Integrating New Sustainability Regulations With Innovative and Flexible Business Models: A Path To Future Success

Integrating New Sustainability Regulations With Innovative and Flexible Business Models: A Path To Future Success | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Integrating New Sustainability Regulations With Innovative and Flexible Business Models: A Path To Future Success Matic Čufar, Andreja Primec, Arun Elias, Grygorii Kravchenko, and 1 more This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-7084039/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract In recent years, legislation on sustainability has been adopted by the EU and national authorities to increase sustainable behavior among companies, protect nature, and safeguard people. With the implementation of regulations, stakeholders in the economy are increasingly compelled to adopt a sustainability mindset and integrate it into their operations. This integration influences and shapes corporate governance, transform-ing their business models. In this article, we aim to examine the current legislation concerning sustainabil-ity and its impact on economic business models. We will explore how these laws shape business practices, encourage sustainable development, and drive changes in corporate strategies and governance structures. (JEL: Q56, G34, M14) CSRD Business model Flexibility Sustainable Corporate Governance Figures Figure 1 Introduction In recent years, the implementation of sustainability legislation such as CSRD (CSRD), SFRD (Sus-tainable Finance Disclosure Regulation (SFRD), and the Taxonomy Regulation (Taxonomy) has be-gun at the European Union (EU) level. Each of these legislative measures has brought specific chang-es to the reporting of companies and the implementation of sustainability principles within business practice and corporate governance. Reporting data in compliance with the legislation allows companies to present their sustainability profile to their key stakeholders. Companies wishing to meet such legislation's requirements must thoroughly integrate these requirements into their corporate governance. This often requires fundamental changes to their core principles and business models, adapting them to sustainability demands and providing companies with additional opportunities for progress and growth (Primec & Belak, 2022). This article aims to define how legislation influences changes in companies' business models. With this article, we strive to analyse the level of sustainability data reporting in practice following the requirements of NFRD, CSRD. Based on this reporting, it is possible to assess the extent to which sustainability legislation is transforming corporate governance and encouraging companies to adopt innovative business models to meet sustainability requirements. The article is structured as follows: it begins with an introduction that presents the scope, objectives, methods, results and conclusions. It includes a description of the theoretical framework and literature, which examines existing research and key concepts. This section outlines the sustainability regulations and their integration with business models. Additionally, it presents the idea of corporate governance and the MER model of integral management and governance. The next chapter, materials and methods, details the techniques used in the research. After that, follow the results chapter, discussion, and finally, the conclusion, which interprets the results and considers their broader application in future research and findings. 1.1 Overview of Corporate Governance Theories Interest in the study of corporate governance has grown dramatically over the past twenty years. The reason for the increase is most likely attributable to past events that have already been mentioned above (such as corporate failures, economic crises, natural disasters and inadequate corporate management policies). Such events surprised the public and increased the population's doubts about the economy's stability. To avoid uncertainty and improve the economy's strength, many initiatives have been observed in the EU over the past years to create a more stable and secure environment for managing economic activities. Such initiatives include Directive 2014/95/EU and Directive 2017/828. The increase in shareholder responsibilities and rights, as well as the involvement of other stakeholders, have increased the range of the main objectives of the organisations and expanded the circle of stakeholders that influence the companies' functioning. EU action in the field of corporate governance pursues the purpose of adapting the main directions of companies to go beyond purely financial objectives and to steer companies towards achieving objectives that support the long-term sustainability of companies (Freeman, 2010). In corporate governance, it is possible to find several theories that study the connections, factors and consequences of the companies' activities. In recent years, two dominant theories have been found in management and corporate governance. The first theory relates to shareholder theory, and the second refers to stakeholder theory. Čufar & Primec, 2022 and Mousa & Arslan, 2023 notes that corporate social responsibility oscillates between two necessary extremes of social behaviour. The first extreme concentrates the liability of companies solely on their shareholders. The main objectives of companies at this stage are focused on achieving short-term goals of maximising profits for their shareholders. The opposite extreme places corporate responsibility in a broader context and extends CSR to a more comprehensive range of individuals interested in companies (such as shareholders, management, employees, suppliers, customers, interest groups, trade unions, competitors, local environment, etc.). In the context of stakeholder theory, companies do not only focus on achieving short-term financial goals to satisfy shareholders (first extreme) but also adjust their governance and management decisions, resulting in particular companies' functioning according to long-term goals, which consist of the interests of different stakeholders (second extreme). Between the two dominant theories mentioned, there is also the so-called Enlightened Shareholder Value theory, which represents an intermediate approach between them. All three theories will be discussed in more detail in the following sections (Argandoña, 1998; Čufar & Primec, 2022). 1.1.1 Shareholder Theory Shareholder theory is based on the idea that the primary goal of individual companies is to maximise shareholder value. The governance and management of individual companies thus prioritise the companies' shareholders over the interests of other stakeholders, such as suppliers, customers, customers, etc., when making decisions. Shareholder theory advocates that the shareholders of companies are the ultimate owners. As a result, companies must do everything in their power to maximise the value of their owners. The shareholders' value can be increased by paying dividends or by raising the value of the shares. The decisions taken by the members of the board of directors should, therefore, be based on the objective of increasing the value of the share or the value of the dividend. Compared to stakeholder theory, numerous studies have identified the strengths and weaknesses of shareholder theory—four key aspects in the existing literature place shareholder theory ahead of stakeholder theory (O'Connell & Ward; 2020): • Agency perspective: The perspective is based on the so-called contractual obligation of companies to their owners (shareholders). Members of the board of directors of companies are contractually obliged to consider the claims of shareholders (owners of companies) before the claims of other stakeholders. The perspective equates the long-term performance of companies with their financial performance; • Control perspective: The perspective defines a company's shareholders as having a significant influence based on their ownership interest in companies and are, therefore, the most essential stakeholders. With the right to vote, shareholders have influence and can thus influence the decision-making of the management of companies. As the most important stakeholder, shareholders want to retain control over the results of management (management), so members of the management and control of companies should work towards maximising shareholder wealth; • Residual Claims Perspective: The perspective defines that corporate shareholders are crucial because they provide companies with the resources they need for their business. By providing investment funds to companies, shareholders also own them. With the funds invested, shareholders bear a greater risk than other stakeholders. Any decision taken by the board of directors has a direct impact on the assets of the shareholders. As a result, board and supervisory board members work toward maximising shareholder wealth; • Alignment with social wealth: The perspective argues that the benefit for other stakeholders increases by maximising shareholder value. By striving to increase revenues, produce, and offer products and services, companies also meet the needs of different stakeholders, such as suppliers, customers, etc. For example, when companies seek to reduce labour costs by educating their employees, they introduce measures that benefit employees, companies, and their shareholders. Despite the above perspectives, which advocate shareholder theory as the only fundamental theory for increasing the value of companies and ensuring their long-term performance, several views have emerged in practice that do not agree with these perspectives. Shareholder theory advocates primarily increasing the financial performance of companies and thus maximising shareholder value. In addition to financial indicators, other aspects (such as social, environmental, and governance) that represent the performance of individual companies from a more comprehensive perspective must be considered when evaluating their performance. A comprehensive approach by companies, considering all their stakeholders, contributes to a more balanced and sustainable development of companies. With the change in the role of corporations in the wider society, companies are also required to consider a broader view of their management. Companies in the wider society are treated as economic entities and play a key role in solving socially responsible and environmental issues. This has also increased the expectations of key stakeholders for companies. The wider society, therefore, expects responsible and sustainable corporate management from companies. This has increased social pressure on companies to act responsibly and sustainably. In addition to the interests of key stakeholders, existing and upcoming legislative frameworks and regulations encourage companies to consider broader interests, such as maximising shareholder value. There is also an increasing development of sustainable investments, which shows investors' growing interest in companies that follow sustainable practices. Investors increasingly focus on companies' long-term performance and sustainability, including ESG factors (O'Connell & Ward; 2020). 1.1.2 Enlightened Shareholder Value Theory To address the above concerns of shareholder theory, a new enlightened shareholder theory has emerged, which balances financial objectives with social responsibility and sustainability in the corporate governance approach. The enlightened shareholder theory recognises that a company's long-term performance depends not only on financial indicators but also on its ability to consider other stakeholders' interests. The theory's approach still focuses on maximising shareholder value, but it considers a broader set of factors than just the financial performance of companies. The theory argues that the long-term interests of company shareholders are often aligned with the long-term interests of other company stakeholders. In addition to maximising the shareholders' value, company management boards also consider the interests of different stakeholders in their management, try to harmonise them as much as possible, and introduce them into their management process. The enlightened approach encourages companies to consider long-term sustainability and performance, not just short-term financial gains. Companies also incorporate sustainable practices into their operations that benefit both shareholders and society at large (Freeman, 2010; O'Connell & Ward; 2020). Despite the above, the theory of enlightened shareholders contains certain flaws. Although companies also consider other stakeholders' interests in their operations, the ultimate goal is still to maximise their shareholders' value. As a result, companies' boards continue to make decisions that are in the best interests of shareholders and may not be the best for other stakeholders. Although enlightened theory encourages consideration of the long-term effects of corporations, the short-term thinking of corporate management in terms of financial performance may still be prevalent. Such measures may neglect the long-term sustainability and well-being of other stakeholders. Compared to shareholder theory, enlightened shareholder theory represents a step forward in thinking about and promoting sustainable practices. Still, compared to stakeholder theory, it presents certain limitations, especially regarding the extent of corporate responsibility to all its stakeholders, the measurability of goals, and the emphasis on ethics and social responsibility (Freeman, 2010; O'Connell & Ward; 2020). 1.1.3 Stakeholder Theory Changes are constantly taking place in the corporate governance environment. Companies must understand and adapt to individual changes to maintain and operate successfully. As long as changes in the environment are small and implemented at the personal level, company managers can only react appropriately to minor changes in management. However, if the number of external changing factors affecting companies increases, companies must respond accordingly with more drastic changes that can fundamentally change the organisation's current operations. For companies to react promptly to such changes, members of the management board of companies need to understand the changing individual relationships of the groups. To understand the external factors and group relationships that influence companies, it is necessary for companies first to identify and know all of their key stakeholders Freeman, 2010 and Freeman, 1984 defines key stakeholders as: "Any group or individual who can or has influenced the achievement of the goals of a company." (Tse, 2011) cites many studies that report positive results in implementing governance policies that focus more on the key stakeholders of companies in terms of content and implementation rather than just their shareholders. This type of management has several advantages, including employees' focus on companies' performance and suppliers' willingness to work more closely together and share their knowledge. A business focused on key stakeholders also increases the competitiveness of companies. By connecting more closely with key stakeholders, companies will establish unique relationships that will focus solely on the operations of a specific company. In-depth cooperation between companies and their stakeholders represents a unique relationship that brings companies a competitive advantage. The author also cites research findings that have shown that companies that adjust their management according to the interests of key stakeholders also achieve better financial results (Tse, 2011). Among the weaknesses of stakeholder theory is the variety of goals that companies face if they engage with a more significant number of stakeholders and their interests. As an example of this type of management, the author states that company managers could lose focus on key objectives due to a more significant number of key stakeholders. Criticism of the theory also includes the problem of evaluating the added value of individual stakeholders and their impact on business. Indeed, to manage effectively, companies should only consider those stakeholders who bring added value to companies. The weakness of stakeholder theory is its predominantly theoretical-oriented side and lack of implementation in the practical environment (Tse, 2011). Managing the interests of key stakeholders is the alignment of the various relationships that create value in companies. Companies represent a key link of cooperation between stakeholders (such as customers, suppliers, employees, investors, the broader company, etc.) and the management of individual companies, creating added value. To better and more thoroughly understand the functioning of companies, it is necessary to examine the individual relationships between stakeholders in more detail (Freeman, 2010). From the point of view of strategic management, companies mustn't leave out any individual or group that can influence them, or vice versa, when identifying key stakeholders. To that end, companies must, in practice, cover the broadest possible range of individuals or groups that fall within that definition of stakeholder when selecting and identifying key stakeholders. When selecting stakeholders, companies must also exclude individuals or groups with little or no influence over individual companies. Companies must also exclude stakeholders from their stakeholder circle who have entirely different values and plans for managing their activities than companies (Freeman, 1984; Freeman, 2023). Companies must establish an appropriate cooperation system to bridge the stakeholder theory from a theoretical basis and apply it practically. Freeman, 1984 and Freeman, 2023 assumes that to use stakeholder theory in practice successfully, companies should consider at least the following three key aspects: • The first aspect is – rational identification of key stakeholders by companies; • The second aspect is – proper understanding of the organisational process by companies, which will be used for implicit or explicit management of stakeholders; • The third aspect is that to engage with stakeholders successfully, companies need to understand the transactions and negotiations between individual companies and stakeholders and determine whether the negotiations and transactions carried out correspond to the choice of critical stakeholders of each company and the organisational process. To effectively set up a stakeholder governance/management system, companies should first identify a network of their key stakeholders. Companies determine the latter primarily based on Freeman's above definition of stakeholders (Freeman, 1984). They include all individuals and groups meeting this company's definition as their stakeholders. Freeman, 1984 and Freeman, 2023 proposes that companies first make a historical analysis of the environment as a starting point for developing an essential stakeholder structure. Suppose companies cannot prepare a historical study. In that case, the author suggests that companies use a generic stakeholder distribution to identify, adjust, or allocate key stakeholders accordingly. 1.2 Concept of Sustainability in Business As follows from the definition of sustainable development, sustainable corporate governance also focuses on adopting strategies and decisions that enable the long-term successful operation of the company and its existence. The European Commission identifies sustainable corporate governance as corporate governance that considers the consequences of its business decisions on the environment (including climate biodiversity), society, people and the economy. It focuses on long-term sustainable value creation rather than short-term financial value (European Commission, 2021). In the economy, by-products such as environmental pollution, human rights violations, etc., created when a product or product service is co-created, are treated as external externalities. Effective, sustainable corporate governance advocates that companies identify their external externalities, prevent or reduce them, and subsequently eliminate them in the shortest possible time. Only when companies take responsibility and take appropriate measures to eliminate their externalities does governance become holistic and sustainable, consequently stimulating other factors of the environmental and social areas of the ESG network (Pacces, 2021). When reviewing research papers dealing with the concepts of socially responsible and sustainable management, it is possible to notice a different application of the definition of the term. The terms "social responsibility" and "sustainability" are often interchanged and used in the same sense in connection with the activities of individual companies. Due to the uniform use of the term in different scientific works, the distinction between the two concepts under consideration is lost (Montiel, 2008). While corporate social responsibility refers to the assessment of corporate governance in terms of its current (or past through the analysis of past business results) impact on the broader society, sustainability refers to the operation of companies over a more extended period (Meseguer-Sánchez et al., 2021). It includes introducing long-term strategies that enable companies to perform well in the long term from the perspective of social, environmental, and economic factors (Ashrafi et al., 2018). Corporate social responsibility often aims to improve social well-being, which increases the sustainability of companies' operations in the long run. It usually rises above the statutory requirements set by the legal framework and operates voluntarily (Christensen et al., 2021). Compared to sustainable corporate governance, CSR does not involve the development of strategies that would focus on the performance of companies in the long term, taking into account and integrating environmental, social and economic factors (Ashrafi et al., 2018). Within socially responsible management, sustainable management can be an intermediate or an end goal (Ashrafi et al., 2018). Sustainable corporate governance is thus a concept in which non-financial reporting also plays an important role, incorporating both short-term and long-term integration and providing a link between environmental, social and economic factors (Dyllick & Hockerts, 2002). 1.3 Innovative business models Sustainable innovation requires the inclusion of environmental, social, and economic aspects in the company's processes from the initial idea to commercialisation, necessitating systemic changes beyond incremental adjustments (Boons & Lüdeke-Freund, 2013). Innovative business models are crucial for implementing sustainable innovations, as they offer a comprehensive framework that includes key components such as value proposition, value creation configuration, and revenue model (Boons & Lüdeke-Freund, 2013). These models help companies connect their activities with more significant production and consumption systems, facilitating the creation of ecological, economic, and social value (Boons & Wagner, 2009). The historical context highlights the rise of internet companies in the 1990s, which demonstrated the potential of new business models to challenge existing business logic, later evolving to include sustainability as a central element (Hawken et al, 1999; Hart et al., 1999). Managing transitions and innovation systems play a key role in this process, emphasising the need for consistent government support and the involvement of various stakeholders to achieve systemic, sustainable transitions (Rotmans et al., 2001 & Geels, 2002). Therefore, innovative business models are tools for success at the company level and essential mechanisms for promoting broader socio-technical transformations toward sustainability. Furthermore, involving stakeholders in developing new business models enables a more dynamic and inclusive approach, allowing adaptation to environmental and market changes. Such models include technological innovations and changes in social practices and institutions, which are crucial for achieving long-term sustainable development goals. Investments in sustainable innovations have significantly increased in recent years, indicating the growing interest of the business community in transforming challenges into business opportunities and new markets (Montalvo et al., 2011; Lopez- Nicolás et al., 2021). In this way, innovative business models contribute to sustainable growth while providing a competitive advantage to companies willing to invest in the future (Lopez- Nicolás et al., 2021). 1.4 The framework of the EU Sustainability Regulations 1.4.1 Non-financial Reporting Directive (NFRD) On 6 December 2014, Directive 2014/95/EU on disclosure of non-financial and diversity information by certain large undertakings and groups (from now on referred to as the Directive) entered into force. The Directive amends and complements the current Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC. It became applicable to the companies concerned (which are subject to the Directive) in 2018 about the information for the financial year 2017. The Directive was adopted to ensure that companies can contribute to more stable growth and employment by disclosing non-financial information (in addition to financial information). Also, due to the more extensive information, all key stakeholders should be more informed, making it easier for them to monitor the company's management and make decisions about long-term investments. The need to disseminate sustainability information is crucial in identifying risks and building investor and consumer confidence, strengthening the transition to a sustainable global economy that links long-term business profitability with social justice and environmental protection. As most companies operate in more than one country, aligning national provisions with the Directive and the minimum legal requirement regarding the scope of information to be reported is crucial for companies and other stakeholders (Primec, 2017). Companies are free to disclose the information defined by the directive as they see fit. This means that data on non-financial operations can also be published in a separate report. Article 19a of Directive 2014/95/EU requires that the non-financial statement must contain: "at least information on environmental, social and human resources, respect for human rights, anti-corruption and anti-bribery matters, including (Primec, 2017): · A brief description of the company's business model; · A description of the company's policies about those matters, including those relating to, among other things, the conduct of due diligence procedures; · Results of these policies; · The principal risks related to those matters that are related to the company's activities, including, where appropriate and proportionate, its business relationships, products or services, that could give rise to serious adverse effects in those areas and how the company manages those risks; · Key non-financial performance indicators relevant to specific activities. Concerning the implementation of individual policies, the non-financial statement when describing environmental policies shall include details of the present and foreseeable impacts of the company's activities on the environment and, where applicable, on health and safety, as well as details on the use of renewable and non-renewable energy sources, greenhouse gas emissions, water use and air pollution. About social and personnel policy, the statement must contain information on measures to ensure gender equality, the implementation of the fundamental conventions of the International Labour Organization, respect for workers' right to information and consultation, respect for trade union rights, health and safety at work, working conditions, social dialogue, dialogue with local communities and measures taken to ensure the protection and development of these communities (Evropska komisija, 2017). Where an enterprise does not provide certain information in the report, it must clearly explain this. Public-interest entities with an average number of employees on a balance sheet date of more than 500 are obliged to publish information on non-financial operations. Only large enterprises must report because the costs associated with mandatory reporting for medium and small enterprises would outweigh the benefits. Companies can also publish the report only at the group level and not at the individual company level within the group. The measures show that when adopting the directive and establishing reporting requirements, the European Union focused primarily on the materiality of the information reported to minimise the administrative burden on companies due to reporting. Companies, therefore, have a reasonably free hand in reporting non-financial information (Evropska komisija, 2017). 1.4.2 Corporate Sustainability Reporting Directive (CSRD) The CSRD binds large, small, and medium-sized companies whose securities are listed on a regulated market (paragraph 1 of Article 19a of the CSRD) (Primec, 2017). The CSRD replaced or upgraded the previous Non-financial Reporting Directive (NFRD) 2014/95/EU. In addition to information from the areas (business model, policies (including due diligence procedures implemented), the results of these policies, risk and risk management, and key performance indicators relevant to individual activities – which the NFRD already required), companies are also required to report (Primec, 2017): • About their business strategy; • On the risk resilience of the business model and strategy on sustainability matters; • On the plans, they have to ensure that their business model and strategy are compatible with the transition to a sustainable and climate-neutral economy; • Do the business model and strategy take into account the interests of stakeholders, and how do they take them into account; • On business opportunities arising from sustainability matters; • On the role of management and supervisory bodies in matters relating to sustainability; • On the foremost actual and potential adverse impacts associated with the activities of the company, etc. (for more details, see paragraph 2 of Article 19a of the CSRD). Companies must integrate sustainability considerations into their business model, strategy, and goals, impacting the operations and management of companies themselves and audit processes (Primec & Belak, 2022). The information will has to be provided following the new ESRS reporting standards developed by the Commission with the assistance of the European Financial Reporting Advisory Group (EFRAG). Mandatory common standards allow for an in-depth audit, initially in the form of limited assurance on the reliability of sustainability information and later in line with the business of providing reasonable assurance. The reporting format will be uniform for all entities and digital and machine-readable. The sustainability report will become an integral part of the business report, which means it will not be possible to publish it as a separate document, as has been the case so far (Primec, 2017). Introducing common standards ensures that non-financial information becomes comparable to financial information (point 32 of the introduction to the CSRD proposal). Therefore, renaming a non-financial report to a sustainability report is not purely formal. Its purpose is to give greater importance to sustainability information and to make it inherently comparable in weight to financial details (Primec, 2024). 1.5 Integrating Sustainability Regulations with Business Model 1.5.1 Strategic Alignment In reviewing theories of corporate governance and legislation in the field of sustainability, the previously presented research question arises: how does legislation in the field of sustainability influence the formation of business models? To better understand such factors and their connection, it is necessary to comprehend management theories and tools crucial for a company to change its governance system based on external sustainability requirements, such as legislative changes and impacts. The integrated management theory represents a framework comprising various theories and practices that contribute to a holistic approach to management. Regarding sustainability, integrated governance can be defined as "a governance model that integrates the integration of sustainability oversight into board meetings" (UNEP, 2014). Concerning sustainability, the theory of integral management and governance represents a system that addresses issues related to sustainability, taking into account opportunities in a way that enables companies to create value for their stakeholders. For the successful implementation (implementation, realisation) of integral management and governance, the owners and management of companies must start discussing the risks and opportunities that sustainability brings and include sustainability-oriented topics as well as sustainable projects on their agenda (UNEP, 2014) Integral management and governance is an integral (holistic) approach that encourages members of shareholders' (owners) and management boards to integrate various sustainability factors into the decision-making process. Implementing integral management and governance into companies aims to create value for (all) companies' stakeholders. Companies achieve this by including sustainable projects in the decision-making process of shareholders (owners) and management board members, setting sustainable strategies and monitoring their implementation. For companies to achieve long-term sustainable results through integral management and governance, it is essential that companies take into account sustainability factors for success in their management, which include (IFAC, 2012): Focus on customers and stakeholders: · Understanding and meeting customer needs; · Adaptation of all activities of individual companies to these needs. Effective management and strategy setting: · Providing ethical and strategic leadership that is geared towards sustainable value creation; · Implementation of key activities that include company values, ethical culture and organisational structures and processes. Integral corporate governance and management, risk management and internal control: · Development of effective management and governance structures and processes of integrated risk management and internal control; · Balancing Performance and Compliance in Corporate Governance. Innovation and flexibility: · Introduction of innovative processes and products that improve the performance of companies; · The adaptability of companies to changing circumstances. Financial Management: · Providing financial support to management and implementing strategies through sustainable value creation; · Implementation of good practices in areas such as taxes, costs, profitability and capital management. HR and talent management: · Human Resources and Talent Management as a Basic Function of Companies; · Combining HR and talent management with the financial function of companies. Operational excellence: · Aligning the allocation of corporate resources with strategic objectives and factors for creating value for corporate stakeholders; · Supporting the decision-making process with timely performance analysis. Effective and transparent communication: · Communicating with key stakeholders and ensuring that key stakeholders receive all relevant information; · Preparation of quality business reporting to facilitate decision-making and support key stakeholders. The above factors represent the areas companies use to achieve high performance and comprehensive management. Companies successfully pursue such factors to ensure long-term competitiveness and sustainable integral governance and management. Companies must strive for the most successful implementation of these factors, representing the most important areas for ensuring organisational success for company members, shareholders, stakeholders and the wider society (IFAC, 2012). Integral management and governance bring many benefits (such as process consistency and optimisation). Over the years, the demands of the environment and society at large on companies have become increasingly demanding and extensive. Integral management and governance represent a solution with which companies regulate and meet the needs and expectations of key stakeholders. This keeps companies competitive and sustainable. Past research shows that companies have realised the important role of integral management and governance in practice. As a result, more and more companies are making decisions and implementing integral management and governance in their operations. Improving the effectiveness of integral management promotes a shift to integral approaches in management practices. The benefits of integral management and governance include (Dalling & Holt, 2012): · Increased profitability – companies improve performance and profitability through better risk management; Risks are addressed from different angles through an integrated management system; · Financial benefits arising from the elimination of functional and reputational risks; · Reducing costs by optimising processes, combining management functions and streamlining roles and responsibilities; · Improve communication by merging processes and integrating functions; · Facilitated ownership due to trained staff and integration of functional disciplines; · Improved risk assessment and control – process integrity allows for better decision-making, prioritisation, and resource allocation. Companies must change their operations and functions to implement integral management and governance. In doing so, they may encounter several obstacles, such as a lack of commitment from management and conflicts of interest. When implementing integral management and governance, management must be aware of the advantages and opportunities of the integral process. The whole process must occur gradually and through many governance and management initiatives. Excessive and too fast implementation can cause an overload of management board members. To effectively implement integral processes, companies must appoint a suitable and qualified manager to manage integral functions and process management. In addition to board and supervisory members, other stakeholders must also be aware of the advantages and benefits that integral systems, governance and management bring. Otherwise, companies will not be able to achieve the desired efficiency. Employees also play an essential role among key stakeholders. The latter are often accustomed to stable operation and can express dissatisfaction in the event of possible changes, which hinders the successful implementation of an integral management system. Integral management and governance must be introduced at all levels and dimensions of the governance and management process. Opportunities and risks must be addressed at all levels, from management to production. In doing so, companies must consider stakeholders' needs and expectations. The key to successful integral management is the understanding and coordination of the goals and strategies of companies. This can only be achieved when individual functional goals are aligned with common goals at all levels and dimensions of the corporate governance and management process (Dalling & Holt, 2012). Based on past research findings, it was concluded that corporate governance plays a key role in the performance of corporate operations. Through a corporate governance system, companies can reflect their interests and promote the values they stand for. Therefore, Corporate governance also plays a vital role in sustainability. By effectively managing and integrating long-term planning, stakeholder involvement, and ethical action, companies are more likely to promote sustainability-oriented relationships (Jamali et al., 2008). When companies have a stable corporate governance structure, they are also usually more transparent. Such companies disclose more information about their sustainability practices and governance mechanisms. Transparency over the governance and operations of companies increases their reputation and the trust of key stakeholders, improving companies' environmental, social, and governance performance (Dhaliwal et al., 2011). From the point of view of state bodies and institutional arrangements, corporate governance can be influenced by several aspects. External factors, such as laws, codes and standards of corporate governance, constitute instruments that guide and influence the development of corporate governance. This creates business practices that give new impetus and guidance to other companies. Members of management and supervisory bodies, who have the task of increasing the efficiency and effectiveness of their operations, also significantly impact the formation of successful business practices. At the same time, they must also ensure long-term and sustainable management. The positive correlation between corporate sustainability initiatives and profitability demonstrates that companies do not need to sacrifice financial performance in their management to achieve effective, sustainable outcomes. Companies should not consider sustainability as a marketing factor or an area of operation but should treat it as a governance issue requiring strategic control from companies (Eccles & Krzus, 2010; Jo & Harioto, 2011). Effective corporate governance and sustainable business are closely interlinked. Therefore, companies must integrate key stakeholders' opinions, long-term objectives and non-financial indicators into their decisions. This makes them more likely to act sustainably in their operations. The next chapter will detail social responsibility and sustainable corporate governance (Jamali et al., 2008). 1.5.2 MER Model of Integral Management The MER model of integral management and governance provides a comprehensive framework that identifies and better understands the influence of external factors (such as legislation) on a company's corporate governance and business models (Belak et al., 2014). Consequently, the MER model of integral management and governance was chosen in the research article to study the impact of sustainability legislation on the changes in selected companies' business models, aiming to understand and interpret the studied concepts better. To comply with external environmental requirements (such as legislative changes), businesses must adequately prepare internally and implement appropriate steps to achieve the desired goals (Belak et al., 2015). The MER integral management and governance model is designed three-dimensionally (process, instrumental and institutional dimensions). All three dimensions are interconnected horizontally and vertically, forming a permanently functioning whole. All three dimensions represent management as a partial system of companies, which is essential for the organisation's overall functioning. This means that management is everywhere in individual companies, in all its processes, instruments and institutions. The MER model of integral management and governance is based on the multidimensional integration of management with the broader society and its environment, taking into account the fundamental mission of an individual company in the form of development and survival. The MER model of integral management and governance brings a holistic approach that combines several aspects of management, strategy, economics, operational efficiency, and innovation. This allows for a more balanced approach to analysis and improvement in companies. The model is designed to adapt to different types of companies and industrial sectors. From the point of view of individual companies, the MER model of integral management and governance is used in all phases of the life cycle, in all development phases, and all phases of individual companies of all sizes. The model is based on considering several performance factors, which are also related to social responsibility and sustainability (such as philosophy, culture, ethics, ecology, etc.) (Belak et al., 2014). The description of the MER model of integral management and governance can be presented from three different parts: 1) Integral management, 2) Enterprise and its environment, and 3) Success factors of an enterprise. The essential features of the MER Model of Integral Management and Governance are presented in Figure 1 and discussed in the continuation of the paper (Belak & Duh, 2015). 1.6 Introduction to Flexibility Management in Sustainable Business Models Flexibility management has emerged as a critical strategic approach in the dynamic business environment shaped by evolving sustainability regulations. As highlighted by the integration of the CSRD, SFDR, and Taxonomy Regulation, organizations must develop adaptive mechanisms to align their operations with these legislative requirements. Flexibility management ensures that businesses can respond proactively to such changes, enhancing their resilience and capacity for innovation. This paper extends its exploration of sustainable business models by emphasizing the role of flexibility management in achieving legislative compliance while fostering long-term growth. 1.6.1 Flexibility in Corporate Governance Corporate governance plays a pivotal role in adapting to sustainability requirements, as emphasized by the MER model of integral management. Flexibility management complements this framework by enabling organizations to adjust governance structures dynamically in response to new regulations and stakeholder expectations. For example, incorporating flexible decision-making processes allows companies to address both short-term compliance needs and long-term strategic goals. Flexibility also promotes the integration of diverse stakeholder interests, aligning corporate objectives with broader societal and environmental imperatives. 1.6.2 Process Adaptability and Innovation Sustainability regulations necessitate systemic changes in business models, as incremental adjustments are often insufficient. Flexibility management supports this transformation by fostering process adaptability and promoting innovation. As demonstrated by case studies in the article, companies that implement flexible operational practices—such as modular reporting systems or adaptive production methods—are better positioned to meet sustainability goals. This adaptability not only ensures compliance but also drives competitive advantage by enabling organizations to capitalize on emerging opportunities in sustainable markets. 1.6.3 Strategic Flexibility for Long-term Competitiveness Strategic flexibility is essential for businesses navigating the complexities of sustainability legislation. The integration of flexibility management with strategic planning enables companies to anticipate regulatory changes and adjust their objectives accordingly. By embedding sustainability into their core strategies, organizations can achieve alignment with legislative frameworks while pursuing innovation and growth. For instance, flexibility management allows companies to iteratively refine their sustainability goals, balancing regulatory requirements with market-driven priorities. 1.6.4 Stakeholder Engagement and Risk Mitigation The article underscores the importance of stakeholder-oriented governance in fostering sustainable business practices. Flexibility management enhances this approach by establishing dynamic feedback loops that accommodate changing stakeholder expectations. This adaptability not only strengthens stakeholder trust but also mitigates risks associated with non-compliance or reputational harm. By leveraging flexibility management, organizations can proactively address emerging challenges, ensuring alignment with both legislative and stakeholder demands. 1.7 Innovative Approaches A literature review reveals that there are already particular examples of companies that have successfully changed and refined their business models following environmental sustainability requirements. As an example of an innovative approach, it is possible to present a case study of a Spanish company in the wine sector that introduced sustainable innovations and a sustainable business model using the triple-layered business canvas. The company introduced certified vegan wine, leading to economic, environmental, and business model changes. The company altered its business model by starting to use new bottles that are lighter and more environmentally friendly in collaboration with local vineyards and universities for the development of sustainable practices. By doing so, the company implemented sustainable policies and a sustainable business model (López-Nicolás et al, 2022). Additionally, other companies have changed their business models from processing and preparing gas generators to offering gas as a service and from steam turbine business models to providing electrical energy. With such strategies and innovative business models, companies have successfully introduced sustainable business models that create value while considering sustainability's economic, environmental, and social dimensions. Case studies demonstrate how companies in various sectors and sizes successfully implement innovative business models to achieve sustainability. Based on past research, it can be determined that companies can view sustainability either as an advantage or a disadvantage. In the past, companies have successfully established business models that have brought them additional opportunities from a sustainability perspective (Yang et al., 2023). Materials and Methods As part of the research, the multiple case study method was used to analyse the sustainability reports of selected companies. The multiple case study analysis enables the definition and examination of a precisely defined phenomenon in the actual context of the company. It allows for studying phenomena in a particular area using numerous data and analyses. In this research, annual reports and sustainability reports were evaluated using content analysis. This analysis allows for obtaining information to analyse the causes and ways that explain the reasons and circumstances for performing specific activities of the examined entities (Lina et al., 2023; Voss et al., 2008). The content analysis method was used to obtain and evaluate information. This method has been used by other researchers in similar studies where information was obtained from annual reports related to economic, social, and environmental reporting. It is suitable for the evaluation of data in qualitative form. Therefore, the method is appropriate for evaluating annual report information studied within this paper. The content analysis method comprises the following stages. First, the method verifies the essence of the information necessary from NFRD, CSRD in the company's annual or sustainability reports. For the research, binary coding 0,1 has been used under the content analysis method. If the company reported the data, it was assigned a value 1 for that area. Otherwise, the company was assigned a value of 0 (Lajili & Zéghal, 2005). The research aims to verify the following research question: How does legislation influence the change in companies' business models? The research was conducted based on the analysis of information reporting by companies in their sustainability or annual reports concerning the requirements of NFRD and CSRD. For the NFRD and CSRD requirements, the extent to which companies report information by ESRS standards was analysed. It was verified whether companies report information on: Environmental areas (following ESRS E standards, including environmental information related to climate change, pollution, water and marine resources, biodiversity and ecosystems, and circular economy); Social areas (following ESRS S standards, including social information related to social factors, which include the company's workforce, employees in the supply chain, other groups and local communities, and customers and end users); Governance areas (under ESRS G standards, including governance information related to the company's business model and strategies, management and quality of relations with business partners, corporate governance and supervisory board, products and services of the company, risk management and internal control and responsible business practices). For each of the above areas of NFRD and CSRD, whether the company discloses information relevant to the research above question will be verified. The higher the score the companies receive, the more it is expected that the applicable legislation on sustainability impacts the reporting of sustainability information and, consequently, the co-creation of innovative sustainable business models. The purpose is to examine whether the reporting of sustainability information has altered companies' corporate governance. This analysis aimed to determine if sustainability legislation impacts companies' management and business models. The research utilised the research model presented in the paper by Čufar et al., 2014. The research model investigates whether the NFRD and CSRD affect the process, instrumental, and institutional dimensions at all three hierarchical levels (company policy, strategic management, tactical and operational management). The individual dimensions and hierarchical levels were structured following the MER model of integral management and governance. The research model consists of the following constructs (C) (Čufar et al., 2024): C1: mission, purposes, and primary goals of companies at the policy level; C2: corporate, general, and business strategies at the level of strategic management; C3: implementation of policies and strategy formulation at the tactical and operational management levels; C4: description of planning, organising, directing, and controlling; C5: an overview of preparatory information activities, decision-making, and measures undertaken as process functions; C6: an overview of values, business and management guiding principles, styles, techniques, and management methods; C7: overview of corporate governance institutions. The research was conducted on a sample of 33 companies from selected countries: Slovenia (9 companies), Germany (10 companies), Poland (3 companies) and India (11 companies). Companies from India were selected to compare whether the level of reporting in non-EU countries differs from that of companies headquartered in the EU. In Slovenia, the analyzed companies were Holding Slovenske elektrarne d.o.o. (HSE), Petrol d.d., Pivovarna Union d.o.o., Nova Ljubljanska banka d.d. (NLB), Nova Kreditna banka Maribor d.d. (NKBM), SKB banka d.d., Krka d.d., Cinkarna Celje d.d. and Talum d.d. In Germany, the companies Siemens AG, Beiersdorf AG, Bayerische Motoren Werke AG (BMW), Commerzbank AG, Deutsche Bank AG, E.ON SE, Henkel AG & Co. KGaA, RWE AG, SAP SE and Volkswagen AG were analyzed. In Poland, the companies CD PROJEKT S.A., KGHM Polska Miedź S.A. and Grupa Azoty S.A.were analyzed and in India, the companies Bharat Petroleum Corporation Limited, ITC Limited, HCL Technologies Limited, Housing Development Finance Corporation Limited (HDFC), Hindustan Unilever Limited, Infosys Limited, Oil and Natural Gas Corporation Limited (ONGC), Reliance Industries Limited, State Bank of India (SBI), Tata Group and Wipro Limited were analyzed. The companies were selected based on the classification of the information technology (4 companies), financial services (8 companies), energy and mining (9 companies), industrial manufacturing (9 companies) and consumer goods (3 companies). The study was conducted based on information obtained from publicly published annual reports or separate sustainability reports for the financial year 2023. Reporting requirements under the NFRD and CSRD and reporting following the MER model of integral management and governance were studied for 2023. For this purpose, annual or sustainability reports for these years were also examined. The research was conducted based on the following steps. First, a content analysis of selected companies' annual or separate sustainability reports was conducted. Each document was reviewed and evaluated. The information obtained from the study assessed whether the company reports based on NFRD and CSRD requirements. The information analysis was based on publicly available documents, annual reports, and separate sustainability reports that companies publicly publish on their websites. Based on these data, a content analysis of the information was performed, and the research above areas and research questions were defined. The annual or separate sustainability reports were thoroughly reviewed and evaluated, verifying whether they disclosed information related to the above areas. For each of the mentioned areas and questions, it was analysed whether the company reports the mentioned information and to what extent. The research results were compiled and analysed based on the performed analysis, and a conclusion was prepared concerning the set research question. From the obtained results, a conclusion was prepared (Čufar at al., 2025; Lajili & Zéghal, 2005). Results The following section will present the results of the research. The results are detailed in two parts. First, the extent to which companies reported information that was compliant with the NFRD and CSRD requirements will be presented. In the second part we will present the extent to which companies reported information in line with the MER model of integral management and governance. 4.1 CSRD regulation The following section will present the company's reporting results on the CSRD requirements. Based on the research results from the perspective of environmental factors (such as climate change, pollution, water and marine resources, biodiversity and ecosystems, and circular economy), it is evident that, from the perspective of environmental factors, companies from Poland and Slovenia reported the most detailed and comprehensive information in respect to CSRD requirements. They were followed by companies in Germany and then by companies in India. The results indicate that all of the observed companies reported more than half of the required information. This indicates that companies are committed to incorporating and reporting environmental-related information in their annual reporting. EU companies reported data in more detail compared to companies from India, suggesting that detailed legislation in the field of sustainability contributes to more thorough and comprehensive reporting. Based on the research results from the perspective of social factors (such as the company's workforce, employees in the supply chain, other groups and local communities, and customers and end users), it is evident that, from the perspective of social factors, companies from Poland and Slovenia reported the most detailed and comprehensive information in respect to CSRD requirements. They were followed by companies in Germany and then by companies in India. The results indicate that companies are committed to incorporating and reporting social-related information in their annual reporting. EU companies reported data in more detail compared to companies from India, suggesting that more detailed legislation in the field of sustainability contributes to more thorough and comprehensive reporting. Based on the research results from the perspective of governance factors (such as the company's business model and strategies, management and quality of relations with business partners, corporate governance and supervisory board, products and services of the company, risk management and internal control, and responsible business practices), it is evident that, from the perspective of governance factors, companies from Poland and Slovenia reported the most detailed and comprehensive information. They were followed by companies in Germany and then by companies in India. The results indicate that all of the observed companies reported more than half of the required information. This indicates that companies are committed to incorporating and reporting governance-related information in their annual reporting. EU companies reported data in more detail compared to companies from India, suggesting that more legislation in the field of the sustainability contributes to more thorough and comprehensive reporting. When examining companies within each industry, it was evident that the highest level of information reporting was achieved by companies in the Information Technology sector. They were followed by companies in the Consumer Goods sector and companies in the Financial sector (banks and insurance companies), followed by companies in the Energy and Mining sector, and finally by companies in the Industrial Manufacturing sector. Financial sector, Consumer Goods, and Information Technology companies reported information within the top quartile of the required information level. Consequently, the results indicate comprehensive reporting of these disclosures in the mentioned sectors. In the Mining and Energy and Industrial Manufacturing sectors, the level of reported information exceeded half of the required disclosures. A more detailed examination of reporting across different disclosure areas reveals that the highest level of reporting on environmental factors was achieved by companies in the Information Technology sector. Companies in the Consumer Goods sector and the Financial Services sector also attained high reporting scores. Slightly lower reporting levels were observed in the Energy and Mining and Industrial Manufacturing sectors. However, companies across all sectors reported more than half of the required information. The highest level of reporting on social factors was achieved by companies in the Information Technology sector and by the Companies in the Consumer Goods sector, followed by companies in the Financial Services sector. A slightly lower level of reporting on social factors was achieved by companies in the Energy and Mining sector. The lowest level of reporting was observed in the Industrial Manufacturing sector. An analysis of the reporting data on governance factors reveals that the highest level of reporting was achieved by companies in the Consumer Goods sector. They were followed by companies in the Energy and Mining sector, then by companies in the Information Technology and Financial Services sectors. The lowest level of reporting was observed in the Industrial Manufacturing sector. Companies across all sectors reported more than half of the required information. An analysis of the reporting results for individual ESG factors (environmental, social, and governance) and sectors (Information Technology, Consumer Goods, Financial Services, Energy and Mining, and Industrial Manufacturing) reveals that companies in all observed countries are committed to reporting sustainability-related information. Companies in EU countries reported more comprehensive information than those in non-EU countries. It is evident that certain sectors provide more detailed sustainability information. On average all of the analyzed companies engaged ESG principles in their governance and report at least some parts of sustainability information. 4.4 MER model of integral management and governance Based on the research results, it can be concluded that the average level of corporate governance reporting, according to the MER model of integral management and governance, was higher for companies that reported sustainability information more comprehensively compared to those that reported less sustainability information in accordance with CSRD. The results of the reporting demonstrate a significant commitment by companies to sustainable operations and transparency, contributing to better stakeholder information and enhancing public trust in their activities. Results indicate that the highest level of information reporting was achieved in the instrumental dimension with the reporting of group C6 information of the research model, such as values, business and management guiding principles, styles, techniques, and management methods. This was followed by reporting corporate governance institutions' information of group C7 of the research model and then reporting in the groups from C1-C5 information of the research model, following the measurement model of integral management and governance. Discussion Research results show that companies are committed to reporting sustainability information in their annual reporting. With the implementation of the CSRD, SFRD and Taxonomy regulation, it is expected that the level of sustainability reporting will rise, and companies in EU will report even more comprehensive information, providing their key stakeholders with additional insights and information needed for thorough decision-making. The research results have shown that EU and non-EU companies are committed towards reporting sustainability information, and their corporate governance decisions are progressively intertwined with sustainability requirements. In terms of CSRD, it is evident that companies in the EU who are obliged to report under the EU sustainability legislation report higher level of sustainability information than companies who are not obliged to report sustainability information under such legislation. Thus, the results of the results are indicating the influence of legislation on corporate operations and governance. In addition, results of the research indicate that the sector in which a company operates influences the level of sustainability reporting it conducts. Comprehensive reporting of information has also been observed in the reporting of data related to corporate governance (when measured based on the research model consistent with the MER model of integral management and governance). It is important to emphasise that reporting such information presents an external image of the company that can influence key stakeholders and, consequently, the company's returns. As a result, companies are likely to focus on achieving the highest possible level of sustainability reporting in the future. With the introduction of the CSRD and ESRS, such reporting will become even more standardised, making it easier for key stakeholders to analyse which companies are more sustainably oriented and which are less so. The results of the report indicate that companies have started to report more comprehensive information based on sustainability legislation and that stricter legislation and standardisation contribute to better comparability and transparency of reported data. According to the MER model of integral management and governance, the research model (Čufar et al., 2024) also evaluated the differences in corporate governance reporting. It can be concluded that companies are focusing on the supplementation and implementation of corporate governance systems and business models to meet sustainability requirements in the long term, thereby becoming more competitive in the market and contributing more comprehensive and sustainable activities in the fields of environment and society, thus supporting sustainability in these areas. The findings presented in this article highlight the transformative impact of sustainability legislation on business models and governance structures. By integrating flexibility management into their operational and strategic frameworks, organizations can achieve greater adaptability, resilience, and innovation. This synergy between sustainability and flexibility not only supports legislative compliance but also positions companies for long-term success in a rapidly changing global environment. From the perspective of implications for business, it is expected that sustainability reporting and legislation will encourage companies to transform their business models and management towards sustainability-oriented goals. This contributes to sustainable business operations and comprehensive management of economic entities, which promotes sustainability in the long term. Companies can achieve a high competitive advantage based on sustainable strategies and implement strategies and solutions that surpass the current solutions of existing companies. However, a disadvantage of this movement includes transforming existing companies towards sustainability. Such changes are often associated with high costs and time, requiring significant resources for implementation. There is also a risk of reduced competitive advantage compared to companies not subject to such reporting requirements. Companies from third countries might thus have a slight competitive edge that companies in the EU would find challenging to outweigh. Future research could focus on standardising individual reporting and testing models on a larger sample of companies over a longer timeframe. This approach would provide a more detailed overview of reporting practices. Additionally, comparing the reporting results of companies in the EU with those from other third countries presents a valuable opportunity for future research. This comparison would reveal the extent to which companies from third countries comply with the sustainability legislation applicable in the EU. When selecting the research sample, companies from the financial sector (banks and insurance companies) were also included. Since these companies are subject to different ESG reporting regulations, which make their data difficult to compare with non-financial industries, this constitutes a limitation of the research and must be considered when interpreting the results. Conclusions Based on the research results and findings from past studies, it can be concluded that sustainability legislation is one of the factors influencing the change in companies' business models. In implementing business models, numerous factors and circumstances must be considered, varying from case to case (considering companies environment, legislation, etc.). Nonetheless, legislation plays a significant role in ensuring appropriate standardisation and harmonised reporting of sustainability information by companies. This gives key stakeholders a more comprehensive information set and reduces economic uncertainty. On the other hand, the legislation also ensures sufficient transparency and the creation of new opportunities, allowing companies that create added value through sustainable principles to maintain and enhance their competitive advantage and have opportunities for further growth. Sustainability legislation is also crucial for ensuring long-term success while considering environmental, economic, and social factors. Thus, it must give companies sufficient freedom and flexibility to maintain their competitive advantage and grow. Companies depend on legislation to provide favourable conditions for growth and development, and legislation depends on successful sustainability-oriented companies to shape the regulatory framework based on their best practices and innovative sustainable business models, enabling economic growth and development while considering sustainability goals. Declarations Conflict of Interest The authors declare that they have no conflict of interest. Ethical Approval This article does not contain any studies with human participants or animals performed by any of the authors. Informed Consent Not applicable. Funding The authors did not receive support from any organization for the submitted work. Author Contribution All stated authors contributed to the manuscript, however M.C. is the fist author and J.B. is treated as the leading and corresponding author.FundingThis research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors. Acknowledgement FundingThis research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors. References Argandoña, A. (1998). The stakeholder theory and the common good. Journal of Business Ethics, 17(9), 1093–1102. Ashrafi, M., Adams, M., Walker, T. R., & Magnan, G. (2018). How corporate social responsibility can be integrated into corporate sustainability: A theoretical review of their relationships. 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Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-7084039","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":491458702,"identity":"4896cbb5-49ac-4892-8347-bd0ec1a8b16d","order_by":0,"name":"Matic Čufar","email":"","orcid":"","institution":"Univerza v Mariboru, Ekonomsko-poslovna fakulteta","correspondingAuthor":false,"prefix":"","firstName":"Matic","middleName":"","lastName":"Čufar","suffix":""},{"id":491458705,"identity":"024c276a-0246-4a0b-972d-ddd51632c384","order_by":1,"name":"Andreja Primec","email":"","orcid":"","institution":"Univerza v Mariboru, Ekonomsko-poslovna fakulteta","correspondingAuthor":false,"prefix":"","firstName":"Andreja","middleName":"","lastName":"Primec","suffix":""},{"id":491458706,"identity":"380e9b25-2d14-4674-af03-70d18585cece","order_by":2,"name":"Arun Elias","email":"","orcid":"","institution":"Victoria University of Wellington","correspondingAuthor":false,"prefix":"","firstName":"Arun","middleName":"","lastName":"Elias","suffix":""},{"id":491458707,"identity":"a68d8996-1b91-4dd8-92b0-889834a2a516","order_by":3,"name":"Grygorii Kravchenko","email":"","orcid":"","institution":"Kozminski University","correspondingAuthor":false,"prefix":"","firstName":"Grygorii","middleName":"","lastName":"Kravchenko","suffix":""},{"id":491458709,"identity":"de25d42b-a4f0-4aeb-a415-6b722d09e90f","order_by":4,"name":"Jernej Belak","email":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAZAAAAAyAQMAAABI0h/eAAAABlBMVEX///8AAABVwtN+AAAACXBIWXMAAA7EAAAOxAGVKw4bAAAA0UlEQVRIiWNgGAWjYBAC9vnnn0n/sGGos5/B2Cbxse0wg3z/AfxaGGfwmEsz8DAkG0gwHzOc2facweAwAVtAWmYDtSRukGBLS+Zt+89gwEykFqAtPGaHbdtuE6Flfv+z2x94gH6R4DFvzgVqkW8maAs/UBnEFogWBiL8cqwa4hf+b4ctgSFGUIvgDJ40a4YekBYes2RGYrRIA1VaM9yQAHvfsOfMYR6Cgcwnf8ZM+keBTZ39/DNmEj8qDssRjEookICzeIhSPwpGwSgYBaMAPwAAV0JDPmiAimsAAAAASUVORK5CYII=","orcid":"","institution":"Univerza v Mariboru, Ekonomsko-poslovna fakulteta","correspondingAuthor":true,"prefix":"","firstName":"Jernej","middleName":"","lastName":"Belak","suffix":""}],"badges":[],"createdAt":"2025-07-09 12:53:32","currentVersionCode":1,"declarations":"","doi":"10.21203/rs.3.rs-7084039/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-7084039/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":93899836,"identity":"977d5d19-d720-47e5-aaa2-d6cf15807a54","added_by":"auto","created_at":"2025-10-20 04:51:24","extension":"png","order_by":1,"title":"Figure 1","display":"","copyAsset":false,"role":"figure","size":289056,"visible":true,"origin":"","legend":"\u003cp\u003eMER Model of Integral Management and Governance (Belak \u0026amp; Duh, 2015)\u003c/p\u003e","description":"","filename":"1.png","url":"https://assets-eu.researchsquare.com/files/rs-7084039/v1/32b70bfdda58dcaccf4e9a25.png"},{"id":94058215,"identity":"ce01d037-a03d-478c-84d1-1adffd7d7ce3","added_by":"auto","created_at":"2025-10-22 05:31:30","extension":"pdf","order_by":0,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":1006593,"visible":true,"origin":"","legend":"","description":"","filename":"manuscript.pdf","url":"https://assets-eu.researchsquare.com/files/rs-7084039/v1/94de2dcb-13c8-44e4-83ca-d3e583c240aa.pdf"}],"financialInterests":"No competing interests reported.","formattedTitle":"Integrating New Sustainability Regulations With Innovative and Flexible Business Models: A Path To Future Success","fulltext":[{"header":"Introduction","content":"\u003cp\u003eIn recent years, the implementation of sustainability legislation such as CSRD (CSRD), SFRD (Sus-tainable Finance Disclosure Regulation (SFRD), and the Taxonomy Regulation (Taxonomy) has be-gun at the European Union (EU) level. Each of these legislative measures has brought specific chang-es to the reporting of companies and the implementation of sustainability principles within business practice and corporate governance. Reporting data in compliance with the legislation allows companies to present their sustainability profile to their key stakeholders. Companies wishing to meet such legislation\u0026apos;s requirements must thoroughly integrate these requirements into their corporate governance. This often requires fundamental changes to their core principles and business models, adapting them to sustainability demands and providing companies with additional opportunities for progress and growth (Primec \u0026amp; Belak, 2022).\u003c/p\u003e\n\u003cp\u003eThis article aims to define how legislation influences changes in companies\u0026apos; business models. With this article, we strive to analyse the level of sustainability data reporting in practice following the requirements of NFRD, CSRD. Based on this reporting, it is possible to assess the extent to which sustainability legislation is transforming corporate governance and encouraging companies to adopt innovative business models to meet sustainability requirements.\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eThe article is structured as follows: it begins with an introduction that presents the scope, objectives, methods, results and conclusions. It includes a description of the theoretical framework and literature, which examines existing research and key concepts. This section outlines the sustainability regulations and their integration with business models. Additionally, it presents the idea of corporate governance and the MER model of integral management and governance. The next chapter, materials and methods, details the techniques used in the research. After that, follow the results chapter, discussion, and finally, the conclusion, which interprets the results and considers their broader application in future research and findings.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.1 \u0026nbsp;Overview of Corporate Governance Theories\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eInterest in the study of corporate governance has grown dramatically over the past twenty years. The reason for the increase is most likely attributable to past events that have already been mentioned above (such as corporate failures, economic crises, natural disasters and inadequate corporate management policies). Such events surprised the public and increased the population\u0026apos;s doubts about the economy\u0026apos;s stability. To avoid uncertainty and improve the economy\u0026apos;s strength, many initiatives have been observed in the EU over the past years to create a more stable and secure environment for managing economic activities. Such initiatives include Directive 2014/95/EU and Directive 2017/828. The increase in shareholder responsibilities and rights, as well as the involvement of other stakeholders, have increased the range of the main objectives of the organisations and expanded the circle of stakeholders that influence the companies\u0026apos; functioning. EU action in the field of corporate governance pursues the purpose of adapting the main directions of companies to go beyond purely financial objectives and to steer companies towards achieving objectives that support the long-term sustainability of companies (Freeman, 2010).\u003c/p\u003e\n\u003cp\u003eIn corporate governance, it is possible to find several theories that study the connections, factors and consequences of the companies\u0026apos; activities. In recent years, two dominant theories have been found in management and corporate governance. The first theory relates to shareholder theory, and the second refers to stakeholder theory. Čufar \u0026amp; Primec, 2022 and Mousa \u0026amp; Arslan, 2023 notes that corporate social responsibility oscillates between two necessary extremes of social behaviour. The first extreme concentrates the liability of companies solely on their shareholders. The main objectives of companies at this stage are focused on achieving short-term goals of maximising profits for their shareholders. The opposite extreme places corporate responsibility in a broader context and extends CSR to a more comprehensive range of individuals interested in companies (such as shareholders, management, employees, suppliers, customers, interest groups, trade unions, competitors, local environment, etc.). In the context of stakeholder theory, companies do not only focus on achieving short-term financial goals to satisfy shareholders (first extreme) but also adjust their governance and management decisions, resulting in particular companies\u0026apos; functioning according to long-term goals, which consist of the interests of different stakeholders (second extreme). Between the two dominant theories mentioned, there is also the so-called Enlightened Shareholder Value theory, which represents an intermediate approach between them. All three theories will be discussed in more detail in the following sections (Argando\u0026ntilde;a, 1998; Čufar \u0026amp; Primec, 2022).\u0026nbsp;\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.1.1 Shareholder Theory\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eShareholder theory is based on the idea that the primary goal of individual companies is to maximise shareholder value. The governance and management of individual companies thus prioritise the companies\u0026apos; shareholders over the interests of other stakeholders, such as suppliers, customers, customers, etc., when making decisions. Shareholder theory advocates that the shareholders of companies are the ultimate owners. As a result, companies must do everything in their power to maximise the value of their owners. The shareholders\u0026apos; value can be increased by paying dividends or by raising the value of the shares. The decisions taken by the members of the board of directors should, therefore, be based on the objective of increasing the value of the share or the value of the dividend. Compared to stakeholder theory, numerous studies have identified the strengths and weaknesses of shareholder theory\u0026mdash;four key aspects in the existing literature place shareholder theory ahead of stakeholder theory (O\u0026apos;Connell \u0026amp; Ward; 2020):\u003c/p\u003e\n\u003cp\u003e\u0026bull; Agency perspective: The perspective is based on the so-called contractual obligation of companies to their owners (shareholders). Members of the board of directors of companies are contractually obliged to consider the claims of shareholders (owners of companies) before the claims of other stakeholders. The perspective equates the long-term performance of companies with their financial performance;\u0026nbsp;\u003c/p\u003e\n\u003cp\u003e\u0026bull; Control perspective: The perspective defines a company\u0026apos;s shareholders as having a significant influence based on their ownership interest in companies and are, therefore, the most essential stakeholders. With the right to vote, shareholders have influence and can thus influence the decision-making of the management of companies. As the most important stakeholder, shareholders want to retain control over the results of management (management), so members of the management and control of companies should work towards maximising shareholder wealth;\u003c/p\u003e\n\u003cp\u003e\u0026bull; Residual Claims Perspective: The perspective defines that corporate shareholders are crucial because they provide companies with the resources they need for their business. By providing investment funds to companies, shareholders also own them. With the funds invested, shareholders bear a greater risk than other stakeholders. Any decision taken by the board of directors has a direct impact on the assets of the shareholders. As a result, board and supervisory board members work toward maximising shareholder wealth;\u003c/p\u003e\n\u003cp\u003e\u0026bull; Alignment with social wealth: The perspective argues that the benefit for other stakeholders increases by maximising shareholder value. By striving to increase revenues, produce, and offer products and services, companies also meet the needs of different stakeholders, such as suppliers, customers, etc. For example, when companies seek to reduce labour costs by educating their employees, they introduce measures that benefit employees, companies, and their shareholders.\u003c/p\u003e\n\u003cp\u003eDespite the above perspectives, which advocate shareholder theory as the only fundamental theory for increasing the value of companies and ensuring their long-term performance, several views have emerged in practice that do not agree with these perspectives. Shareholder theory advocates primarily increasing the financial performance of companies and thus maximising shareholder value. In addition to financial indicators, other aspects (such as social, environmental, and governance) that represent the performance of individual companies from a more comprehensive perspective must be considered when evaluating their performance. A comprehensive approach by companies, considering all their stakeholders, contributes to a more balanced and sustainable development of companies. With the change in the role of corporations in the wider society, companies are also required to consider a broader view of their management. Companies in the wider society are treated as economic entities and play a key role in solving socially responsible and environmental issues. This has also increased the expectations of key stakeholders for companies. The wider society, therefore, expects responsible and sustainable corporate management from companies. This has increased social pressure on companies to act responsibly and sustainably. In addition to the interests of key stakeholders, existing and upcoming legislative frameworks and regulations encourage companies to consider broader interests, such as maximising shareholder value. There is also an increasing development of sustainable investments, which shows investors\u0026apos; growing interest in companies that follow sustainable practices. Investors increasingly focus on companies\u0026apos; long-term performance and sustainability, including ESG factors (O\u0026apos;Connell \u0026amp; Ward; 2020).\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.1.2 \u0026nbsp; \u0026nbsp; \u0026nbsp;Enlightened Shareholder Value Theory\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eTo address the above concerns of shareholder theory, a new enlightened shareholder theory has emerged, which balances financial objectives with social responsibility and sustainability in the corporate governance approach. The enlightened shareholder theory recognises that a company\u0026apos;s long-term performance depends not only on financial indicators but also on its ability to consider other stakeholders\u0026apos; interests. The theory\u0026apos;s approach still focuses on maximising shareholder value, but it considers a broader set of factors than just the financial performance of companies. The theory argues that the long-term interests of company shareholders are often aligned with the long-term interests of other company stakeholders. In addition to maximising the shareholders\u0026apos; value, company management boards also consider the interests of different stakeholders in their management, try to harmonise them as much as possible, and introduce them into their management process. The enlightened approach encourages companies to consider long-term sustainability and performance, not just short-term financial gains. Companies also incorporate sustainable practices into their operations that benefit both shareholders and society at large (Freeman, 2010; O\u0026apos;Connell \u0026amp; Ward; 2020).\u003c/p\u003e\n\u003cp\u003eDespite the above, the theory of enlightened shareholders contains certain flaws. Although companies also consider other stakeholders\u0026apos; interests in their operations, the ultimate goal is still to maximise their shareholders\u0026apos; value. As a result, companies\u0026apos; boards continue to make decisions that are in the best interests of shareholders and may not be the best for other stakeholders. Although enlightened theory encourages consideration of the long-term effects of corporations, the short-term thinking of corporate management in terms of financial performance may still be prevalent. Such measures may neglect the long-term sustainability and well-being of other stakeholders. Compared to shareholder theory, enlightened shareholder theory represents a step forward in thinking about and promoting sustainable practices. Still, compared to stakeholder theory, it presents certain limitations, especially regarding the extent of corporate responsibility to all its stakeholders, the measurability of goals, and the emphasis on ethics and social responsibility (Freeman, 2010; O\u0026apos;Connell \u0026amp; Ward; 2020).\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.1.3 Stakeholder Theory\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eChanges are constantly taking place in the corporate governance environment. Companies must understand and adapt to individual changes to maintain and operate successfully. As long as changes in the environment are small and implemented at the personal level, company managers can only react appropriately to minor changes in management. However, if the number of external changing factors affecting companies increases, companies must respond accordingly with more drastic changes that can fundamentally change the organisation\u0026apos;s current operations. For companies to react promptly to such changes, members of the management board of companies need to understand the changing individual relationships of the groups. To understand the external factors and group relationships that influence companies, it is necessary for companies first to identify and know all of their key stakeholders Freeman, 2010 and Freeman, 1984 defines key stakeholders as: \u0026quot;Any group or individual who can or has influenced the achievement of the goals of a company.\u0026quot; (Tse, 2011) cites many studies that report positive results in implementing governance policies that focus more on the key stakeholders of companies in terms of content and implementation rather than just their shareholders. This type of management has several advantages, including employees\u0026apos; focus on companies\u0026apos; performance and suppliers\u0026apos; willingness to work more closely together and share their knowledge. A business focused on key stakeholders also increases the competitiveness of companies. By connecting more closely with key stakeholders, companies will establish unique relationships that will focus solely on the operations of a specific company. In-depth cooperation between companies and their stakeholders represents a unique relationship that brings companies a competitive advantage. The author also cites research findings that have shown that companies that adjust their management according to the interests of key stakeholders also achieve better financial results (Tse, 2011).\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eAmong the weaknesses of stakeholder theory is the variety of goals that companies face if they engage with a more significant number of stakeholders and their interests. As an example of this type of management, the author states that company managers could lose focus on key objectives due to a more significant number of key stakeholders. Criticism of the theory also includes the problem of evaluating the added value of individual stakeholders and their impact on business. Indeed, to manage effectively, companies should only consider those stakeholders who bring added value to companies. The weakness of stakeholder theory is its predominantly theoretical-oriented side and lack of implementation in the practical environment (Tse, 2011).\u003c/p\u003e\n\u003cp\u003eManaging the interests of key stakeholders is the alignment of the various relationships that create value in companies. Companies represent a key link of cooperation between stakeholders (such as customers, suppliers, employees, investors, the broader company, etc.) and the management of individual companies, creating added value. To better and more thoroughly understand the functioning of companies, it is necessary to examine the individual relationships between stakeholders in more detail (Freeman, 2010). From the point of view of strategic management, companies mustn\u0026apos;t leave out any individual or group that can influence them, or vice versa, when identifying key stakeholders. To that end, companies must, in practice, cover the broadest possible range of individuals or groups that fall within that definition of stakeholder when selecting and identifying key stakeholders. When selecting stakeholders, companies must also exclude individuals or groups with little or no influence over individual companies. Companies must also exclude stakeholders from their stakeholder circle who have entirely different values and plans for managing their activities than companies (Freeman, 1984; Freeman, 2023).\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eCompanies must establish an appropriate cooperation system to bridge the stakeholder theory from a theoretical basis and apply it practically. Freeman, 1984 and Freeman, 2023 assumes that to use stakeholder theory in practice successfully, companies should consider at least the following three key aspects:\u003c/p\u003e\n\u003cp\u003e\u0026bull; The first aspect is \u0026ndash; rational identification of key stakeholders by companies;\u003c/p\u003e\n\u003cp\u003e\u0026bull; The second aspect is \u0026ndash; proper understanding of the organisational process by companies, which will be used for implicit or explicit management of stakeholders;\u003c/p\u003e\n\u003cp\u003e\u0026bull; The third aspect is that to engage with stakeholders successfully, companies need to understand the transactions and negotiations between individual companies and stakeholders and determine whether the negotiations and transactions carried out correspond to the choice of critical stakeholders of each company and the organisational process.\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eTo effectively set up a stakeholder governance/management system, companies should first identify a network of their key stakeholders. Companies determine the latter primarily based on Freeman\u0026apos;s above definition of stakeholders (Freeman, 1984). They include all individuals and groups meeting this company\u0026apos;s definition as their stakeholders. Freeman, 1984 and Freeman, 2023 proposes that companies first make a historical analysis of the environment as a starting point for developing an essential stakeholder structure. Suppose companies cannot prepare a historical study. In that case, the author suggests that companies use a generic stakeholder distribution to identify, adjust, or allocate key stakeholders accordingly.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.2 Concept of Sustainability in Business\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eAs follows from the definition of sustainable development, sustainable corporate governance also focuses on adopting strategies and decisions that enable the long-term successful operation of the company and its existence. The European Commission identifies sustainable corporate governance as corporate governance that considers the consequences of its business decisions on the environment (including climate biodiversity), society, people and the economy. It focuses on long-term sustainable value creation rather than short-term financial value (European Commission, 2021). In the economy, by-products such as environmental pollution, human rights violations, etc., created when a product or product service is co-created, are treated as external externalities. Effective, sustainable corporate governance advocates that companies identify their external externalities, prevent or reduce them, and subsequently eliminate them in the shortest possible time. Only when companies take responsibility and take appropriate measures to eliminate their externalities does governance become holistic and sustainable, consequently stimulating other factors of the environmental and social areas of the ESG network (Pacces, 2021).\u003c/p\u003e\n\u003cp\u003eWhen reviewing research papers dealing with the concepts of socially responsible and sustainable management, it is possible to notice a different application of the definition of the term. The terms \u0026quot;social responsibility\u0026quot; and \u0026quot;sustainability\u0026quot; are often interchanged and used in the same sense in connection with the activities of individual companies. Due to the uniform use of the term in different scientific works, the distinction between the two concepts under consideration is lost (Montiel, 2008). While corporate social responsibility refers to the assessment of corporate governance in terms of its current (or past through the analysis of past business results) impact on the broader society, sustainability refers to the operation of companies over a more extended period (Meseguer-S\u0026aacute;nchez et al., 2021). It includes introducing long-term strategies that enable companies to perform well in the long term from the perspective of social, \u0026nbsp; environmental, and economic factors (Ashrafi et al., 2018). Corporate social responsibility often aims to improve social well-being, which increases the sustainability of companies\u0026apos; operations in the long run. It usually rises above the statutory requirements set by the legal framework and operates voluntarily (Christensen et al., 2021). Compared to sustainable corporate governance, CSR does not involve the development of strategies that would focus on the performance of companies in the long term, taking into account and integrating environmental, social and economic factors (Ashrafi et al., 2018). Within socially responsible management, sustainable management can be an intermediate or an end goal (Ashrafi et al., 2018). Sustainable corporate governance is thus a concept in which non-financial reporting also plays an important role, incorporating both short-term and long-term integration and providing a link between environmental, social and economic factors (Dyllick \u0026amp; Hockerts, 2002).\u0026nbsp;\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.3 Innovative business models\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eSustainable innovation requires the inclusion of environmental, social, and economic aspects in the company\u0026apos;s processes from the initial idea to commercialisation, necessitating systemic changes beyond incremental adjustments (Boons \u0026amp; L\u0026uuml;deke-Freund, 2013). Innovative business models are crucial for implementing sustainable innovations, as they offer a comprehensive framework that includes key components such as value proposition, value creation configuration, and revenue model (Boons \u0026amp; L\u0026uuml;deke-Freund, 2013). These models help companies connect their activities with more significant production and consumption systems, facilitating the creation of ecological, economic, and social value (Boons \u0026amp; Wagner, 2009). The historical context highlights the rise of internet companies in the 1990s, which demonstrated the potential of new business models to challenge existing business logic, later evolving to include sustainability as a central element (Hawken et al, 1999; Hart et al., 1999).\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eManaging transitions and innovation systems play a key role in this process, emphasising the need for consistent government support and the involvement of various stakeholders to achieve systemic, sustainable transitions (Rotmans et al., 2001 \u0026amp; Geels, 2002). Therefore, innovative business models are tools for success at the company level and essential mechanisms for promoting broader socio-technical transformations toward sustainability. Furthermore, involving stakeholders in developing new business models enables a more dynamic and inclusive approach, allowing adaptation to environmental and market changes. Such models include technological innovations and changes in social practices and institutions, which are crucial for achieving long-term sustainable development goals. Investments in sustainable innovations have significantly increased in recent years, indicating the growing interest of the business community in transforming challenges into business opportunities and new markets (Montalvo et al., 2011; Lopez- Nicol\u0026aacute;s et al., 2021). In this way, innovative business models contribute to sustainable growth while providing a competitive advantage to companies willing to invest in the future (Lopez- Nicol\u0026aacute;s et al., 2021).\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.4 \u0026nbsp;The framework of the EU Sustainability Regulations\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.4.1 Non-financial Reporting Directive (NFRD)\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eOn 6 December 2014, Directive 2014/95/EU on disclosure of non-financial and diversity information by certain large undertakings and groups (from now on referred to as the Directive) entered into force. The Directive amends and complements the current Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC. It became applicable to the companies concerned (which are subject to the Directive) in 2018 about the information for the financial year 2017.\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eThe Directive was adopted to ensure that companies can contribute to more stable growth and employment by disclosing non-financial information (in addition to financial information). Also, due to the more extensive information, all key stakeholders should be more informed, making it easier for them to monitor the company\u0026apos;s management and make decisions about long-term investments. The need to disseminate sustainability information is crucial in identifying risks and building investor and consumer confidence, strengthening the transition to a sustainable global economy that links long-term business profitability with social justice and environmental protection. As most companies operate in more than one country, aligning national provisions with the Directive and the minimum legal requirement regarding the scope of information to be reported is crucial for companies and other stakeholders (Primec, 2017).\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eCompanies are free to disclose the information defined by the directive as they see fit. This means that data on non-financial operations can also be published in a separate report. Article 19a of Directive 2014/95/EU requires that the non-financial statement must contain: \u0026quot;at least information on environmental, social and human resources, respect for human rights, anti-corruption and anti-bribery matters, including (Primec, 2017):\u003c/p\u003e\n\u003cp\u003e\u0026middot; A brief description of the company\u0026apos;s business model;\u0026nbsp;\u003c/p\u003e\n\u003cp\u003e\u0026middot; A description of the company\u0026apos;s policies about those matters, including those relating to, among other things, the conduct of due diligence procedures;\u0026nbsp;\u003c/p\u003e\n\u003cp\u003e\u0026middot; Results of these policies;\u0026nbsp;\u003c/p\u003e\n\u003cp\u003e\u0026middot; The principal risks related to those matters that are related to the company\u0026apos;s activities, including, where appropriate and proportionate, its business relationships, products or services, that could give rise to serious adverse effects in those areas and how the company manages those risks;\u0026nbsp;\u003c/p\u003e\n\u003cp\u003e\u0026middot; Key non-financial performance indicators relevant to specific activities.\u003c/p\u003e\n\u003cp\u003eConcerning the implementation of individual policies, the non-financial statement when describing environmental policies shall include details of the present and foreseeable impacts of the company\u0026apos;s activities on the environment and, where applicable, on health and safety, as well as details on the use of renewable and non-renewable energy sources, greenhouse gas emissions, water use and air pollution. About social and personnel policy, the statement must contain information on measures to ensure gender equality, the implementation of the fundamental conventions of the International Labour Organization, respect for workers\u0026apos; right to information and consultation, respect for trade union rights, health and safety at work, working conditions, social dialogue, dialogue with local communities and measures taken to ensure the protection and development of these communities (Evropska komisija, 2017).\u003c/p\u003e\n\u003cp\u003eWhere an enterprise does not provide certain information in the report, it must clearly explain this. Public-interest entities with an average number of employees on a balance sheet date of more than 500 are obliged to publish information on non-financial operations. Only large enterprises must report because the costs associated with mandatory reporting for medium and small enterprises would outweigh the benefits. Companies can also publish the report only at the group level and not at the individual company level within the group. The measures show that when adopting the directive and establishing reporting requirements, the European Union focused primarily on the materiality of the information reported to minimise the administrative burden on companies due to reporting. Companies, therefore, have a reasonably free hand in reporting non-financial information (Evropska komisija, 2017).\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.4.2 Corporate Sustainability Reporting Directive (CSRD)\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eThe CSRD binds large, small, and medium-sized companies whose securities are listed on a regulated market (paragraph 1 of Article 19a of the CSRD) (Primec, 2017).\u003c/p\u003e\n\u003cp\u003eThe CSRD replaced or upgraded the previous Non-financial Reporting Directive (NFRD) 2014/95/EU. In addition to information from the areas (business model, policies (including due diligence procedures implemented), the results of these policies, risk and risk management, and key performance indicators relevant to individual activities \u0026ndash; which the NFRD already required), companies are also required to report (Primec, 2017):\u003c/p\u003e\n\u003cp\u003e\u0026bull; \u0026nbsp; \u0026nbsp; About their business strategy;\u0026nbsp;\u003c/p\u003e\n\u003cp\u003e\u0026bull; \u0026nbsp; \u0026nbsp; On the risk resilience of the business model and strategy on sustainability matters;\u003c/p\u003e\n\u003cp\u003e\u0026bull; \u0026nbsp; \u0026nbsp; On the plans, they have to ensure that their business model and strategy are compatible with the transition to a sustainable and climate-neutral economy;\u0026nbsp;\u003c/p\u003e\n\u003cp\u003e\u0026bull; \u0026nbsp; \u0026nbsp; Do the business model and strategy take into account the interests of stakeholders, and how do they take them into account;\u0026nbsp;\u003c/p\u003e\n\u003cp\u003e\u0026bull; \u0026nbsp; \u0026nbsp; On business opportunities arising from sustainability matters;\u003c/p\u003e\n\u003cp\u003e\u0026bull; \u0026nbsp; \u0026nbsp; On the role of management and supervisory bodies in matters relating to sustainability;\u0026nbsp;\u003c/p\u003e\n\u003cp\u003e\u0026bull; \u0026nbsp; \u0026nbsp; On the foremost actual and potential adverse impacts associated with the activities of the company, etc. (for more details, see paragraph 2 of Article 19a of the CSRD).\u003c/p\u003e\n\u003cp\u003eCompanies must integrate sustainability considerations into their business model, strategy, and goals, impacting the operations and management of companies themselves and audit processes (Primec \u0026amp; Belak, 2022). The information will has to be provided following the new ESRS reporting standards developed by the Commission with the assistance of the European Financial Reporting Advisory Group (EFRAG). Mandatory common standards allow for an in-depth audit, initially in the form of limited assurance on the reliability of sustainability information and later in line with the business of providing reasonable assurance. The reporting format will be uniform for all entities and digital and machine-readable. The sustainability report will become an integral part of the business report, which means it will not be possible to publish it as a separate document, as has been the case so far (Primec, 2017).\u003c/p\u003e\n\u003cp\u003eIntroducing common standards ensures that non-financial information becomes comparable to financial information (point 32 of the introduction to the CSRD proposal). Therefore, renaming a non-financial report to a sustainability report is not purely formal. Its purpose is to give greater importance to sustainability information and to make it inherently comparable in weight to financial details (Primec, 2024).\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003e1.5 Integrating Sustainability Regulations with Business Model\u003c/strong\u003e\u003c/em\u003e\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.5.1 Strategic Alignment\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eIn reviewing theories of corporate governance and legislation in the field of sustainability, the previously presented research question arises: how does legislation in the field of sustainability influence the formation of business models? To better understand such factors and their connection, it is necessary to comprehend management theories and tools crucial for a company to change its governance system based on external sustainability requirements, such as legislative changes and impacts. The integrated management theory represents a framework comprising various theories and practices that contribute to a holistic approach to management. Regarding sustainability, integrated governance can be defined as \u0026quot;a governance model that integrates the integration of sustainability oversight into board meetings\u0026quot; (UNEP, 2014). Concerning sustainability, the theory of integral management and governance represents a system that addresses issues related to sustainability, taking into account opportunities in a way that enables companies to create value for their stakeholders. For the successful implementation (implementation, realisation) of integral management and governance, the owners and management of companies must start discussing the risks and opportunities that sustainability brings and include sustainability-oriented topics as well as sustainable projects on their agenda (UNEP, 2014)\u003c/p\u003e\n\u003cp\u003eIntegral management and governance is an integral (holistic) approach that encourages members of shareholders\u0026apos; (owners) and management boards to integrate various sustainability factors into the decision-making process. Implementing integral management and governance into companies aims to create value for (all) companies\u0026apos; stakeholders. Companies achieve this by including sustainable projects in the decision-making process of shareholders (owners) and management board members, setting sustainable strategies and monitoring their implementation. For companies to achieve long-term sustainable results through integral management and governance, it is essential that companies take into account sustainability factors for success in their management, which include (IFAC, 2012):\u003c/p\u003e\n\u003cp\u003eFocus on customers and stakeholders:\u003c/p\u003e\n\u003cp\u003e\u0026middot; Understanding and meeting customer needs;\u003c/p\u003e\n\u003cp\u003e\u0026middot; Adaptation of all activities of individual companies to these needs.\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eEffective management and strategy setting:\u003c/p\u003e\n\u003cp\u003e\u0026middot; Providing ethical and strategic leadership that is geared towards sustainable value creation;\u003c/p\u003e\n\u003cp\u003e\u0026middot; Implementation of key activities that include company values, ethical culture and organisational structures and processes.\u003c/p\u003e\n\u003cp\u003eIntegral corporate governance and management, risk management and internal control:\u003c/p\u003e\n\u003cp\u003e\u0026middot; Development of effective management and governance structures and processes of integrated risk management and internal control;\u003c/p\u003e\n\u003cp\u003e\u0026middot; Balancing Performance and Compliance in Corporate Governance.\u003c/p\u003e\n\u003cp\u003eInnovation and flexibility:\u003c/p\u003e\n\u003cp\u003e\u0026middot; Introduction of innovative processes and products that improve the performance of companies;\u003c/p\u003e\n\u003cp\u003e\u0026middot; The adaptability of companies to changing circumstances.\u003c/p\u003e\n\u003cp\u003eFinancial Management:\u003c/p\u003e\n\u003cp\u003e\u0026middot; Providing financial support to management and implementing strategies through sustainable value creation;\u003c/p\u003e\n\u003cp\u003e\u0026middot; Implementation of good practices in areas such as taxes, costs, profitability and capital management.\u003c/p\u003e\n\u003cp\u003eHR and talent management:\u003c/p\u003e\n\u003cp\u003e\u0026middot; Human Resources and Talent Management as a Basic Function of Companies;\u003c/p\u003e\n\u003cp\u003e\u0026middot; Combining HR and talent management with the financial function of companies.\u003c/p\u003e\n\u003cp\u003eOperational excellence:\u003c/p\u003e\n\u003cp\u003e\u0026middot; Aligning the allocation of corporate resources with strategic objectives and factors for creating value for corporate stakeholders;\u003c/p\u003e\n\u003cp\u003e\u0026middot; Supporting the decision-making process with timely performance analysis.\u003c/p\u003e\n\u003cp\u003eEffective and transparent communication:\u003c/p\u003e\n\u003cp\u003e\u0026middot; Communicating with key stakeholders and ensuring that key stakeholders receive all relevant information;\u003c/p\u003e\n\u003cp\u003e\u0026middot; Preparation of quality business reporting to facilitate decision-making and support key stakeholders.\u003c/p\u003e\n\u003cp\u003eThe above factors represent the areas companies use to achieve high performance and comprehensive management. Companies successfully pursue such factors to ensure long-term competitiveness and sustainable integral governance and management. Companies must strive for the most successful implementation of these factors, representing the most important areas for ensuring organisational success for company members, shareholders, stakeholders and the wider society (IFAC, 2012).\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eIntegral management and governance bring many benefits (such as process consistency and optimisation). Over the years, the demands of the environment and society at large on companies have become increasingly demanding and extensive. Integral management and governance represent a solution with which companies regulate and meet the needs and expectations of key stakeholders. This keeps companies competitive and sustainable. Past research shows that companies have realised the important role of integral management and governance in practice. As a result, more and more companies are making decisions and implementing integral management and governance in their operations. Improving the effectiveness of integral management promotes a shift to integral approaches in management practices. The benefits of integral management and governance include (Dalling \u0026amp; Holt, 2012):\u003c/p\u003e\n\u003cp\u003e\u0026middot; Increased profitability \u0026ndash; companies improve performance and profitability through better risk management; Risks are addressed from different angles through an integrated management system;\u003c/p\u003e\n\u003cp\u003e\u0026middot; Financial benefits arising from the elimination of functional and reputational risks;\u003c/p\u003e\n\u003cp\u003e\u0026middot; Reducing costs by optimising processes, combining management functions and streamlining roles and responsibilities;\u003c/p\u003e\n\u003cp\u003e\u0026middot; Improve communication by merging processes and integrating functions;\u003c/p\u003e\n\u003cp\u003e\u0026middot; Facilitated ownership due to trained staff and integration of functional disciplines;\u003c/p\u003e\n\u003cp\u003e\u0026middot; Improved risk assessment and control \u0026ndash; process integrity allows for better decision-making, prioritisation, and resource allocation.\u003c/p\u003e\n\u003cp\u003eCompanies must change their operations and functions to implement integral management and governance. In doing so, they may encounter several obstacles, such as a lack of commitment from management and conflicts of interest. When implementing integral management and governance, management must be aware of the advantages and opportunities of the integral process. The whole process must occur gradually and through many governance and management initiatives. Excessive and too fast implementation can cause an overload of management board members. To effectively implement integral processes, companies must appoint a suitable and qualified manager to manage integral functions and process management. In addition to board and supervisory members, other stakeholders must also be aware of the advantages and benefits that integral systems, governance and management bring. Otherwise, companies will not be able to achieve the desired efficiency. Employees also play an essential role among key stakeholders. The latter are often accustomed to stable operation and can express dissatisfaction in the event of possible changes, which hinders the successful implementation of an integral management system. Integral management and governance must be introduced at all levels and dimensions of the governance and management process. Opportunities and risks must be addressed at all levels, from management to production. In doing so, companies must consider stakeholders\u0026apos; needs and expectations. The key to successful integral management is the understanding and coordination of the goals and strategies of companies. This can only be achieved when individual functional goals are aligned with common goals at all levels and dimensions of the corporate governance and management process (Dalling \u0026amp; Holt, 2012).\u003c/p\u003e\n\u003cp\u003eBased on past research findings, it was concluded that corporate governance plays a key role in the performance of corporate operations. Through a corporate governance system, companies can reflect their interests and promote the values they stand for. Therefore, Corporate governance also plays a vital role in sustainability. By effectively managing and integrating long-term planning, stakeholder involvement, and ethical action, companies are more likely to promote sustainability-oriented relationships (Jamali et al., 2008). When companies have a stable corporate governance structure, they are also usually more transparent. Such companies disclose more information about their sustainability practices and governance mechanisms. Transparency over the governance and operations of companies increases their reputation and the trust of key stakeholders, improving companies\u0026apos; environmental, social, and governance performance (Dhaliwal et al., 2011). From the point of view of state bodies and institutional arrangements, corporate governance can be influenced by several aspects. External factors, such as laws, codes and standards of corporate governance, constitute instruments that guide and influence the development of corporate governance. This creates business practices that give new impetus and guidance to other companies. Members of management and supervisory bodies, who have the task of increasing the efficiency and effectiveness of their operations, also significantly impact the formation of successful business practices. At the same time, they must also ensure long-term and sustainable management. The positive correlation between corporate sustainability initiatives and profitability demonstrates that companies do not need to sacrifice financial performance in their management to achieve effective, sustainable outcomes. Companies should not consider sustainability as a marketing factor or an area of operation but should treat it as a governance issue requiring strategic control from companies (Eccles \u0026amp; Krzus, 2010; Jo \u0026amp; Harioto, 2011). Effective corporate governance and sustainable business are closely interlinked. Therefore, companies must integrate key stakeholders\u0026apos; opinions, long-term objectives and non-financial indicators into their decisions. This makes them more likely to act sustainably in their operations. The next chapter will detail social responsibility and sustainable corporate governance (Jamali et al., 2008).\u003c/p\u003e\n\u003cp\u003e1.5.2 MER Model of Integral Management\u003c/p\u003e\n\u003cp\u003eThe MER model of integral management and governance provides a comprehensive framework that identifies and better understands the influence of external factors (such as legislation) on a company\u0026apos;s corporate governance and business models (Belak et al., 2014). Consequently, the MER model of integral management and governance was chosen in the research article to study the impact of sustainability legislation on the changes in selected companies\u0026apos; business models, aiming to understand and interpret the studied concepts better. To comply with external environmental requirements (such as legislative changes), businesses must adequately prepare internally and implement appropriate steps to achieve the desired goals (Belak et al., 2015).\u003c/p\u003e\n\u003cp\u003eThe MER integral management and governance model is designed three-dimensionally (process, instrumental and institutional dimensions). All three dimensions are interconnected horizontally and vertically, forming a permanently functioning whole. All three dimensions represent management as a partial system of companies, which is essential for the organisation\u0026apos;s overall functioning. This means that management is everywhere in individual companies, in all its processes, instruments and institutions. The MER model of integral management and governance is based on the multidimensional integration of management with the broader society and its environment, taking into account the fundamental mission of an individual company in the form of development and survival. The MER model of integral management and governance brings a holistic approach that combines several aspects of management, strategy, economics, operational efficiency, and innovation. This allows for a more balanced approach to analysis and improvement in companies. The model is designed to adapt to different types of companies and industrial sectors. From the point of view of individual companies, the MER model of integral management and governance is used in all phases of the life cycle, in all development phases, and all phases of individual companies of all sizes. The model is based on considering several performance factors, which are also related to social responsibility and sustainability (such as philosophy, culture, ethics, ecology, etc.) (Belak et al., 2014). The description of the MER model of integral management and governance can be presented from three different parts: 1) Integral management, 2) Enterprise and its environment, and 3) Success factors of an enterprise. The essential features of the MER Model of Integral Management and Governance are presented in Figure 1 and discussed in the continuation of the paper (Belak \u0026amp; Duh, 2015).\u0026nbsp;\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.6 Introduction to Flexibility Management in Sustainable Business Models\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eFlexibility management has emerged as a critical strategic approach in the dynamic business environment shaped by evolving sustainability regulations. As highlighted by the integration of the CSRD, SFDR, and Taxonomy Regulation, organizations must develop adaptive mechanisms to align their operations with these legislative requirements. Flexibility management ensures that businesses can respond proactively to such changes, enhancing their resilience and capacity for innovation. This paper extends its exploration of sustainable business models by emphasizing the role of flexibility management in achieving legislative compliance while fostering long-term growth.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.6.1 Flexibility in Corporate Governance\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eCorporate governance plays a pivotal role in adapting to sustainability requirements, as emphasized by the MER model of integral management. Flexibility management complements this framework by enabling organizations to adjust governance structures dynamically in response to new regulations and stakeholder expectations. For example, incorporating flexible decision-making processes allows companies to address both short-term compliance needs and long-term strategic goals. Flexibility also promotes the integration of diverse stakeholder interests, aligning corporate objectives with broader societal and environmental imperatives.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.6.2 Process Adaptability and Innovation\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eSustainability regulations necessitate systemic changes in business models, as incremental adjustments are often insufficient. Flexibility management supports this transformation by fostering process adaptability and promoting innovation. As demonstrated by case studies in the article, companies that implement flexible operational practices\u0026mdash;such as modular reporting systems or adaptive production methods\u0026mdash;are better positioned to meet sustainability goals. This adaptability not only ensures compliance but also drives competitive advantage by enabling organizations to capitalize on emerging opportunities in sustainable markets.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.6.3 Strategic Flexibility for Long-term Competitiveness\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eStrategic flexibility is essential for businesses navigating the complexities of sustainability legislation. The integration of flexibility management with strategic planning enables companies to anticipate regulatory changes and adjust their objectives accordingly. By embedding sustainability into their core strategies, organizations can achieve alignment with legislative frameworks while pursuing innovation and growth. For instance, flexibility management allows companies to iteratively refine their sustainability goals, balancing regulatory requirements with market-driven priorities.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.6.4 Stakeholder Engagement and Risk Mitigation\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eThe article underscores the importance of stakeholder-oriented governance in fostering sustainable business practices. Flexibility management enhances this approach by establishing dynamic feedback loops that accommodate changing stakeholder expectations. This adaptability not only strengthens stakeholder trust but also mitigates risks associated with non-compliance or reputational harm. By leveraging flexibility management, organizations can proactively address emerging challenges, ensuring alignment with both legislative and stakeholder demands.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.7 Innovative Approaches\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eA literature review reveals that there are already particular examples of companies that have successfully changed and refined their business models following environmental sustainability requirements. As an example of an innovative approach, it is possible to present a case study of a Spanish company in the wine sector that introduced sustainable innovations and a sustainable business model using the triple-layered business canvas. The company introduced certified vegan wine, leading to economic, environmental, and business model changes. The company altered its business model by starting to use new bottles that are lighter and more environmentally friendly in collaboration with local vineyards and universities for the development of sustainable practices. By doing so, the company implemented sustainable policies and a sustainable business model (L\u0026oacute;pez-Nicol\u0026aacute;s et al, 2022).\u003c/p\u003e\n\u003cp\u003eAdditionally, other companies have changed their business models from processing and preparing gas generators to offering gas as a service and from steam turbine business models to providing electrical energy. With such strategies and innovative business models, companies have successfully introduced sustainable business models that create value while considering sustainability\u0026apos;s economic, environmental, and social dimensions. Case studies demonstrate how companies in various sectors and sizes successfully implement innovative business models to achieve sustainability. Based on past research, it can be determined that companies can view sustainability either as an advantage or a disadvantage. In the past, companies have successfully established business models that have brought them additional opportunities from a sustainability perspective (Yang et al., 2023).\u003c/p\u003e"},{"header":"Materials and Methods","content":"\u003cp\u003eAs part of the research, the multiple case study method was used to analyse the sustainability reports of selected companies. The multiple case study analysis enables the definition and examination of a precisely defined phenomenon in the actual context of the company. It allows for studying phenomena in a particular area using numerous data and analyses. In this research, annual reports and sustainability reports were evaluated using content analysis. This analysis allows for obtaining information to analyse the causes and ways that explain the reasons and circumstances for performing specific activities of the examined entities (Lina et al., 2023; Voss et al., 2008).\u003c/p\u003e\n\u003cp\u003eThe content analysis method was used to obtain and evaluate information. This method has been used by other researchers in similar studies where information was obtained from annual reports related to economic, social, and environmental reporting. It is suitable for the evaluation of data in qualitative form. Therefore, the method is appropriate for evaluating annual report information studied within this paper. The content analysis method comprises the following stages. First, the method verifies the essence of the information necessary from NFRD, CSRD in the company\u0026apos;s annual or sustainability reports. For the research, binary coding 0,1 has been used under the content analysis method. If the company reported the data, it was assigned a value 1 for that area. Otherwise, the company was assigned a value of 0 (Lajili \u0026amp; Z\u0026eacute;ghal, 2005).\u003c/p\u003e\n\u003cp\u003eThe research aims to verify the following research question: How does legislation influence the change in companies\u0026apos; business models?\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eThe research was conducted based on the analysis of information reporting by companies in their sustainability or annual reports concerning the requirements of NFRD and CSRD. For the NFRD and CSRD requirements, the extent to which companies report information by ESRS standards was analysed. It was verified whether companies report information on:\u003c/p\u003e\n\u003cul\u003e\n \u003cli\u003eEnvironmental areas (following ESRS E standards, including environmental information related to climate change, pollution, water and marine resources, biodiversity and ecosystems, and circular economy);\u003c/li\u003e\n \u003cli\u003eSocial areas (following ESRS S standards, including social information related to social factors, which include the company\u0026apos;s workforce, employees in the supply chain, other groups and local communities, and customers and end users);\u003c/li\u003e\n \u003cli\u003eGovernance areas (under ESRS G standards, including governance information related to the company\u0026apos;s business model and strategies, management and quality of relations with business partners, corporate governance and supervisory board, products and services of the company, risk management and internal control and responsible business practices).\u003c/li\u003e\n\u003c/ul\u003e\n\u003cp\u003eFor each of the above areas of NFRD and CSRD, whether the company discloses information relevant to the research above question will be verified. The higher the score the companies receive, the more it is expected that the applicable legislation on sustainability impacts the reporting of sustainability information and, consequently, the co-creation of innovative sustainable business models.\u003c/p\u003e\n\u003cp\u003eThe purpose is to examine whether the reporting of sustainability information has altered companies\u0026apos; corporate governance. This analysis aimed to determine if sustainability legislation impacts companies\u0026apos; management and business models. The research utilised the research model presented in the paper by Čufar et al., 2014. The research model investigates whether the NFRD and CSRD affect the process, instrumental, and institutional dimensions at all three hierarchical levels (company policy, strategic management, tactical and operational management). The individual dimensions and hierarchical levels were structured following the MER model of integral management and governance. The research model consists of the following constructs (C) (Čufar et al., 2024):\u003c/p\u003e\n\u003cul\u003e\n \u003cli\u003eC1: mission, purposes, and primary goals of companies at the policy level;\u003c/li\u003e\n \u003cli\u003eC2: corporate, general, and business strategies at the level of strategic management;\u003c/li\u003e\n \u003cli\u003eC3: implementation of policies and strategy formulation at the tactical and operational management levels;\u003c/li\u003e\n \u003cli\u003eC4: description of planning, organising, directing, and controlling;\u003c/li\u003e\n \u003cli\u003eC5: an overview of preparatory information activities, decision-making, and measures undertaken as process functions;\u003c/li\u003e\n \u003cli\u003eC6: an overview of values, business and management guiding principles, styles, techniques, and management methods;\u003c/li\u003e\n \u003cli\u003eC7: overview of corporate governance institutions.\u003c/li\u003e\n\u003c/ul\u003e\n\u003cp\u003eThe research was conducted on a sample of 33 companies from selected countries: Slovenia (9 companies), Germany (10 companies), Poland (3 companies) and India (11 companies). Companies from India were selected to compare whether the level of reporting in non-EU countries differs from that of companies headquartered in the EU. In Slovenia, the analyzed companies were Holding Slovenske elektrarne d.o.o. (HSE), Petrol d.d., Pivovarna Union d.o.o., Nova Ljubljanska banka d.d. (NLB), Nova Kreditna banka Maribor d.d. (NKBM), SKB banka d.d., Krka d.d., Cinkarna Celje d.d. and Talum d.d. In Germany, the companies Siemens AG, Beiersdorf AG, Bayerische Motoren Werke AG (BMW), Commerzbank AG, Deutsche Bank AG, E.ON SE, Henkel AG \u0026amp; Co. KGaA, RWE AG, SAP SE and Volkswagen AG were analyzed. In Poland, the companies CD PROJEKT S.A., KGHM Polska Miedź S.A. and Grupa Azoty S.A.were analyzed and in India, the companies Bharat Petroleum Corporation Limited, ITC Limited, HCL Technologies Limited, Housing Development Finance Corporation Limited (HDFC), Hindustan Unilever Limited, Infosys Limited, Oil and Natural Gas Corporation Limited (ONGC), Reliance Industries Limited, State Bank of India (SBI), Tata Group and Wipro Limited were analyzed. The companies were selected based on the classification of the information technology (4 companies), financial services (8 companies), energy and mining (9 companies), industrial manufacturing (9 companies) and consumer goods (3 companies). The study was conducted based on information obtained from publicly published annual reports or separate sustainability reports for the financial year 2023. Reporting requirements under the NFRD and CSRD and reporting following the MER model of integral management and governance were studied for 2023. For this purpose, annual or sustainability reports for these years were also examined.\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eThe research was conducted based on the following steps. First, a content analysis of selected companies\u0026apos; annual or separate sustainability reports was conducted. Each document was reviewed and evaluated. The information obtained from the study assessed whether the company reports based on NFRD and CSRD requirements. The information analysis was based on publicly available documents, annual reports, and separate sustainability reports that companies publicly publish on their websites. Based on these data, a content analysis of the information was performed, and the research above areas and research questions were defined. The annual or separate sustainability reports were thoroughly reviewed and evaluated, verifying whether they disclosed information related to the above areas. For each of the mentioned areas and questions, it was analysed whether the company reports the mentioned information and to what extent. The research results were compiled and analysed based on the performed analysis, and a conclusion was prepared concerning the set research question. From the obtained results, a conclusion was prepared (Čufar at al., 2025; Lajili \u0026amp; Z\u0026eacute;ghal, 2005).\u003c/p\u003e"},{"header":"Results","content":"\u003cp\u003eThe following section will present the results of the research. The results are detailed in two parts. First, the extent to which companies reported information that was compliant with the NFRD and CSRD requirements will be presented. In the second part we will present the extent to which companies reported information in line with the MER model of integral management and governance.\u0026nbsp;\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e4.1 CSRD regulation\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eThe following section will present the company\u0026apos;s reporting results on the CSRD requirements.\u003c/p\u003e\n\u003cp\u003eBased on the research results from the perspective of environmental factors (such as\u0026nbsp;climate change, pollution, water and marine resources, biodiversity and ecosystems, and circular economy), it is evident that, from the perspective of environmental factors, companies from Poland and Slovenia reported the most detailed and comprehensive information in respect to CSRD requirements. They were followed by companies in Germany and then by companies in India. The results indicate that all of the observed companies reported more than half of the required information. This indicates that companies are committed to incorporating and reporting environmental-related information in their annual reporting. EU companies reported data in more detail compared to companies from India, suggesting that detailed legislation in the field of sustainability contributes to more thorough and comprehensive reporting.\u003c/p\u003e\n\u003cp\u003eBased on the research results from the perspective of social factors (such as the company\u0026apos;s workforce, employees in the supply chain, other groups and local communities, and customers and end users), it is evident that, from the perspective of social factors, companies from Poland and Slovenia reported the most detailed and comprehensive information in respect to CSRD requirements. They were followed by companies in Germany and then by companies in India. The results indicate that companies are committed to incorporating and reporting social-related information in their annual reporting. EU companies reported data in more detail compared to companies from India, suggesting that more detailed legislation in the field of sustainability contributes to more thorough and comprehensive reporting.\u003c/p\u003e\n\u003cp\u003eBased on the research results from the perspective of governance factors (such as the company\u0026apos;s business model and strategies, management and quality of relations with business partners, corporate governance and supervisory board, products and services of the company, risk management and internal control, and responsible business practices), it is evident that, from the perspective of governance factors, companies from Poland and Slovenia reported the most detailed and comprehensive information. They were followed by companies in Germany and then by companies in India. The results indicate that all of the observed companies reported more than half of the required information. This indicates that companies are committed to incorporating and reporting governance-related information in their annual reporting. EU companies reported data in more detail compared to companies from India, suggesting that more legislation in the field of the sustainability contributes to more thorough and comprehensive reporting.\u003c/p\u003e\n\u003cp\u003eWhen examining companies within each industry, it was evident that the highest level of information reporting was achieved by companies in the Information Technology sector. They were followed by companies in the Consumer Goods sector and companies in the Financial sector (banks and insurance companies), followed by companies in the Energy and Mining sector, and finally by companies in the Industrial Manufacturing sector. Financial sector, Consumer Goods, and Information Technology companies reported information within the top quartile of the required information level. Consequently, the results indicate comprehensive reporting of these disclosures in the mentioned sectors. In the Mining and Energy and Industrial Manufacturing sectors, the level of reported information exceeded half of the required disclosures.\u003c/p\u003e\n\u003cp\u003eA more detailed examination of reporting across different disclosure areas reveals that the highest level of reporting on environmental factors was achieved by companies in the Information Technology sector. Companies in the Consumer Goods sector and the Financial Services sector also attained high reporting scores. Slightly lower reporting levels were observed in the Energy and Mining and Industrial Manufacturing sectors. However, companies across all sectors reported more than half of the required information. The highest level of reporting on social factors was achieved by companies in the Information Technology sector and by the Companies in the Consumer Goods sector, followed by companies in the Financial Services sector. A slightly lower level of reporting on social factors was achieved by companies in the Energy and Mining sector. The lowest level of reporting was observed in the Industrial Manufacturing sector.\u0026nbsp;An analysis of the reporting data on governance factors reveals that the highest level of reporting was achieved by companies in the Consumer Goods sector. They were followed by companies in the Energy and Mining sector, then by companies in the Information Technology and Financial Services sectors. The lowest level of reporting was observed in the Industrial Manufacturing sector.\u0026nbsp;Companies across all sectors reported more than half of the required information.\u003c/p\u003e\n\u003cp\u003eAn analysis of the reporting results for individual ESG factors (environmental, social, and governance) and sectors (Information Technology, Consumer Goods, Financial Services, Energy and Mining, and Industrial Manufacturing) reveals that companies in all observed countries are committed to reporting sustainability-related information. Companies in EU countries reported more comprehensive information than those in non-EU countries. It is evident that certain sectors provide more detailed sustainability information. On average all of the analyzed companies engaged ESG principles in their governance and report at least some parts of sustainability information.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e4.4 MER model of integral management and governance\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eBased on the research results, it can be concluded that the average level of corporate governance reporting, according to the MER model of integral management and governance, was higher for companies that reported sustainability information more comprehensively compared to those that reported less sustainability information in accordance with CSRD. The results of the reporting demonstrate a significant commitment by companies to sustainable operations and transparency, contributing to better stakeholder information and enhancing public trust in their activities.\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eResults indicate that the highest level of information reporting was achieved in the instrumental dimension with the reporting of group C6 information of the research model, such as values, business and management guiding principles, styles, techniques, and management methods. This was followed by reporting corporate governance institutions\u0026apos; information of group C7 of the research model and then reporting in the groups from C1-C5 information of the research model, following the measurement model of integral management and governance.\u0026nbsp;\u003c/p\u003e"},{"header":"Discussion","content":"\u003cp\u003eResearch results show that companies are committed to reporting sustainability information in their annual reporting. With the implementation of the CSRD, SFRD and Taxonomy regulation, it is expected that the level of sustainability reporting will rise, and companies in EU will report even more comprehensive information, providing their key stakeholders with additional insights and information needed for thorough decision-making.\u0026nbsp;The research results have shown that EU and non-EU companies are committed towards reporting sustainability information, and their corporate governance decisions are progressively intertwined with sustainability requirements. In terms of CSRD, it is evident that companies in the EU who are obliged to report under the EU sustainability legislation report higher level of sustainability information than companies who are not obliged to report sustainability information under such legislation. Thus, the results of the results are indicating the influence of legislation on corporate operations and governance. In addition, results of the research indicate that the sector in which a company operates influences the level of sustainability reporting it conducts. Comprehensive reporting of information has also been observed in the reporting of data related to corporate governance (when measured based on the research model consistent with the MER model of integral management and governance).\u003c/p\u003e\n\u003cp\u003eIt is important to emphasise that reporting such information presents an external image of the company that can influence key stakeholders and, consequently, the company\u0026apos;s returns. As a result, companies are likely to focus on achieving the highest possible level of sustainability reporting in the future. With the introduction of the CSRD and ESRS, such reporting will become even more standardised, making it easier for key stakeholders to analyse which companies are more sustainably oriented and which are less so.\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eThe results of the report indicate that companies have started to report more comprehensive information based on sustainability legislation and that stricter legislation and standardisation contribute to better comparability and transparency of reported data. According to the MER model of integral management and governance, the research model (Čufar et al., 2024) also evaluated the differences in corporate governance reporting. It can be concluded that companies are focusing on the supplementation and implementation of corporate governance systems and business models to meet sustainability requirements in the long term, thereby becoming more competitive in the market and contributing more comprehensive and sustainable activities in the fields of environment and society, thus supporting sustainability in these areas.\u003c/p\u003e\n\u003cp\u003eThe findings presented in this article highlight the transformative impact of sustainability legislation on business models and governance structures. By integrating flexibility management into their operational and strategic frameworks, organizations can achieve greater adaptability, resilience, and innovation. This synergy between sustainability and flexibility not only supports legislative compliance but also positions companies for long-term success in a rapidly changing global environment.\u003c/p\u003e\n\u003cp\u003eFrom the perspective of implications for business, it is expected that sustainability reporting and legislation will encourage companies to transform their business models and management towards sustainability-oriented goals. This contributes to sustainable business operations and comprehensive management of economic entities, which promotes sustainability in the long term. Companies can achieve a high competitive advantage based on sustainable strategies and implement strategies and solutions that surpass the current solutions of existing companies. However, a disadvantage of this movement includes transforming existing companies towards sustainability. Such changes are often associated with high costs and time, requiring significant resources for implementation. There is also a risk of reduced competitive advantage compared to companies not subject to such reporting requirements. Companies from third countries might thus have a slight competitive edge that companies in the EU would find challenging to outweigh.\u003c/p\u003e\n\u003cp\u003eFuture research could focus on standardising individual reporting and testing models on a larger sample of companies over a longer timeframe. This approach would provide a more detailed overview of reporting practices. Additionally, comparing the reporting results of companies in the EU with those from other third countries presents a valuable opportunity for future research. This comparison would reveal the extent to which companies from third countries comply with the sustainability legislation applicable in the EU.\u003c/p\u003e\n\u003cp\u003eWhen selecting the research sample, companies from the financial sector (banks and insurance companies) were also included. Since these companies are subject to different ESG reporting regulations, which make their data difficult to compare with non-financial industries, this constitutes a limitation of the research and must be considered when interpreting the results.\u003c/p\u003e"},{"header":"Conclusions","content":"\u003cp\u003eBased on the research results and findings from past studies, it can be concluded that sustainability legislation is one of the factors influencing the change in companies' business models. In implementing business models, numerous factors and circumstances must be considered, varying from case to case (considering companies environment, legislation, etc.). Nonetheless, legislation plays a significant role in ensuring appropriate standardisation and harmonised reporting of sustainability information by companies. This gives key stakeholders a more comprehensive information set and reduces economic uncertainty. On the other hand, the legislation also ensures sufficient transparency and the creation of new opportunities, allowing companies that create added value through sustainable principles to maintain and enhance their competitive advantage and have opportunities for further growth. Sustainability legislation is also crucial for ensuring long-term success while considering environmental, economic, and social factors. Thus, it must give companies sufficient freedom and flexibility to maintain their competitive advantage and grow. Companies depend on legislation to provide favourable conditions for growth and development, and legislation depends on successful sustainability-oriented companies to shape the regulatory framework based on their best practices and innovative sustainable business models, enabling economic growth and development while considering sustainability goals.\u003c/p\u003e"},{"header":"Declarations","content":"\u003ch2\u003eConflict of Interest\u003c/h2\u003e\u003cp\u003eThe authors declare that they have no conflict of interest.\u003c/p\u003e\u003cp\u003e\u003cstrong\u003eEthical Approval\u003c/strong\u003e\u003cp\u003eThis article does not contain any studies with human participants or animals performed by any of the authors.\u003c/p\u003e\u003c/p\u003e\u003cp\u003e\u003cstrong\u003eInformed Consent\u003c/strong\u003e\u003cp\u003eNot applicable.\u003c/p\u003e\u003ch2\u003eFunding\u003c/h2\u003e\u003cp\u003eThe authors did not receive support from any organization for the submitted work.\u003c/p\u003e\u003ch2\u003eAuthor Contribution\u003c/h2\u003e\u003cp\u003eAll stated authors contributed to the manuscript, however M.C. is the fist author and J.B. is treated as the leading and corresponding author.FundingThis research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.\u003c/p\u003e\u003ch2\u003eAcknowledgement\u003c/h2\u003e\u003cp\u003eFundingThis research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.\u003c/p\u003e"},{"header":"References","content":"\u003col\u003e\n \u003cli\u003eArgando\u0026ntilde;a, A. 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Journal of Cleaner Production, 140, 1794\u0026ndash;1804.\u003c/li\u003e\n\u003c/ol\u003e"}],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":true,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":false,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":false,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":false,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"CSRD, Business model, Flexibility, Sustainable Corporate Governance","lastPublishedDoi":"10.21203/rs.3.rs-7084039/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-7084039/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eIn recent years, legislation on sustainability has been adopted by the EU and national authorities to increase sustainable behavior among companies, protect nature, and safeguard people. With the implementation of regulations, stakeholders in the economy are increasingly compelled to adopt a sustainability mindset and integrate it into their operations. This integration influences and shapes corporate governance, transform-ing their business models. In this article, we aim to examine the current legislation concerning sustainabil-ity and its impact on economic business models. We will explore how these laws shape business practices, encourage sustainable development, and drive changes in corporate strategies and governance structures.\u003c/p\u003e\n\u003cp\u003e(JEL: Q56, G34, M14)\u003c/p\u003e","manuscriptTitle":"Integrating New Sustainability Regulations With Innovative and Flexible Business Models: A Path To Future Success","msid":"","msnumber":"","nonDraftVersions":[{"code":1,"date":"2025-10-20 04:51:19","doi":"10.21203/rs.3.rs-7084039/v1","editorialEvents":[{"type":"communityComments","content":0}],"status":"published","journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true}}],"origin":"","ownerIdentity":"c271f9c6-7b91-454a-98a9-2a50cb049698","owner":[],"postedDate":"October 20th, 2025","published":true,"recentEditorialEvents":[],"rejectedJournal":[],"revision":"","amendment":"","status":"posted","subjectAreas":[],"tags":[],"updatedAt":"2025-10-22T05:23:23+00:00","versionOfRecord":[],"versionCreatedAt":"2025-10-20 04:51:19","video":"","vorDoi":"","vorDoiUrl":"","workflowStages":[]},"version":"v1","identity":"rs-7084039","journalConfig":"researchsquare"},"__N_SSP":true},"page":"/article/[identity]/[[...version]]","query":{"redirect":"/article/rs-7084039","identity":"rs-7084039","version":["v1"]},"buildId":"8U1c8b4HqxoKbykW_rLl7","isFallback":false,"isExperimentalCompile":false,"dynamicIds":[84888],"gssp":true,"scriptLoader":[]}