandoned as teams scramble to prepare for next year's reporting requirements.
Getting back to strategy
Despite this challenging picture, we remain strongly in favour of increased corporate accountability and transparency. Done right, regulations can drive innovation and transformation, helping to create the framework for genuine progress. But regulatory frameworks need to be:
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Consistent – Steady goalposts that create market stability
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Clear – Companies need to understand what's expected of them
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Flexible – Less prescriptive, to allow businesses to focus on their unique situations
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Strategic – Focused on incentivising long-term outcomes, not box-ticking
The Porter Hypothesis works when regulation provides clear, stable signals. It fails when it’s most often paired with the word “burden”, becoming a moving target that consumes all available bandwidth. It wins when it’s a springboard for innovation, and a compass for where to aim it.
At Salterbaxter, we keep our finger on the pulse of regulatory updates (follow us on LinkedIn for the latest!), and help you navigate these complex landscapes while making the most of the insights gained from the process. We use regulation as a catalyst for the kind of bold innovative thinking that sustainability challenges demand.