S04E4: The Policy Paradox - Why Regulations Reduce Action

Daniel: Welcome back to "The Supply Chain Dialogues." I'm Daniel Helmig, and I'm here with Aimee, my AI research assistant. Over the past three episodes, we've uncovered some uncomfortable truths about why achieving net-zero by 2040 is getting harder, not easier. We've seen how measurement standards can reduce actual action, and how traditional economics systematically kills climate investments.

Aimee: Today we're examining the final piece of this troubling puzzle – Hypothesis 3 from your research. We're looking at whether current external policies and regulations actually incentivise the supply chain changes they're designed to encourage.

Daniel: And Aimee, I have to warn our listeners – I'm quite miserable about what we discovered. When I started this research, I expected to find that regulations were helping, even if imperfectly. What we found is that current regulatory frameworks are not just ineffective – they're actively counterproductive.

Aimee: The statistical evidence is quite stark. The research revealed a negative relationship between policy perceptions and implementation activities, with a beta coefficient of minus 0.290, significant at p less than 0.001.

Daniel: In plain English, that means companies with more positive perceptions of regulatory frameworks actually showed less implementation of supply chain changes for emission reduction. It's the complete opposite of what regulations are supposed to achieve.

Aimee: And this finding has only a weak explanatory power – just 10.8% of the variance in companies' willingness to adapt supply chains for emission reduction. This suggests that current policy mechanisms are largely irrelevant to actual corporate decision-making.

Daniel: The regulatory framework variable wasn't even statistically significant. Companies simply don't see existing regulations as relevant factors in their decision-making about supply chain changes. After decades of EU climate policy, regulations are basically noise in the system.

Daniel: The European Union has created a regulatory framework that exhibits what can only be described as fundamental misalignment. We're witnessing a Pareto inefficiency of staggering proportions.

Aimee: Can you explain what you mean by Pareto inefficiency in this context?

Daniel: Certainly. The EU approach mandates reduction targets for Scope 1 and 2 emissions, which typically represent, as we now mentioned many times, only 10-30% of total corporate emissions, whilst only requiring reporting for Scope 3 emissions, which represent the rest of the problem. It's like focusing all your fire-fighting efforts on the garden shed whilst the main house burns down.

Aimee: The research found this represents a striking deviation from effective prioritisation principles. How did this happen?

Daniel: It happened because politicians and bureaucrats regulate what's easy to control in the confines of their few states rather than what actually matters. Scope 1 and 2 emissions are straightforward – companies control their own facilities and energy purchases. But because Scope 3 emissions are harder to measure and influence, they've settled for just reporting them.

Aimee: And this creates what the research terms "sustainability bureaucracy."

Daniel: Exactly. Extensive reporting that impedes rather than enables progress towards net-zero goals. Companies are channelling enormous resources into compliance activities rather than emission reduction initiatives. We've created a system where appearing compliant is more important than being effective.

Aimee: The research suggests that regulatory compliance activities may compete with actual implementation efforts for organisational resources and attention.

Daniel: And this is where I get genuinely frustrated with the EU leadership. We have some of the smartest policy minds in the world, yet they've created frameworks that systematically work against their stated objectives. The CSRD, for example, creates massive reporting burdens whilst failing to mandate the very actions that would actually reduce emissions.

Aimee: Speaking of the CSRD, can you explain how this plays out in practice?

Daniel: Under CSRD requirements, companies must report on their entire value chain emissions with increasing granularity. I've watched companies spend six months developing methodologies to calculate Scope 3 emissions from employee commuting – six months! – whilst 85% of their emissions come from purchased materials, and they haven't started engaging those suppliers because "we need baseline data first."

Aimee: That's methodological perfectionism preventing practical action.

Daniel: It's worse than that. It's regulatory-mandated methodological perfectionism. The regulations are actively preventing practical action. And here's what really angers me – this wasn't necessary. Companies could have used Pareto principles, focused on the 20% of suppliers causing 80% of emissions, and made real progress. Instead, they're trapped in compliance theatre.

And let's address the elephant in the room, Aimee. Sometimes I wonder who actually voted these EU officials into power, and who gave them the mandate to over-regulate European companies whilst China builds coal plants until their massive investments in renewable energy are stable enough and the US focuses on domestic manufacturing.

Aimee: You're referring to what some call the "democratic deficit" in EU climate policy?

Daniel: Precisely. These regulations are created by people who concentrate on their own territories and the voters they're accountable to. But the democratic concept within the European Union is complicated, to put it mildly. I genuinely wonder who voted these people into office and who gave them the direction to create this regulatory maze. And - even worse, who in the local governments which form the EU keep an eye on this nonsense? You see, if you look at the body of regulation of the EU, you will be amazed to see, how much additional legislation is coming from the EU member states. And - their is only partial alignment, if you look at the implementation patterns between the states. It all reminds me of the fable of the emperors new clothes - in reality, the whole gang of experts and politicians standing there in Brussels stark naked.

Aimee: ok, let’s get back to the research. It found that the weak relationship between policy perception and implementation suggests that existing regulatory approaches fail to drive corporate sustainability transformation effectively.

Daniel: The R-squared of 0.108 means that all this regulatory effort explains barely 11% of what companies actually do. Think about that – decades of EU climate policy, thousands of pages of regulations, enormous compliance costs, and it explains 11% of corporate behaviour. It's a massive policy failure.

Aimee: And this misalignment appears to be getting worse rather than better.

Daniel: Absolutely. The recent "stop the clock" directive postponing CSRD reporting deadlines by two years shows that even the EU recognises its own regulations are unworkable. But instead of fixing the fundamental misalignment, they're just delaying implementation. 

Aimee: The research also found that this regulatory ineffectiveness goes beyond industry boundaries. It's not about particular sectors – it's about systemic regulatory failure.

Daniel: Right. Whether we're talking about automotive, electronics, or mechanical engineering, the fundamental tension between regulatory requirements and operational realities remains constant. The regulations are structurally misaligned with how businesses actually operate.

Aimee: And larger companies, despite having more resources, actually face greater challenges with regulatory compliance.

Daniel: Because larger companies have more complex regulatory exposure across multiple jurisdictions. They're dealing with German supply chain due diligence laws, French territorial impact assessments, and EU CSRD requirements simultaneously. It's regulatory chaos.

Let me give you a concrete example of this regulatory failure, Aimee. I worked with a German automotive supplier that reduced its Scope 1 emissions by 50% – impressive headlines, great press releases, full regulatory compliance. But that represented only 5% of their total emissions.

Aimee: Meanwhile, what about their Scope 3 emissions?

Daniel: They could have engaged just ten key suppliers and potentially reduced their total emissions by 30%. But there's no regulatory requirement to do so – just to report on it. So they invested millions in their own facilities to achieve a 5% improvement whilst ignoring the 30% opportunity of really reducing emissions in their supply chain.

Aimee: Because the regulations don't align with the actual emission sources.

Daniel: Exactly. And this isn't an accident – it's the predictable result of regulatory frameworks designed by people who don't understand operational realities. Politicians want to regulate what they can control directly, not what actually matters for climate outcomes.

Aimee: The research found that companies with broader international presence actually performed better on emissions management. What does this tell us about regulatory approaches?

Daniel: It tells us that exposure to diverse regulatory environments forces companies to develop more sophisticated sustainability approaches. Companies operating across multiple regions learn to navigate varied compliance requirements and stakeholder expectations, making them better at actual sustainability management.

Aimee: So geographic diversity becomes a strategic advantage rather than a compliance burden.

Daniel: Precisely. But current EU regulations treat international operations as a liability to be controlled rather than an asset to be leveraged. The regulatory focus on supply chain localisation completely misses this insight.

Aimee: And this connects to the broader finding that regulatory frameworks show weak associations with actual supply chain implementation measures.

Daniel: The regulatory framework variable in our analysis wasn't even statistically significant. Companies simply don't see existing regulations as relevant to their actual decision-making. That should be a wake-up call for policymakers, but I doubt they're listening.

What particularly angers me, Aimee, is how current regulations systematically misallocate corporate resources away from climate action towards compliance activities.

Aimee: Can you quantify this resource misallocation?

Daniel: Every hour sustainability teams spend perfecting carbon accounting methodologies to meet regulatory requirements is an hour they're not spending negotiating renewable energy contracts with suppliers. Every euro spent on compliance software is a euro not invested in supplier transformation programmes.

Aimee: And larger companies face even greater resource diversion.

Daniel: Because they have more sophisticated compliance structures. When a large company implements a new regulatory requirement, it requires coordination across multiple divisions, countries, and business units. The administrative overhead is enormous, whilst a smaller company might simply make practical changes.

Aimee: And this connects to the finding that regulatory compliance activities may compete with actual implementation efforts for organisational resources and attention.

Daniel: It's not "may compete" – they definitively compete. I've seen it happen repeatedly. Companies facing regulatory deadlines postpone supplier engagement projects to focus on compliance reporting. The regulations are actively preventing climate action.

Aimee: So what should policymakers actually do differently? 

Daniel: The research provides some clear recommendations, though I'm not optimistic about political willingness to implement them.

Aimee: The research suggests several approaches. First, recalibrating regulatory focus to better align with Pareto principles, directing more attention to Scope 3 emissions.

Daniel: Which means abandoning the current approach of mandating reductions only for Scope 1 and 2 emissions. Politicians need to focus regulatory pressure where it can actually make a difference – on supply chain emissions, not just direct emissions.

Aimee: The research also recommends developing targeted interventions to address the specific barriers created by current regulatory frameworks.

Daniel: This means designing regulations that support transformation rather than just documentation. Instead of requiring detailed measurement of every emission source, focus on mandating engagement with the largest emission sources in supply chains. Focus on output, not process. We have brilliant metrics systems by the ISO organization, that could be used rather than the mambo-jumbo of any organisation feeling equipped to define. I know that they all mean well, but many studies have shown that real business change only happens when the rules are clear and monolithic.

Aimee: And creating financial incentives or changing boundary conditions that help offset the disadvantages that sustainability initiatives face in conventional evaluations.

Daniel: Market entrance requirements, tax incentives for long-term sustainability investments, and regulatory requirements that force companies to account for environmental externalities in their financial planning. Make the economics work for climate action rather than against it.

Aimee: The research emphasises the importance of balancing transparency requirements with practical implementation considerations.

Daniel: Stop increasing reporting obligations that paradoxically impede progress toward emissions reduction goals. The finding that standards implementation shows a negative relationship with actual supply chain changes should be a warning to policymakers, not an invitation to create more standards.

Aimee: And developing more action-oriented frameworks that emphasise transformation rather than documentation.

Daniel: Exactly. As I said: Measure outcomes, not processes. Mandate emission reductions, not reporting methodologies. Let companies achieve targets however they want, rather than prescribing specific measurement approaches. Just have one metrics system to use - and let this be ISO.

As we wrap up this episode, I want to be clear about the stakes here. We've now examined all three pillars of current climate policy – measurement standards, economic frameworks, and regulatory approaches – and found that each systematically works against rapid emission reduction.

Aimee: The pattern across all three hypotheses suggests we need fundamental revision of how organisations and policymakers approach corporate sustainability governance.

Daniel: The current approach is not just ineffective – it's counterproductive. We're running out of time for incremental reforms to broken systems. The 2040 or any other timing deadline from 2035, to 2035, or god forbid, 2050:  net-zero deadline requires transformation, not compliance theatre.

Aimee: And the research shows this isn't about particular companies or industries – it's about systemic barriers that transcend organisational and sectoral boundaries.

Daniel: Which means the solutions need to be systemic too. We need new measurement approaches that focus on outcomes rather than processes, new economic frameworks that properly value long-term sustainability benefits, and new regulatory approaches that mandate results rather than documentation.

Aimee: For our listeners, what's the key takeaway from this four-episode series?

Daniel: The key takeaway is that good intentions aren't enough. Smart people working within broken systems will produce broken outcomes. If we're serious about net-zero by 2040, we need to fundamentally rethink our approaches to standards, economics, and regulation.

Current approaches aren't just failing – they're actively preventing the transformation we desperately need. And until European policymakers acknowledge this reality and make fundamental changes, we'll continue to see more compliance theatre and less climate action.

Next episode, we'll begin exploring what actually works – the alternative approaches that can accelerate rather than impede the transition to net-zero supply chains.

Stay safe, be bold, and see you in two weeks. These are the Supply Chain Dialogues, produced and copyrighted by Helmig Advisory in 2025.