Companies count the cost of compliance with green regulation

Europe’s Green Deal to tackle climate change has produced plenty of red tape for businesses. Since it was agreed in 2019, with the aim of achieving climate neutrality by 2050, dozens of laws have been introduced.

Companies have new obligations to audit their supply chains for environmental damage and human rights violations, to prove that commodities such as beef and coffee do not come from deforested land, and to ensure more products can be repaired.

Richard Sterneberg, head of global government relations at law firm DLA Piper, says the volume is unprecedented. “There is a lot of regulation coming down the track at the same time. The compliance costs are high and it is easier for the bigger companies to comply.”

Some companies have decided simply to ditch suppliers in countries that may not be able to assemble the data needed to comply with the Corporate Sustainability Due Diligence Directive. Passed by the European parliament last month, and due to come into force by 2027, the law requires EU and non-EU companies with significant turnover in the bloc to ensure that their supply chains do not harm workers or the environment.

Other companies may quit the EU, instead. “Legislation is having an impact on investment flows coming into Europe,” Sterneberg says. “The EU wants to set the agenda, globally, but other countries are not following suit so there is not a level playing field.”

Continuing with business as usual is condemning our economy as well as people’s health and the environment to a grim future

The Green Deal has created a bonanza for his industry, however. Thomas Delille, a partner in the EU public policy practice at law firm Squire Patton Boggs, says his team has been expanding fast. 

“Various pieces of EU legislation have placed a new generation of obligations on economic operators, centred on the concept of due diligence,” he says. “Very often, companies need to start working on their compliance despite a lack of guidance on how to interpret and implement the law.”

Many companies are reluctant to talk about costs. But one multinational, which did not want to be identified, tells the FT that the only cost-effective way to comply with the 2023 Corporate Sustainability Reporting Directive is to digitalise everything — which can be difficult in some developing countries where suppliers still provide paper invoices.

The CSRD, which will apply to reports published from next year, demands information about companies’ impact on people and the environment, allowing investors to assess the financial risks and opportunities arising from sustainability issues.

The company estimates it has spent $18mn in the past three years on automating its carbon emissions data, and expects to spend another $50mn-$60mn over the next three to five years to comply fully with the CSRD. On top of this, it anticipates millions of dollars in annual costs for data compliance and auditing.

The company will also have to comply with the Carbon Border Adjustment Mechanism, at a cost of at least $500,000 a year. The CBAM is intended to protect EU heavy industry, which must pay for its carbon emissions under the bloc’s emissions trading scheme, from being undercut by producers in countries with more lenient rules. From 2030, it will levy a charge on imports of steel, cement and other products to account for the carbon emitted while making them. 

Importers are responsible for providing the information. The first reports were due this year but only 10 per cent of German companies, for example, complied by the initial January deadline. 

In a recent analysis of EU policymaking, Zach Meyers, assistant director of the Centre for European Reform think-tank, says the European Commission, in its attempts to deal with crises such as the Covid-19 pandemic and climate change, “has become a more political body”. 

This means, he argues, that the EU “has lost one of its strengths: having a technocratic lawmaking body focused on designing laws based on evidence and good practice, and which is less beholden to short-term politics than the European parliament and European Council”.

He says the commission has rushed consultation with industry, often uses emergency procedures to avoid impact assessments, and increasingly uses so-called delegated acts, which are not scrutinised by the other institutions or subject to open debate.

NGOs, however, support the changes, although many proposals were watered down by EU governments before they approved them.

Amandine Van Den Berghe, lawyer with environmental organisation ClientEarth, says: “The climate, biodiversity and pollution crises are here now and already causing business disruption. Continuing with business as usual — or, worse, deregulating — is condemning our economy as well as people’s health and the environment to a grim future.

“The CSDDD is not reinventing the wheel — it turns voluntary international standards that have existed for over a decade into binding rules. The law was developed in response to requests from the private sector to bring clarity and harmonisation to a fragmented EU legislative landscape, as well as calls from civil society for more responsible business conduct.”

She says many companies and investors support it.

We need a consistent and predictable policy, which is not changing all the time

Indeed, some businesses say it is not the amount of legislation that is the problem but the constant changes, often at national level.

Among them is Netherlands-based boiler company BDR Thermea, owner of brands such as Baxi and De Dietrich, which began transitioning from making gas boilers to electrically powered heat pumps a decade ago.

However, after protests in Germany, the government there scrapped plans to oblige householders to adopt heat pumps. Meanwhile, other countries ended subsidies or policies that mandated heat pumps in new homes. As gas prices have dropped, so has demand.

BDR Thermea, which operates globally but manufactures mainly in the EU, is now switching staff back from heat pumps to gas boilers to match demand.

“The market for heat pumps is going down,” says chief executive Tjarko Bouman.

“We need clarity on the regulations . . . and a consistent and predictable policy, which is not changing all the time,” he adds. “It creates uncertainty with consumers.”

He welcomes the CSDDD, despite its cost. “We are a key player in the energy transition. And, as such, I believe we should be a frontrunner, in being a sustainable corporation ourselves. It’s the right thing to do.”