Finnish Sustainability Report Has Lessons for EU Regulators: An Interview with Dr. Nikodemus Solitander

Dr. Nikodemus Solitander is a researcher and associate dean at the Hanken School of Economics in Helsinki, Finland, and the director of the Centre for Corporate Responsibility at Hanken. He was the principal investigator for the Cumulative Effects of EU Sustainability Legislation (CEULA) project, which examines the impact of European Union (EU) sustainability regulations on Finnish firms.

“The things that these regulations try to grapple with are fundamental when it comes to basic human rights and climate change as a threat to humanity itself,” insisted Solitander. “If we can't deal with the issues that are underlying the regulation, then we need to use all kinds of legal mechanisms and approaches. We know that if we just do it on a voluntary basis, we will not get there soon enough.”

As Solitander told Graham Freeman, senior reporter for sustainability for 3E, “My sense is that it's inevitable that regulation will come because progress is so slow.”

According to Solitander, one of the main findings of the study is that not surprisingly, the level of preparedness swings widely, both amongst Finnish companies and those in certain EU countries. Some firms are quite well prepared, while some are not prepared at all.

Funded by the Ministry for Foreign Affairs of Finland (MFA) and managed by the Finnish University Partnership for International Development (UniPID), the report used interviews with representatives from the agrifood, forestry, mining, and textiles industries to analyze how firms understand their regulatory requirements and how they prepare to meet them, with a particular interest in the cumulative effects of the regulations on Finnish companies at the intersection of various risk centers.

Solitander noted that companies found it challenging to estimate increased costs from regulatory burdens. “Almost no companies foresaw, for example, that they would need to increase the number of personnel, as they were all planning to reorganize internally.” According to Solitander, when companies did successfully estimate costs, those costs were usually more moderate than expected.

The recent announcement of the EU Omnibus proposal to reduce sustainability reporting for businesses means CEULA's research holds important lessons for any firm interacting with EU sustainability regulations. CEULA examines the impact of the Carbon Border Adjustment Mechanism (CBAM), the Regulation on Deforestation-Free Products (EUDR), the Ecodesign for Sustainable Products Regulation (ESPR), the Forced Labour Regulation (FLR), and the Corporate Sustainability Due Diligence Directive (CSDDD).

Uncertainty and Perception of Punishment for Being Proactive

The EU Commission's intention for the Omnibus is to reduce the reporting burden on EU small and medium enterprises (SMEs) and catalyze European competitiveness and innovation. However, CEULA's results show that it might also be proliferating new uncertainties for businesses.

“One uncertainty is a lack of clarity about what the regulations are and how they should be interpreted,” said Solitander. “Companies are really looking for guidance and how to understand the regulations. There is also a larger uncertainty that the EU itself creates by backtracking on timelines in terms of when these regulations will be in effect or backtracking on some central logic. This creates a situation where the firms are already quite reactive in their way of thinking. It exacerbates the reactiveness of these companies and creates an incentive for them to be even more reactive.”

For proactive companies that have been diligently preparing for sustainability regulations for some time, the potential repeal of requirements means many of them feel as though they've been wasting their resources.

“I think there's also the concern among the proactive firms that they are being penalized for being proactive,” said Solitander. “They anticipated that the field would be leveled in a sense by these regulations. We've been doing a little bit of follow up research with them, and they feel that it [the Omnibus] is rewarding the lagging firms that have done very little if anything about these issues.”

Solitander related that the uncertainty about what will happen with the Omnibus means companies are looking for answers.

He explained that Finland is a fairly small country of about 5.5 million people with few firms that fall within the scope of either the CBAM or CSDDD. However, when the ministry had an open hearing, there were 300 participants. “Because of my research, I've been trying over the years to partake in similar hearings, and there have never been that many firms present. You could just hear that most of them really don't know where this is going. They are really uncertain what they should be doing if they have already prepared their CSDDD reports, not to mention not knowing what the implications of these proposed changes to CSDDD will be,” he explained.

Efficiency or Deregulation?

At the recent EU Competitiveness Council, several countries expressed an interest in extending Omnibus cuts to other regulations like the EUDR and ESPR, raising the possibility that the Omnibus could be the first step towards wider deregulation.

“All companies that are well prepared for these challenges know what the regulations are trying to grapple with,” said Solitander. “We should never forget what these regulations are trying to do. It's not just regulation for the sake of regulation; it's trying to grapple with these wicked problems that we have made very little progress on in almost 30 years or even longer. For those firms that have done nothing but wait for the regulation to manifest itself one day and then start reacting to that, the Omnibus at large - no matter if we talk about CSDDD or CBAM or whatever - is a welcome thing.”

Solitander highlighted that while the Omnibus is supposed to create efficiencies, it could lead to large corporations putting even more onerous responsibilities onto SMEs through contractual cascading.

“These small- and medium-sized companies feel they are not getting the support or guidance from the larger companies in terms of what is needed from them,” said Solitander. “They feel that the larger companies are taking a maximalist approach where they ask for all of the different data points and then just say, 'OK, we'll collect all the data points and then we'll see what we need from there.'” Solitander said that while there is room for improvement in the regulations, large-scale regulatory cuts are not the answer. In his opinion, most experts and researchers agree that improvements to the regulations could be achieved through technical changes to the regulations, rather than a complete renegotiation and rewrite.

Overall, said Solitander, many of the firms that have been the most proactive in their preparations are not very happy about the Omnibus.

“For them, it creates a situation where they cannot really trust that the regulatory environment is very stable,” said Solitander. “It gives them signals that they should become less proactive and more reactive, which is not fundamentally intentional with the voluntary approach of CSR at large.”

In addition, the ESG companies in the financial sector are not, at least in Finland and the Nordics, very impressed by the fact that most of their supply chain data points will not be available. “How they should assess risk and the cost of capital from an ESG perspective is very unclear,” said Solitander, who pointed out that many of those proactive firms have also invested significant resources in preparations that might no longer be necessary.

“Most of these regulations that we looked at are very data intensive,” said Solitander. “When we asked companies where they have made investments or where they intend to reorganize very heavily, it all had to do with large scale IT investments in new systems and new ways of structuring reporting processes. Many of them have already invested in new traceability systems and IT systems.”

Sustainability Regulations: Carrot or Stick?

Solitander noted that when it comes to incorporating things like human rights in the global supply chain, we can't simply wait for businesses to do the right thing. What has been institutionalized in the CSDDD “is what used to be considered the global minimum standard for human rights,” said Solitander. The United Nations Guiding Principles on Business and Human Rights were published in 2012. For 10 years, almost nothing happened in terms of European firms preparing for what was inevitable, he added, which is that at some point in time there would be regulations around human rights.

Regulatory action, according to Solitander, is therefore an inevitable consequence of inaction.

“For the CSDDD, it's really about minimum basic human rights as should be fulfilled in the supply chain,” he said. “It's not some kind of maximalist approach where you put super-high standards on what should be achieved.”

It's the same, to a certain extent, with the CBAM, he added. The CBAM was necessary because there was slow progress in voluntarily taking steps to address climate change. Solitander said that the possibility of civil liability in these regulations was another important catalyst for firms to begin meeting the due diligence obligations of regulations like the CSDDD. This is what we might call the “stick” approach. At the same time, the “carrot” approach has involved the EU drafting the regulations in such a way as to avoid telling firms on a granular level how to run their businesses. The carrot approach, however, has created its own challenges.

“The reason it's not written on that kind of detailed level is actually because that's what the companies themselves were lobbying for,” said Solitander. “On the one hand, the companies are calling for less-detailed regulation because they want to innovate both process and technology, and then at the same time they want more guidance and more details in terms of exactly how they should approach these things, exactly through which kind of systems, and so forth.”

In other words, the companies themselves are “creating a situation that is very uncertain or unsustainable because they both want and don't want detailed regulations.”

What Comes Next?

Solitander believes that the pressure on SMEs resulting from contractual cascading and lack of support has been behind some of the EU's attempts to temper regulatory obligations through the Omnibus, and that the unique situations in the countries that supported drastic regulatory cuts explains a big part of their vocal opposition to stricter regulations.

“In Germany, you have all of these small- and medium-sized suppliers in these large multinational chains, and they know even less how they're supposed to handle these kind of data requests that come in and where they should get the resources,” said Solitander. “There might not even be financial resources to understand what is entailed in the data points, how they should collect them, and so forth.”

They need support with that, both from the government and from the industry leaders. “That was always a risk in the kind of approach that the EU regulation had where contractual cascading was to a certain extent almost incentivized,” said Solitander, who notes that the burden of contractual cascading extends beyond the EU and into the very deepest levels of the global supply chain.

“If we think about the agricultural or mining supply chains, the contractual cascading ends with small-hold farmers in Ethiopia or something like that,” said Solitander. “How are they supposed to have the capacity or the resources to deal with all this data collection? I think that fear was real.”

A potential consequence of contractual cascading would therefore be a consolidation of smaller suppliers into something resembling plantations.

“If we take coffee as an example, we already had coffee companies here in Finland saying a couple of years ago that this will lead us to a kind of plantation-based model, because it's only the large plantations, these multinational suppliers, that have the capacity to provide us with the kind of granular data that we need,” said Solitander. “They weren't at that point building up the capacity for their suppliers to deal with it. I think that is a backlash that we are seeing here in the EU currently, especially from German medium-sized companies.”

Solitander believes that regardless of the outcome of the Omnibus, regulations are inevitable. Realistically, said Solitander, issues like climate change and human rights will persist if we don't deal with them now, and they will become increasingly complex over time.

“The longer you wait with these investments, the more complex the problems will be and the heavier the cost will actually be to deal with them,” he said. “I still believe that the companies who invest now, who feel penalized, will, in the end, bear the lowest cost for these issues.”

(Note: This interview has been edited for length and clarity.)

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