Uphill climb for sustainable competitiveness

Sustainability continues to be at the forefront of the policy and business agenda. However, in a world of constant change, being a sustainable and competitive business has become an increasing challenge.

A new report by Mario Draghi, former president of the European Central Bank, will contribute to the European Commission’s work on a new plan for Europe’s sustainable prosperity and competitiveness. The future of European competitiveness – A competitiveness strategy for Europe indicates that sustainable competitiveness should require that businesses are productive and environmentally friendly, making Europe open for business while shaping a better and fairer world.

However, it concludes that there are a number of hurdles to jump over before this becomes a reality, with the regulatory burden identified as a major issue.

Strategy and analysis

The report contains two parts, Part A and Part B, and provides a number of broad recommendations to boost Europe’s competitiveness. Part A outlines the strategy, while the more substantial Part B provides an in-depth analysis and recommendations.

Part B explores how the EU’s ‘regulatory flow’ – the number of new provisions passed in a dedicated time period – is potentially making the EU’s regulatory environment less favourable for conducting business compared with the US. It notes that, during the first half of the 2019-24 parliamentary term, the legislative process was taking an average of 19 months. Therefore, an accelerated but more focused legislative process is required to regain Europe’s competitiveness.

Sustainability burden

Draghi’s report highlights the EU’s sustainability reporting and due diligence framework as a major source of regulatory burden. According to the report, this is magnified by a lack of guidance to facilitate the application of complex rules and to clarify the interaction between various pieces of legislation. The framework includes legislation, such as the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive.

The report identifies what Draghi views as several important issues: the cost of compliance for companies; the risk of overcompliance, such as over-reporting, especially for SMEs across the value chain (with unclear definitions the main issue); and a lack of guidance.

Looking more closely at the report, we can see that the burden on SMEs and those in the value chain seems to be a primary concern. The report references the need for mitigation of burden for SMEs both within requirements and in tools, such as software for reporting.

However, it is also the case that standards specifically developed for SME reporting are well under way. Additionally, value-chain transitional provisions in the European Sustainability Reporting Standards for reporting companies are also a relief for those in their value-chain – and exist now.

Similarly, guidance has already been a significant focus of the European Financial Reporting Advisory Group, and contributions are also coming in from across the ESG ecosystem, from bodies such as the Global Reporting Initiative and the Carbon Disclosure Project. Businesses must have easy access to guidance that is clear and transparent, making it simple to apply and measure. This will combat the issue of over-compliance and put Europe in good stead to boost its sustainable prosperity and competitiveness.

Address inconsistency

Addressing overlaps and inconsistencies between regulatory requirements is also called out. Overlaps are inevitable as specific issues are addressed over time. Efforts to address this area are already under way – for example, with the review of Sustainable Finance Disclosures Regulation. However, there are still areas – for example, decarbonisation – where overlaps and inconsistencies could be addressed.

Regulation is an important driver for change, and transparency empowers the markets to be part of that change. While an overall reduction in regulation burden may well be an important part of EU policy over the next few years, it is also clear from the report that continuing to address areas of concern will make a significant difference, without requiring major pullbacks and potentially placing decarbonisation and other sustainability goals at risk.

Throughout the report, technology and innovation are seen as critical and digitisation remains an important pillar of change. For example, the provision of software to assist SMEs with their role in value chains is a notable mention.

However, while European companies are addressing new requirements by repurposing existing reporting processes and infrastructures, such as legacy tools or point solutions, these methods are proving inadequate and inevitably lead to manual workarounds, introducing the risk of human error and lacking scalability.

Finally, shifting to an integrated reporting approach not only ensures regulatory compliance but also aligns with and propels broader business objectives. In fact, according to Workiva's 2024 ESG Practitioner Survey, 88% of those who took part believe that integrated reporting will have a positive impact on a company’s long-term value creation. Assured integrated reporting, which involves integrating sustainability and financial information with strong assurance readiness, will be critical to maintaining sustainability momentum.