Sustainability: The New Mandate or an Overrated Trend?

CSRD, CSDDD, LkSG - Welcome to the jungle.

The topic of sustainability is often perceived by companies as a complex and burdensome administrative task. The process usually begins with understanding the criteria for various reporting obligations. For instance, the number of employees might be the deciding factor (LkSG), while in other cases, it’s a combination of employee numbers and capital liability (CSDDD). Alternatively, the criteria may involve a “two-out-of-three” formula, including employee count, turnover, balance sheet total, or capital market relevance (CSRD).

Adding to the complexity, the implementation timelines for these regulations are not aligned. While we won’t delve into the relevance of these regulations here, it’s worth noting that many companies are so focused on meeting the requirements set by regulators that they have little time or resources left to explore the potential benefits. 

Why is sustainability becoming increasingly important?

1. Because legislators demand it. 

   The EU, in collaboration with its member states, has committed to achieving climate neutrality by 2050. This net-zero goal can only be met by drastically reducing avoidable emissions and offsetting unavoidable ones through sequestration. The EU has outlined three main tools to achieve net zero:

   • Promoting green technology and infrastructure,
   • Increasing corporate transparency, and
   • Implementing market mechanisms like CO2 certificates.

   While the benefits of EU subsidies are clear, the advantages of enhanced reporting obligations are less obvious to many companies.

2. Because the world is changing. 

   Europe is warming faster than any other part of the planet. Climate change leads to cascading effects: when water becomes scarce, nuclear power plants must shut down, rivers can no longer support transport, harvests fail, and tourism declines. Moreover, a warmer world is also a wetter one. Warm air retains more moisture, causing heavy rainfall events to increase. After heatwaves come floods, which can destroy capital, machinery, infrastructure, and personal property within hours.

   To adapt, companies need clarity about their climate risks:

   • Which transport routes are vulnerable?
   • Which production sites or suppliers might be impacted?
   • What insurance policies are viable and worth investing in?

   By conducting scenario analyses and impact assessments, companies can prioritize and manage these risks. Awareness is the first step toward resilience.

3. Because people are changing.

   Over the past decade, public expectations around sustainability have shifted dramatically. Consumers ask whether packaging is made from recycled plastic. Investors inquire about gender diversity in management. NGOs investigate supply chain ethics, questioning whether suppliers exploit child labor. Even courts are holding companies accountable, as seen when a Peruvian farmer sued RWE in Germany over the climate impacts of coal-fired power generation.

   The role of businesses has evolved. Companies are no longer expected to merely pursue profit but to actively contribute to the well-being of society and future generations. The old mantra, “The business of business is business,” is as outdated as the Intel 4004 processor.

4. Because everything is interconnected. 

   The global push for climate neutrality is not just a political ambition but a driver of regulatory action and market expectations. Industrialized nations are reshaping their economies to align with this goal, impacting business models and supply chains. For example:

   • Demand for renewable energy is increasing, while demand for injection pumps is declining.
   • The price of CO2 is rising, and CO2 storage technologies are becoming critical.
   • Businesses are innovating to meet new needs, from drought-resistant crops to green roofing solutions.

   Sustainability is no longer a choice but a necessity. Regulatory frameworks like CSRD, physical realities of climate change, and shifting market expectations make sustainability the cornerstone of a successful corporate strategy.

How to develop a sustainability strategy?

Creating a sustainability strategy involves five key steps:

1. Analysis
2. Development of the target picture
3. Derivation of necessary measures
4. Creation of the implementation plan
5. Implementation

The foundation of a successful strategy lies in the analysis phase. Incorrect assumptions—such as underestimating how CO2 pricing could affect procurement costs or failing to identify high-risk suppliers—can undermine the strategy’s effectiveness.

A double materiality analysis, as defined by the CSRD within the ESRS categories, offers a thorough approach. Companies subject to CSRD can use these results to establish their strategy, while others can adapt a scaled-down materiality analysis based on the CSRD framework. This involves asking two critical questions for each category:

1. How do external developments impact the company?
2. How does the company impact these developments?

For instance, in the context of climate change:

• External impact: How will global warming and CO2 prices affect the company?
• Internal impact: How much greenhouse gas does the company emit?
  
  

Minimum focus areas for a sustainability strategy:

1. Climate change: CO2 footprint, energy mix, opportunities and risks from climate protection policy and global warming.
2. Waste and resource consumption: waste quantities (recyclable and non-recyclable), resource usage (raw materials, water, etc.) .
3. Biodiversity and ecosystems: impact on or reliance on fish stocks, forests, peatlands, soil fertility, etc.   
4. Working conditions: Employee welfare and supplier labor conditions.
5. Human rights: Risks associated with indirect suppliers in high-risk regions.
6. Community impacts: Projects affecting local communities (e.g., real estate, pipelines).
7. Consumer behavior: Shifts in customer expectations or preferences.
8. Code of conduct: Establishing ethical guidelines.

What are the advantages of sustainability for companies?  

Stable earnings:

If market changes (demand, purchase prices, regulatory restrictions) are recognized in good time, appropriate measures can be initiated. For example, the effects of climate change and the political measures to limit it play a decisive role for companies. Apart from physical climate risks, the anticipation of regulation is a key challenge for corporate strategy. Which laws will apply in two years, which in five? How will the price of CO2 change? Companies that draw up various scenarios and examine their profitability in them can take timely adjustment measures and stabilize or improve their earnings in the long term.

Stable financing: 

Banks increasingly prioritize sustainability information from borrowers, driven by their own reporting requirements and a desire to minimize loan default risks. This applies to companies of all sizes. For instance, medium-sized enterprises may need to disclose details about their production sites to assess exposure to storm or flood risks. Providing this transparency strengthens financing prospects.

Stable relationships:

For manufacturing businesses, reliable suppliers are critical. Early engagement with suppliers on sustainability issues fosters collaboration, enabling solutions and improvements. Additionally, participating in industry associations can help create new ecosystems or diversify supply chains, enhancing long-term resilience.

Conclusion
Sustainability is no longer optional—it is essential. Companies that align their strategies with sustainability will not only ensure compliance but also unlock opportunities for stable earnings, secure financing, and resilient partnerships.

The business of business is sustainable business.