The response now often termed “backlash” will create its very own backlash. Even if sustainability regulations are softened or delayed, the underlying sustainability challenges won’t go away.[1] If there is one thing you should take away from this article, it is that change is unavoidable:

Change is happening: Whatever happens, companies will be affected by change. In an ideal world, they would transition smoothly to more sustainable pathways. In the worst case, the private sector will have to deal with a disorderly transition and suffer the inefficiencies of a heavily fragmented regulatory landscape. Meanwhile the real danger — increasing physical risks — will continue to rise.[2]

Change is needed: The current disruption is reallocating resources and reshaping industries and their value chains. And this is just the beginning. This presents companies with tremendous opportunities — and risks.[3] First and foremost, they should make sure they are on the winning side.

Change is wanted: Change is not only unavoidable, it is the ultimate goal. Sustainability regulations aim to create transparency about the progress companies make and the challenges they face. Some lawmakers may have taken things too far, but this is mainly the result of the subject matter’s breadth and complexity. The end purpose is to enable equity investors and lenders to assess investment risks and opportunities. The intention is to harness capitalism’s transformative power, where “creative destruction” (as coined by the economist Schumpeter) drives progress by steering capital to sustainable business practices.

Companies must think twice before rolling back sustainability commitments. Stepping back from past promises will have significant business implications, including reputational and liability risks. In some places regulatory pressure may soften temporarily, but it will persist, albeit in a more strongly fragmented manner. This could be in the form of a shift of regulatory action from the federal to the state level, for example, or more extraterritorial rules.

Failure to mitigate adverse environmental impacts ultimately results in their continued increase – think more physical risks and more microplastics accumulating in the environment. Meanwhile, concerned and affected parties will move from lobbying lawmakers to suing in court. It is unlikely that these trends will diminish the need for vigilant oversight by senior management.

Olivier Jaeggi

[1]      In their recent article, Georg Kell and Martin Reeves and Helena Carmody Fox from the BCG Henderson Institute framed this very well: “In the short term, therefore, it seems reasonable to expect a further unraveling of the corporate sustainability agenda. In the longer term, however, there are reasons to believe that several countervailing forces will overturn this short-term reversal and lead to a renewed emphasis on sustainability. (…) planetary realities ultimately shape politics.”

[2]      The Central Banks and Supervisors Network for Greening the Financial System (NGFS) has developed seven scenarios to help organizations assess how they might be affected by transition and physical risks. The worst-case scenario described above is named “Fragmented World,” where climate action is insufficient and comes too late.

[3]      In the words of Blackrock’s CEO Larry Fink: “I believe the decarbonizing of the global economy is going to create the greatest investment opportunity of our lifetime. It will also leave behind the companies that don’t adapt, regardless of what industry they are in.”