3 minute read 24 Feb 2022

The CEO Imperative: Why Eurozone CEOs are prioritizing ESG investments

Authors
Julie Hood

EY EMEIA Strategy and Transactions Leader

Passionate ambassador of an entrepreneurial mind-set in the workplace. Aspiring digital guru. Avid supporter of innovation. Trained architect. Youth mentor. Charity volunteer. Mother.

Constantin Gall

Managing Partner, Strategy and Transactions, Ernst & Young GmbH

Decades of experience in transactions, corporate finance, strategy and international management. Trusted advisor. Transformation enthusiast. Passionate driver who likes traveling.

3 minute read 24 Feb 2022

EY analysis shows benefits to creating long-term sustainability agenda and ESG value through strategy and M&A, in the Eurozone.

In brief
  • The EY CEO Survey 2022 assesses responses from 507 Eurozone CEOs, including how they are adjusting ESG strategies.
  • A key finding is that the landscape has changed due to the pandemic, and stakeholders are expecting more ESG investments from businesses.
  • While globally some investors have reservations, Eurozone investors are generally more supportive of CEOs investing in environmental sustainability.

As people and communities around the world continue in efforts to overcome the challenges of the COVID-19 pandemic, according to the EY CEO Survey 2022, the vast majority (90%) Eurozone businesses have already been impacted, with over a third (38%) stating the pandemic has fundamentally reshaped their industries. Furthermore, 59% of planned acquisitions in the Eurozone in the past 12 months were cancelled or failed because of the COVID-19 pandemic.

In this edition of the CEO Imperative Series, which provides critical answers and actions to help CEOs reframe the future of their organizations, we explore how CEOs are making changes to their strategies in the face of this new landscape. Over three-quarters (77%) of Eurozone CEOs have adjusted or are planning to adjust their operations or supply chains to reduce costs or minimize risks. According to respondents, one of the most critical risks to their future growth strategies is the acceleration of climate change impacts and increasing pressures to build sustainability (15%) — surpassed only by increasing geopolitical tensions, trade conflicts, protectionism and sanctions (21%). The top three capital strategy issues receiving the most attention and resources as identified by respondents are investing in digital transformation, investing in existing business to accelerate organic growth and value creation, and investing in sustainability.

Businesses have increased their focus on achieving a green recovery, and more broadly, environmental, social, and governance (ESG) targets. Consumers, employees and investors are increasingly voicing expectations that businesses address ESG issues — and CEOs are taking notice. This is especially true in the Eurozone, where from the survey, 30% of CEOs think that ESG will likely impact their role (compared to 23% of CEOs globally).

According to the survey, achieving profit and revenue goals alone are no longer sufficient metrics when it comes to meeting stakeholder expectations. As a result, CEOs are putting higher value on ESG, and around 27% already see the competitive advantage of having a clearly defined sustainable strategy. Eurozone respondents also identify the growing focus on ESG as the top challenge or opportunity changing the role of the CEO (30% of Eurozone CEOs, compared to 23% globally).

Importance of ESG

86%

of Eurozone CEOs think that ESG is an important value driver, even higher than revenue growth.

In addition, Eurozone companies are increasingly tying their ESG goals to M&A growth. M&A is perceived as a critical driver of growth with nearly two-thirds (56% vs long-term average of 47%) of CEOs in the region expecting their companies to pursue acquisitions in the next 12 months, targeted towards countries like France, US and the UK.

In the 2021 survey, 26% of Eurozone CEOs cited ESG as the key reason for pursuing acquisitions (compared to 20% of global CEOs). This is driving a substantial uptick in ESG-driven investments in the Eurozone, with 2021 being a record year for the region (589 ESG-driven acquisitions, up 35% YOY from 2020).1 ESG is a pressing issue for investors around the world, but the Eurozone is leading the way in demanding CEOs take action.

Not only in terms of sustainability M&A, European companies are also performing well on their overall sustainability agenda (reflected in their high ESG scores). According to the EY Europe Attractiveness Survey 2021 (pdf) , as many as 9 in 10 global executives say that environmental sustainability is important to their investment strategy, with 85% perceiving Europe as a green leader. Furthermore, 7 out of the top 10 ESG scorers in the energy sector are domiciled in Eurozone.2

ESG is a pressing issue for investors around the world, but the Eurozone is leading the way in demanding CEOs take action.
Julie Hood
EY EMEIA Strategy and Transactions Leader

Nevertheless, challenges remain. Around 46% of Eurozone respondents admit that they have encountered resistance from investors and shareholders about their sustainability transition strategy, which is much less than their global peers (65%). Moreover, out of the respondents who faced resistance, nearly two thirds (65%) of Eurozone respondents indicate this is by a minority of investors and/or stakeholders (compared to 46% globally).

The data suggests that, while there is more that can be done to underscore the importance of ESG for their businesses, Eurozone CEOs have much greater support for taking action. Improving the environmental impact of company activities was cited as the most important objective for CEOs (26% of Eurozone respondents, compared to 21% globally) — and CEO vision and determination are key personal attributes needed to succeed in a post-pandemic world (25%).

From our analysis, net return on the MSCI Europe ESG Leaders Index were much higher than the MSCI Europe index during the January 2020 to December 2021 period.

Businesses in the Eurozone with higher ESG investments are already outperforming the wider market. This only underscores the tremendous opportunities ESG offers for bottom lines.
Constantin M. Gall
Managing Partner, Strategy and Transactions, Ernst & Young GmbH

With sustainability issues high on the agenda in the Eurozone, it has become essential for businesses to understand their unique set of ESG challenges and work toward the design and realization of sustainability objectives. Businesses in the Eurozone with higher ESG investments are already outperforming the wider market. This only underscores the tremendous opportunities ESG offers for bottom lines. It indicates that there is a positive business case for creating long-term sustainability and ESG value through strategy, M&A, capital allocation and portfolio optimization in the Eurozone.

Summary

Eurozone CEOs are giving ESG more prominence in their business strategies and see ESG’s value for growth. From EY analysis, there is a positive business case for taking action on ESG in the region. Eurozone CEOs may face some resistance from investors, but they have more support compared to their global peers.

About this article

Authors
Julie Hood

EY EMEIA Strategy and Transactions Leader

Passionate ambassador of an entrepreneurial mind-set in the workplace. Aspiring digital guru. Avid supporter of innovation. Trained architect. Youth mentor. Charity volunteer. Mother.

Constantin Gall

Managing Partner, Strategy and Transactions, Ernst & Young GmbH

Decades of experience in transactions, corporate finance, strategy and international management. Trusted advisor. Transformation enthusiast. Passionate driver who likes traveling.