S04E02 - The Standards Paradox - Why More Rules Mean Less Action (Copy)

Episode 2: The Standards Paradox - Why More Rules Mean Less Action

Duration: 35 minutes
Host: Daniel Helmig

  Welcome to the Supply Chain Dialogues, Season Four, Episode Two. I'm Daniel Helmig, and if you listened to our first episode, you'll know we're diving deep into why achieving net-zero Scope 3 emissions by 2040 seems to be getting harder, not easier, despite all our best efforts.

Today we're tackling what is called "The Standards Paradox" – and honestly, the research findings are going to surprise you - but not in a good way. We discovered that companies with more extensive measurement and reporting standards actually correlate with less progress towards supply chain modifications necessary for emission reductions.

Today, we try something new. The study I conducted was anonymous and based on all major requirements for data and personal security. Several people, after they concluded the questionnaire, called me up and we had long conversations about what it would actually take to make an impact in Scope 3 net-zero ambitions. 

One of the callers and by now a dear friend, let’s call her Dr Elizabeth Schmitt, which is not her real name, was willing to speak to me in a recorded interview, under the condition that I take the interview transcript and feed it into a AI voice, remove her company's name, and any indication of the industry she is working with. So, you're listening now to the result of this necessary scherade, enjoy:

I'm now joined by Dr Schmitt, a former Supply Chain Director at a multinational company in Germany, who has participated in the study. And, like me, she is now an independent supply chain and sustainability advisor. Elizabeth, you've seen this from both sides – corporate implementation and advisory. When I first shared these findings with you, what was your immediate reaction?

To be frank, I wasn't entirely surprised, but seeing it quantified was sobering. During my tenure at our company, we implemented numerous standards, including the Greenhouse Gas Protocol, CSRD, and all these industry-specific frameworks. While they provided structure, I observed that teams became consumed with compliance rather than transformation. The statistical correlation of minus 0.334 that your research revealed? It validates what many of us suspected but couldn't prove.

Before we dive into the data, let's set the scene. When we talk about measurement and reporting standards, what exactly are we discussing?

We're talking about frameworks I mentioned before:  the GHG Protocol, which defines Scope 1, 2, and 3 emissions. Then there's the Corporate Sustainability Reporting Directive – CSRD, which is becoming the so-called gold standard in Europe. Add ISO standards, the Science-Based Targets initiative, and you've got a complex web. Each has merit individually, but collectively they create "standards overload."

Let's talk numbers. Our research approached 5400 German discrete manufacturing companies. We got a decent return, including input from your former corporate employer, higher than needed for this kind of statistical endeavour. And we found something that challenges what we thought we knew about standards and sustainability. The statistical analysis revealed a significant negative relationship between standards implementation and supply chain changes – a standardised regression coefficient of minus 0.334, significant at p less than 0.001. Now, statistics are much more your world than mine. Would you please translate this for our listeners? What does minus 0.334 actually mean in the real world?

It means that for every additional standard a company implements, its actual supply chain transformation decreases significantly. Imagine two companies: Company A implements five standards, Company B implements two. According to this research, Company B is likely making more actual progress towards reducing emissions. Company A is drowning in compliance, whilst Company B is probably just getting on with the job.

The research suggests that standards compliance activities may be consuming resources and attention that could otherwise be directed towards actual emission reduction initiatives. You've seen this firsthand, haven't you?

Unfortunately, yes. I remember one project where we spent eight months perfecting our Scope 3 measurement methodology. The team was brilliant – they created dashboards, automated data collection, and achieved perfect CSRD compliance. But whilst they were doing that, a smaller team at our competitor simply started working with their top suppliers to switch to renewable energy. Guess who reduced emissions faster?

This reminds me of something I discovered in my research into what academia calls "compliance theatre." It's when organisations focus more on appearing compliant than being effective. Recent cybersecurity research showed that companies spending more on compliance theatre actually had worse security outcomes. Sound familiar?

It's the same pattern. We found ourselves asking, "Are we measuring to improve, or measuring to demonstrate?" Too often, it was the latter.

The research also revealed something interesting about company size. Larger companies, despite having more resources, showed even stronger negative correlations between standards implementation and actual transformation. Why do you think that is?

Larger organisations have more complex compliance structures. When we implemented a new standard, it required coordination across multiple divisions, countries, and business units. The administrative overhead was enormous. Smaller companies might have one person who can pivot quickly and make real changes, whilst the multinational is still in committee deciding which consultant to hire for their standards implementation.

Our research suggests that companies heavily invested in standards reporting show less actual progress in supply chain modifications.

Think of it as opportunity cost in action. Every hour your sustainability team spends perfecting carbon accounting methodologies 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. Don't get me wrong, there is some brilliant software out there like Carbmee, a German company making Scope 3 reporting so much less complex, but in general, most software in this space is uninspired and workload-intensive.

I worked with one automotive manufacturer that had twelve full-time equivalents working on sustainability reporting. Brilliant people, working incredibly hard, producing beautiful reports. But their actual supplier engagement? Three part-time people handling 800 suppliers. The imbalance was staggering.

The research identified what I term "sustainability bureaucracy" – extensive reporting that impedes rather than enables progress towards net-zero goals. Can you give us a concrete example?

Certainly. Under CSRD requirements, companies must report on their entire value chain emissions with increasing granularity. I watched in my new role as advisor, one client spent six months developing a methodology to calculate Scope 3 emissions from employee commuting. Six months! Meanwhile, 85% of their emissions came from purchased materials, and they hadn't started engaging those suppliers because "we need baseline data first."

It's methodological perfectionism preventing practical action. And, the worst part is, that as bad as these regulations might be, what this client did was not necessary. They could have just started based on Pareto and be done with it.

You mention something crucial there – the Pareto principle in action. The research suggests that European regulatory frameworks exhibit fundamental misalignment. We're directing mandatory reduction efforts towards the minor segment – Scope 1 and 2 emissions – whilst leaving the primary source, Scope 3 emissions, subject only to reporting obligations.

It's a classic case of regulating what's easy to measure rather than what matters most. Scope 1 and 2 emissions are relatively straightforward – you control your own facilities and energy purchases. But for discrete manufacturers, Scope 3 emissions are typically 70-90% of their total footprint. Yet because they're harder to measure and influence, we've settled for just reporting them. And let’s not forget: these regulations are done by politicians who concentrate, per se, on their own territories, and the people they can direct. I would have said as well: the people that had voted them into office, but as we know, the democracy concept with the European Union is a difficult one - sometimes I wonder who voted these people that are over-regulating all of us, into power, and who gave them the direction? 

The research found that the current EU approach focuses resources on areas with minimal impact whilst neglecting the areas with maximum potential. How does this play out practically?

I have seen peers of ours in Europe that reduced their Scope 1 emissions by 50% – impressive headlines – but that might represent only 5% of their total emissions. Meanwhile, engaging just ten key suppliers could potentially reduce emissions by 30% overall, but there's no regulatory requirement to do so, just to report on it.

One fascinating finding from the research is that companies with more developed standards frameworks also tend to have more sophisticated economic evaluation processes. But these companies are taking what the research describes as "more measured, systematic approaches" rather than rapid transformation. Is this sophistication actually hindering speed?

There's definitely a maturity trap here. Advanced companies develop "analysis paralysis." They want perfect data, comprehensive cost-benefit analyses, and fully validated business cases before acting. Meanwhile, less sophisticated companies might simply see an opportunity and act.

I remember working with a multinational supplier that took eighteen months to develop the business case for switching to renewable energy in one region. A local competitor made the same switch in six weeks because their CEO simply decided it was the right thing to do.

The research reveals negative correlations across the board – not just standards, but also economic assessment and policy frameworks, all showing negative relationships with actual supply chain changes. What's driving this pattern?

I think we're seeing institutional capture in action. These frameworks were designed by consultants, academics, and policymakers – well-intentioned people, but often removed from operational realities. They've created a system optimised for measurement and reporting rather than transformation.

Speaking of consultants, you mentioned earlier that many companies in the standards space are "quite expensive and by far not the best"?

The sustainability consulting market has exploded. I've seen companies charge one hundred thousand Euros for a carbon footprint assessment that a good internal team could do in a month for the cost of software licences. Worse, these consultants often lack operational experience – they can tell you how to measure everything but struggle with practical implementation advice.

The research also found that companies cannot simply eliminate duplicate work when dealing with multiple standards, but they can significantly reduce it through strategic planning. What's your recommended approach?

Start with the most comprehensive framework – currently that's CSRD in Europe – and build from there. Don't implement standards incrementally; design your entire data architecture to handle the most demanding requirements. Most importantly, ensure every measurement serves an operational purpose, not just a reporting one.

Here's something that challenges conventional wisdom: the research found that companies with broader international presence appear better at managing complex regulatory requirements. This contradicts arguments for supply chain localisation as a sustainability measure. What's your take?

This finding initially surprised me, but it makes sense upon reflection. Companies operating across multiple regulatory environments develop good environmental management systems by necessity. They've learned to handle regulatory complexity, and that capability translates into better emission reduction execution.

The research suggests that exposure to diverse regulatory environments may enhance rather than impede a company's sustainability capabilities. Is this your take as well?

Absolutely. When I was at our company, our operations in California dealt with strict carbon regulations early on. That forced us to develop capabilities that we later deployed globally. Our German operations benefited from lessons learned in California, and our Asian operations used frameworks developed in Europe. Geographic diversity drove innovation.

So rather than pure localisation, the research suggests a "hybrid approach combining regional specialisation with global knowledge sharing." How might companies operationalise this?

As my example pointed out,  think of it as "glocal" sustainability management. You develop global frameworks and standards, but implement them through regional expertise. For instance, your energy transition strategy might be global, but your renewable energy sourcing is deeply local, leveraging regional suppliers and regulations.

Companies should create knowledge-sharing networks that transfer best practices across regions whilst allowing local adaptation.

Let's get practical. Based on this research, what should business leaders do differently? 

First, conduct a brutally honest audit of how your sustainability team spends its time. If more than 30% is on reporting and compliance, you've got a problem. Second, flip your investment priorities – spend 70% on supplier engagement and operational changes, 30% on measurement and reporting.

The research recommends developing "modified evaluation frameworks that better account for long-term environmental benefits." How does this work in practice?

Traditional cost-benefit analysis fails with sustainability investments because it can't properly value long-term environmental benefits or regulatory risk mitigation. Companies need "extended business cases" that include carbon pricing assumptions, regulatory change scenarios, and stakeholder value creation.

For example, when evaluating a supplier switch, don't just compare current costs. Factor in potential carbon taxes, regulatory compliance costs, and reputational benefits. Suddenly, the "more expensive" sustainable supplier becomes the obviously better choice.

The research also recommends implementing "more agile decision-making structures for sustainability initiatives." What have you seen?

Create dedicated transformation teams with decision-making authority and ring-fenced budgets. Don't run every sustainability initiative through normal procurement and approval processes – they're designed for steady-state operations, not transformation.

I've seen companies create "sustainability venture funds" where the CSO can approve investments up to 500,000 euros without committee approval, enabling rapid response to opportunities.

For larger companies, the research suggests they "must acknowledge that their scale creates unique implementation challenges." How should they adapt?

Large companies need to embrace decentralised implementation whilst maintaining a centralised strategy. Set clear emission reduction targets and give business units freedom to achieve them however they want. Stop trying to standardise everything – allow experimentation and learn from what works.

As we wrap up, let's discuss further solutions. The research suggests moving, and I quote, "beyond a compliance-oriented approach to standards implementation toward an integration-focused strategy where sustainability considerations are embedded in core business processes." How do we make this transition?

We discussed this for a long time, Daniel. In my view, start by asking different questions. Instead of "How do we measure this emission source?" ask "How do we eliminate this emission source?" Instead of "Are we compliant with this standard?" ask "Is this standard helping us reduce emissions faster?"

Make sustainability part of every business decision, not a separate workstream that reports quarterly.

The research found that "regulatory frameworks are fundamentally misaligned with operational realities." What would better regulation look like?

Focus on outcomes, not processes. Instead of mandating specific reporting methodologies, mandate emission reduction rates. Create regulations that reward transformation over documentation. Allow companies to achieve targets however they want, rather than prescribing methods.

Looking ahead, what gives you hope that companies can break out of this standards paradox?

I'm seeing leading companies recognise this challenge. They're creating dual systems – minimal viable compliance for regulatory requirements alongside aggressive transformation programmes focused on results. The companies that crack this code will have massive competitive advantages.

Any final advice based on your experience?

Remember that standards are tools, not objectives. The objective is net-zero emissions. If your standards implementation isn't accelerating progress towards that goal, you're doing it wrong. Be brave enough to challenge conventional wisdom and focus on what actually works.

Today, we've explored the amazing finding that more measurement and reporting standards often mean less actual progress towards net-zero emissions. It's a paradox that challenges fundamental assumptions about how sustainability governance should work.

Key takeaways: Standards compliance can become a "sustainability bureaucracy" that diverts resources from actual transformation. Companies with international presence often perform better because they've learned to handle complexity. The solution isn't abandoning standards but using them strategically whilst prioritising operational changes over compliance theatre.

The research reveals systemic barriers across standards implementation, economic assessment, and regulatory frameworks – all showing negative relationships with actual supply chain changes. This suggests we need a fundamental revision of how organisations approach corporate sustainability governance.

Next episode, we'll dive into what I call "The Economics of Inaction" – examining Hypothesis 2 of the research and why traditional cost-benefit analysis systematically undervalues sustainability investments. We'll explore how conventional financial frameworks are fundamentally misaligned with long-term environmental imperatives, and what companies are doing to fix their evaluation methodologies.

Elizabeth, thank you for being with us today.

Thank you, Daniel. These conversations are crucial for moving beyond compliance theatre towards real transformation. And it is a pity that we can not have them in the open, but have to resort to this anonymous format.

Until next time, remember: we're not measuring our way to net-zero – we're transforming our way there. The question is whether our standards are helping or hindering that transformation. In the next episode, we will look at the economics of Inaction and why Cost-Benefit analysis in its current form kills climate action.