How can boards convert sustainability from a wish to a winning reality?

Authors
Julie Linn Teigland

EY EMEIA Area Managing Partner; EY Global Leader, Women. Fast forward

Passionate about the transformational power of digitalization and innovation and its potential to deliver sustainable, inclusive growth for clients. Prominent voice of the Women20 global agenda.

Andrew Hobbs

EY EMEIA Public Policy Leader

Public policy leader focusing on talent, technology, corporate governance and corporate reporting. Father of four, cyclist and dabbling homebrewer.

Contributors
14 minute read 5 Mar 2024

Show resources

  • EY Europe Long-Term Value and Corporate Governance Survey (pdf)

Boards need to step up their role as a challenger in the face of cooling corporate commitment to sustainability.

In brief

  • New research finds boards need to challenge management to embed sustainability into the business model and strategy.
  • A more ambitious approach to sustainability regulations and policy, focusing on more than compliance, can lead to an advantage over the competition.
  • Without decisive action, companies could face a constrained future where policymakers have introduced increasingly stringent measures to manage sustainability crises.

Focusing on sustainability in today’s operating environment is clearly challenging, and there are worrying signs that company commitment to sustainability is cooling at a time when global warming is still unchecked.

If companies do not act quickly enough, policymakers are increasingly likely to intervene, implementing more stringent measures to manage the implications of resource scarcity and limiting companies’ potential for future innovation in the process.

New EY research suggests boards need to respond by leaning in – emboldening management to embed sustainability as a business imperative and rationalizing investment decision-making so that capital allocations flow to projects that make a difference, boost financial performance, and deliver on their promises.

This fourth annual edition of the EY Europe Long-Term Value and Corporate Governance Survey examines the role of governance in sustainable business model innovation. While our 2023 research program  focused on the most effective models and practices of effective sustainability governance, this year we look at how boards can challenge their companies to embrace sustainability as a true business imperative and utilize policy and technology developments to accelerate progress.

Show resources

  • Download the 2024 EY Europe Long-term Value and Corporate Governance Survey

Drawing on the views of 200 directors, CEOs and C-suite heads, we found a group of executives (the “Leaders”) who are better placed to challenge management thinking, scrutinize capital allocation, and insist on greater ambition.

Compared to the “Followers,” the Leaders have a clearer strategic view of how sustainability can achieve their value-creating objectives, tend to go beyond compliance with sustainability regulations, and are better positioned to seize AI’s potential to accelerate sustainability.

Based on that analysis, this article – part of the EY Board Imperative Series – explores three key areas where boards can establish a leading position:

  1. Proactively challenge management to embed sustainability into the business strategy, demanding an ambitious strategic vision from management teams and critically scrutinizing supporting business cases.
  2. Insist on a more ambitious, strategic approach to the policy and regulatory agenda to move beyond compliance and pinpoint where the company can find a strategic advantage over the competition.
  3. Exploit AI’s sustainability potential. AI, sustainability and governance are linked in ways that need to be explored. Responsible governance will allow the organization to balance the sustainability opportunity of AI with its environmental, societal and ethical challenges.
Boards play a key role in maintaining focus on sustainability as a strategic imperative in the face of challenge – reimagining the business for a sustainable future.
Julie Linn Teigland
EY EMEIA Area Managing Partner; EY Global Leader, Women. Fast forward
  • About the research

    Two hundred corporate directors and senior managers were surveyed in November and December 2023. Twenty percent of respondents were chairs or nonexecutive directors of the board, 20% were CEOs, and the remainder were drawn from across the C-suite. Half of respondents’ organizations have revenues of more than €1 billion a year, with the other half between €100 million and €999 million. Respondents were split across 15 European countries and 25 industry segments.

  • Identifying Leaders and Followers

    To identify Leaders and Followers, we assessed how effective their governance was in three key areas: challenging management on its sustainability plans; exercising board oversight on execution and progress against sustainability pledges; and engaging with shareholders about sustainability plans and action.

    The “Leaders” are 45 respondents who have an “extremely effective” sustainability governance capability in two or more of those areas. The “Followers” are 44 respondents who are not “extremely effective” in any of these three core categories.

Vertical garden living green wall plants vs concrete modernism
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1

Chapter 1

The sustainable business imperative

Boards need to lean in and embolden management to embed sustainability into strategy, with an ambitious vision and credible business cases.

While the world has a collective responsibility to address sustainability, businesses play a central role in driving the urgent change needed.

“Companies that execute on their sustainability strategy (whether in operating model, products, support functions, or talent) do not just create more value for our planet and society,” says Julie Linn Teigland, EY EMEIA Area Managing Partner and EY Global Leader – Women. Fast forward. “They are also likely to capture more financial value for the company and its shareholders” — an approach EY calls “value-led sustainability”. In the EY Sustainable Value Survey, 69% of companies said they captured higher financial value than expected from their climate initiatives.

This latest research shows that effective sustainability governance is instrumental in driving those outcomes. Experts are not only more optimistic about revenue growth; they are also more satisfied with progress against climate targets.

Overall results Leaders
1- Boosting customer loyalty and our price premium (selected by 19% of respondents as their first and foremost objective) 1-Driving growth strategy, including new products and services, business models and market expansion (20%)
2 - Creating positive impact on the valuation of the business (17%) =2-Identifying unique advantages over our competition (18%)
3 - Building employee loyalty and engagement (16%) =2-Targeting opportunities for cost efficiencies and optimization (18%)

The value case for sustainability: metrics

As well as making decisive choices about their sustainability ambition, companies will need to show how their initiatives link to value creation and financial performance. However, companies do not appear to have a robust business case showing and quantifying how investing capital and resources in a priority such as net zero will unlock value.

  • Less than a quarter of survey respondents (24%) say they are “completely satisfied” that they have a clear strategic view, backed by credible analysis, of how tackling their material ESG priorities will achieve their value-creating objectives.
  • Moreover, non-executive directors and chairs are particularly skeptical about the business rationale – only 8% are “completely satisfied” – indicating a significant strategic data and information gap at the board level.

The Leaders in the survey are confronting this issue. They prioritize robust sustainability metrics that show financial impact and are much more likely to have complete confidence in the metrics that support decision-making by the board. 

  • Open image description#Close image description

    This graph depicts the higher confidence that Leaders have when it comes to the metrics that support their investment decision-making for sustainability, focusing on three areas: capital allocation, return-on-investment, and financial impact.

A more robust articulation of long-term value potential, backed by a credible business case, is required to build support for sustainability investments that would increase market share, reduce cost of capital, boost net promoter scores and increase employee engagement and productivity. 

Sustainability will always come under close scrutiny when it comes to the value case. While companies might struggle to articulate a business case for major digital investments, sustainability is still perceived as delivering a “greater good.” A digital investment, in contrast, is perceived as directly benefiting the company and attracts less attention if there is no robust business case.

Boards play a critical role in shifting this thinking and some of the misconceptions that are still attached to putting long-term value frameworks in place. Those that resist the development of metrics point to complexity or a lack of data. However, this can be overcome if boards set the expectation that it can and must be done. In short, boards need to reinforce a company culture where sustainability is seen as mission-critical.

Boards need to respond by leaning in – emboldening management to embed sustainability as a business imperative, and rationalizing investment decision-making so that capital allocations flow to projects that make difference.
Andrew Hobbs
EY EMEIA Public Policy Leader

Webinar: Boards and sustainability

 Be notified when registration is open for a discussion sponsored by INSEAD Corporate Governance Centre (ICGC) and EY on how boards can turn sustainability from wishful thinking into reality. 

 

4 June 2024, 9am-10am CEST

Register your interest

  • Key questions for boards

    Strategic vision and sustainability integration
    • How can we actively revise our business strategy to incorporate sustainability at its core? How have the core components of the business model been assessed from a sustainability perspective?
    • What specific steps can we take to ensure our leadership visibly champions and drives our sustainability ambitions?
    • What more could we do in our engagement efforts and sustainability narrative to bring funders and investors closer to our sustainability vision and journey so they are more engaged, enthused and bought in?
    • What new approaches can we adopt to ensure a better balance in our focus on both immediate and long-term sustainable growth?
    • How do we know that management understands the universe of initiatives created under a sustainability umbrella? How can we tell which ones will have the highest impact in building a sustainable business model?
    Sustainable value metrics
    • How can we define sector-specific sustainability metrics that link to value drivers such as market share, consumer uptake, and reduced cost of capital?
    • What skills and capabilities do we need to develop such metrics and monitor them over time?
    • How can we use such metrics in alignment with our reporting and a sharpened investor narrative?
Aerial view of jetski between solar panels floating in a dam
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Chapter 2

A bold approach to sustainability policy and regulations

Boards need to insist on a more ambitious, strategic approach to the policy and regulatory agenda and seek a competitive advantage.

When a policy or regulatory directive is introduced, companies face a choice: seek to unlock the strategic advantage or aim for compliance (and not much more).

A bolder approach offers several advantages:

  • It allows an organization to look at the investment required to achieve compliance and understand where it can build on that investment to unlock an advantage and drive innovation.
  • In the short term, it can streamline the organization’s response to regulations, as boards will be clear about what really matters within a directive. And, in the long term, boards need to be thinking about the business implications if climate change is insufficiently checked, including increased intervention by policymakers.  

For example, Leaders are taking a more proactive approach to the EU Green Deal and in responding to the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD).

Those taking a bolder approach to policy will have assessed their current strategy against the funding and incentives that are available. They will have put in place the capabilities they need – including, potentially, a “Green Deal Officer” – and have team members that offer public sector experience and understanding of the laws, language, culture and stakeholder frameworks that govern public-sector decision-making. Leaning into sustainability policy enables companies to respond to a fast-changing policy and regulatory environment.

Similarly, bold organizations rethink their approach to sustainability reporting. They develop a coherent and compelling long-term value narrative that utilizes “investor-grade” non-financial data and disclosures. They are reshaping their controls, assurance processes, and technologies for an enhanced approach to reporting. They will have defined a central role for the CFO in sustainability reporting and appointed roles such as “ESG Controller.”

The EU Green Deal: incentives and subsidies

The Green Deal, aimed at making member states climate-neutral by 2050, is a comprehensive fiscal policy initiative, embracing grants, tax exemptions, loans and financial instruments. Overall, Leaders are more prepared for it.

  • Open image description#Close image description

    This graph depicts the greater progress that Leaders have made when it comes to responding to the EU Green Deal, focusing on five areas: compliance with regulations, expert capability, monitoring of developments, inputting to proposed regulations in development, and impact on business model and strategy.

Leaders are also more likely to feel they have built an understanding of how to access any funding and incentives available under the Green Deal (40% of Leaders feel they have completed this step versus 23% of Followers). However, Leaders do not outpace the field when it comes to understanding how to access funding and incentives; at 40%, the figure is consistent with the overall results.

That organizations are not fully engaging with the Green Deal could reflect a reluctance to take part in broad policy initiatives. As well as understanding the specifics of incentives and other arrangements, leveraging the Green Deal also requires the experience and knowledge to successfully navigate the particular dynamics and political sensitivities of the public sector.

However, private sector leaders may not fully understand how the public sector works – how politics, regulatory policy and the interests of stakeholders interact. Given that Europe’s policy and regulatory initiatives are likely to grow, boards will need to consider how the organization (and the board itself) develops that understanding.

This could mean bringing public-sector experience onto the board, with due consideration to any conflict-of-interest issues.

  • Key questions for boards

    • How has management reviewed the company’s strategic choices by reference to availability of the different grants, tax exemptions, loans and financial instruments that are part of the EU Green Deal?
    • How have we modeled cost scenarios with (and without) available government incentives and funds? Do we understand how incentives affect asset allocation, product development, and overall strategic planning?
    • In a similar way, how are we developing a “universal” understanding of the wider green policy environment, for example the Inflation Reduction Act in North America and their implications for our strategic choices?
    • How can we build our leadership’s capabilities in effective public-sector interaction and what are the implications for board composition and capabilities?

CSRD and CSDDD: a bold approach can drive climate transition and unlock value

The fifth annual EY Climate Risk Barometer found that while companies are investing more time and energy in the quality of their climate disclosures, only 53% provide a coherent plan for achieving transition.2 However, EU regulations on corporates’ sustainability reporting are intended to drive change in how businesses conduct themselves:

  • The EU’s Corporate Sustainability Reporting Directive states that all listed companies in the EU (and all large companies operating in the EU) will need to disclose a transition plan aligned to 1.5 degrees Celsius warming in the annual report. Or, if they do not, they will need to explain the absence and whether they intend to adopt a plan in the future.
  • Although delayed, the Corporate Sustainability Due Diligence Directive (CSDDD), will expect companies to adopt and put into effect a climate transition plan.

Almost all organizations are making changes in response to the CSRD and CSDDD – either an approach that looks to optimize their capability or a fundamental transformation that involves re-engineering data processes and controls, introducing new technologies, and putting in place new skills and capabilities. Investing in new technologies to manage and analyze non-financial and sustainability data has a wider benefit as well: better data for reporting disclosures also creates better data-driven insight for strategic decision-making. These investments should be seen as part of the wider digital transformation agenda rather than just a discrete solution in one area.

Encouragingly, the number of companies taking a transformative approach to the CSDDD (48%) exceeds those who are aiming simply to optimize sustainability reporting capability (41%). At the same time, 40% plan to transform their approach to sustainability reporting in response to the CSRD and the need to report under the European Sustainability Reporting Standards.

  • Open image description#Close image description

    This graph depicts the response that organizations are taking to the CSRD and CSDDD regulations – showing that an encouraging number are mounting an ambitious response of bold change, with others aiming more for optimization rather than fundamental transformation.

The research shows that Leaders are more likely to be taking a bold approach to the CSRD (51% versus 27% of Followers) – showing an even greater willingness to undertake a more fundamental transformation of reporting. This will need to involve investments in advanced technologies and process re-engineering to address data challenges. Changes to operating models – including the use of managed services providers to meet sustainability reporting requirements – will also be a factor.

These companies, which are looking to achieve more than compliance, can realize significant value. They will be better placed to turn their climate ambition into action, reduce the risk of greenwashing, and improve their access to sources of green finance. At the same time, more ambitious companies will be better placed to provide a compelling story to investors and financial markets about how sustainability will deliver economic value, creating a positive impact on the valuation of the business.

  • Key questions for boards

    • How can we systematically identify and exploit strategic opportunities presented by sustainability regulation?
    • Have we put in place the processes and resources to monitor and analyze policy and regulatory developments on a continuous basis?
    • What concrete, positive and proactive actions can we undertake to shape and adapt to policy and regulatory change? How are we engaging with industry groups and trade associations to develop a collective response to such developments?
Engineer with laptop in field looking at wind turbines
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Chapter 3

AI’s sustainability potential and responsible technology governance

Boards need to exploit the sustainability potential of AI – balancing opportunity and risk by updating technology governance.

AI has significant potential to create positive sustainability outcomes and accelerate a company’s sustainability transformation, but the opportunities must be balanced against the challenges.

While it is inevitable that AI will change the world of work, there are two paths the technology can take. One focuses on taking over the tasks that humans do: automating tasks – such as data collection or compliance – which could lead to a decline in employment. The other focuses on augmenting what people do, focusing on AI’s potential to create new tasks and arming people with better tools to do their job.

The same dynamic plays out in the environmental space. AI can analyze vast datasets to provide insights into climate change, helping in predictive modeling and informing better environmental policies. But advanced AI systems, especially large data centers and servers required for machine learning tasks, also consume significant amounts of energy, contributing to higher carbon footprints.

A majority of respondents recognize the difficult balancing act that must be struck when it comes to reconciling the business opportunity of Generative AI (GenAI) with environmental, societal and ethical challenges:

  • 61% say “AI offers a significant opportunity for driving long-term value, from creating new business models and revenue streams to transforming how work is done.”
  • But 64% also say “the key challenge of GenAI is driving transformation and growth while ensuring ethical and societal implications do not undermine confidence in our organization.”

Responsible technology governance key to balancing opportunity and risk

Building stakeholders’ confidence in AI as a driver of sustainable transformation will require effective and responsible technology governance. However, AI regulations – such as the EU AI Act – are still at an early stage. This raises the risk that too many boards are taking a reactive approach as they wait for more detailed regulatory and policy guidance.

Today, most organizations have made progress in putting in place technology governance for AI. However, not many have a robust approach in place.

Leaders are more likely to be a step ahead, including having a program in place to educate board members on the opportunities and risks of GenAI (33% versus 9% for Followers). However, this raises questions about whether enough is being done in terms of education and understanding: 63% of respondents say that “because GenAI is such a rapid, disruptive technology, it is challenging for boards to keep pace with developments.”

While developments in AI, particularly GenAI, are moving extremely quickly, it is important that a company continue to evolve its technology governance in parallel, allowing it to identify high-value areas for AI deployment and effectively scale learnings and best practices discovered in early pilots.

  • Key questions for boards

    Technology governance and AI’s sustainability potential
    • What specific governance practices should we establish to responsibly harness AI for sustainability?
    • How can we implement AI solutions that align with our sustainability objectives while mitigating associated risks?
    • How can we take a people-centered approach to AI – demonstrating the benefits for people and managing societal risks and concerns?
    AI strategy and governance
    • What is our organization’s AI strategy and how does this align with the overall business strategy and objectives?
    • Do we recognize our company’s place in the AI value chain and understand our obligations under legislation such as the EU AI Act?
    • Do we have visibility of AI being deployed across the organization — including AI that may impact internal controls and reporting to stakeholders?
    • How are we identifying and addressing potential risks associated with the use of AI, including those under regulatory scrutiny such as privacy, security and reporting related risks?
    • Have we assessed how privacy and cybersecurity approaches need to be updated to reflect the latest AI developments and whether cybersecurity oversight needs to change?

Looking forward

The pursuit of sustainability is transforming our socioeconomic paradigm, raising new risks and bringing new sources of value. Developments in AI have the potential to accelerate sustainable outcomes, and encouraging progress is being made in certain areas, such as a significant surge in renewable energy capacity in 2023.3 However, urgent action is still needed to address systemic planet and people challenges. Boards have a critical role to play in pushing executives to identify the opportunities for growth and value creation – driving a bold program of sustainability transformation.

  • Show article references#Hide article references

    1. “As global headwinds slow momentum, how can we accelerate climate action?”, EY 2023 Sustainable Value Study (Second Annual Study), EY, 21 November 2023.
    2. “How will understanding climate risk move you from ambition to action?”, Global Climate Risk Barometer 2023, EY, 27 November 2023.
    3. “Renewable energy surge of 50% driven by China, IEA says,” Financial Times, 11 January 2024.

Summary

Failing to act with the right intensity on areas like net zero and global warming raises the risk that companies will lose autonomy and control. The good news is that boards don’t have to accept this version of the future; they can change it. They just need to lead.

About this article

Authors
Julie Linn Teigland

EY EMEIA Area Managing Partner; EY Global Leader, Women. Fast forward

Passionate about the transformational power of digitalization and innovation and its potential to deliver sustainable, inclusive growth for clients. Prominent voice of the Women20 global agenda.

Andrew Hobbs

EY EMEIA Public Policy Leader

Public policy leader focusing on talent, technology, corporate governance and corporate reporting. Father of four, cyclist and dabbling homebrewer.

Contributors