Sustainability has become a mainstream topic or even a cliché in recent years. Within the corporate world (and beyond), sustainability appears as an inevitable theme. Everyone, whether more or less informed or convinced, knows that there is some reason behind this trend. Some call it a fad, while others argue that sustainability is more than just an imperative—it is a scientific necessity, a license to operate, and, in some cases, a source of competitive advantage. But is it?

In this brief article, I aim to reflect on this topic: Is sustainability, as imposed by European regulations, an advantage or a distraction from corporate strategy?

In the Strategy and Sustainability classes at Católica, we observe the evolution of this trend among various audiences: undergraduate, master's, and executive students. The first group tends to be more convinced of the importance of sustainability, while the latter presents a wider range of opinions. Regardless, today—unlike a few years ago—sustainability is an essential part of the academic curriculum in any general management course.

Additionally, discussions on sustainability topics have evolved from the question "Why is this important?" to "How can we implement it?" Possibly, not because we are all convinced that sustainability is good for business, but primarily because it has become an imperative for stakeholders. Customers and consumers, society, investors and financiers, employees (current and future), and the public sector—with its regulations—are likely the external forces that most compel companies to act with sustainability in mind.

Among all these stakeholders, the public sector has been the one to most profoundly change the rules of the game in the past two to three years. In the European Union, in particular, new ESG legislation requires the financial market (investors and financiers) to report their alignment with ESG criteria (which, in turn, imposes reporting obligations on the companies in their portfolios). Additionally, a significant portion of large companies must now report their ESG alignment according to the European taxonomy and the reporting and due diligence rules outlined in the CSRD and CSDDD. This regulatory shift has been perhaps the biggest driver behind the change in classroom discussions: we no longer debate why sustainability is important. Since it is now a requirement, the focus is simply on implementation.

This represents a radical shift in how companies approach sustainability, something we frequently discuss in class. On the one hand, the increased reporting obligations and adherence to sustainability criteria have clear benefits. On the other, sustainability risks becoming a mechanical exercise, potentially detached from strategy and competitive advantage. We risk turning Sustainability Directors into reporting specialists rather than contributors to a corporate strategy that generates real impact. Instead of shaping sustainability as a strategic driver, they might become compliance managers, ensuring social and environmental accountability but not driving meaningful change.

In the following paragraphs, I will share what I consider to be the three most positive aspects of this legislative package, as well as those that could pose the greatest risk to companies' ability to align strategy with sustainability.

Positive aspects of companies' contribution to sustainability:

1. This legislation increases transparency and reduces greenwashing in sustainability reporting, as all companies involved must report according to rules aligned with their core business. Companies do not simply report the actions they choose or only their positive impacts but must disclose real, systematic data, which is audited by accredited external entities.
2. Standardized reporting with clear and uniform criteria enhances the comparability of companies' sustainability profiles. Companies must not only follow the same reporting standards but also use the same methodology, increasing market confidence in the disclosed data. Additionally, the collected data can be highly useful for corporate decision-making (particularly strategic decisions).
3. The double materiality principle is a revolutionary aspect that has definitively changed how companies approach sustainability. Since this exercise requires broad stakeholder consultation, companies are compelled to reflect on their core business when identifying material topics. This process not only assesses the financial impact (risks and opportunities) of sustainability on their accounts but also evaluates the company's impact on the world, making it a profoundly transformative approach.

Risks for the Strategic Alignment with Sustainability and Creation of Competitive Advantage

1. The burden and bureaucracy of the process drain energy from strategy. In conversations with companies, we have observed that even for the largest ones, the weight and demands of the reporting process can divert energy away from viewing sustainability as a tool for strategic development. It starts to become just another internal process within the company.
2. Sustainability becomes an accounting exercise rather than a driver of competitive advantage and differentiation. When companies adopt global agendas that apply across all sectors—such as the Sustainable Development Goals (SDGs)—they can align themselves with globally relevant priorities and define their strategy based on how their core business can contribute to humanity's most pressing needs. ESG legislation makes an effort to introduce relevant themes into corporate reporting by proposing detailed material topics, but it does not, in itself, promote strategic thinking. Instead, it primarily fosters compliance and the documentation of the status quo (despite including strategic reflections on material topics and data that can support decision-making).
3. Although companies assess risks, impacts, and opportunities based on the new reporting framework, the level of detail in material reporting is far removed from strategic development. The strategy should focus on select few topics that can create differentiation from competitors and unique opportunities to contribute to social prosperity and market leadership. Strategy development is a key driver of corporate competitiveness and growth—something that is not an evident outcome of ESG reporting alone.

Given this, and considering the significant virtues of the new EU reporting obligations, which I fully support, I want to highlight a critical point: the companies that simply comply with these rules will not necessarily thrive in the market. They will merely secure their license to operate.

Despite the extended reporting deadlines and the reduced scope of companies required to report—a result of the recently approved Omnibus Simplification Package by the European Commission—we know that, in general, companies will comply with the new European sustainability reporting framework. Some will do so out of obligation, while others will align with it as a market positioning strategy.

If almost all companies comply, not all will be able to use the results of materiality exercises to shape their strategy. This is where our reflection begins: Is my company approaching sustainability as an obligation or as a potential market advantage with a positive impact on the world?

The answer to this question will determine whether we belong to the group of those who comply or to the group of those who understand that, beyond a license to operate, sustainability is a significant business opportunity. Therefore, it should guide the strategic exercise from the ground up in any organization.

Have a great and impactful week!

Filipa Pires de Almeida
Executive Director
Center for Responsible Business & Leadership