4 minute read 29 Jan 2021
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What investors view as top strategic drivers and threats

By Jamie Smith

EY Americas Center for Board Matters Investor Outreach and Corporate Governance Specialist

Trusted resource on corporate governance and institutional investor trends. Researcher and analyst. Lifelong learner. Mother and nature enthusiast.

Contributors
4 minute read 29 Jan 2021

The quality and execution of a multi-faceted strategy will drive success as climate risk and business model disruption accelerate.

In brief

  • Most investors see climate risk as a top threat to companies in the next few years.
  • Nearly half of investors view the integration ESG opportunities into strategy as among the biggest drivers of success.
  • Investors view workforce and boardroom diversity as critical to a company’s ability to innovate and embrace change.

Coming out of a year of unparalleled disruption, nearly half of investors said their portfolio companies’ quality of strategy and ability to execute will be critical to success — and even survival - over the next three to five years. Many pointed out that in the current environment the ability to formulate, fund and execute a successful strategy will require adapting to  new technology, strengthening crisis response and business continuity planning and having credibility with stakeholders and an open mindset around which products to focus on and which businesses to wind down.

Many investors highlighted that stakeholder needs and the external forces impacting consumers, employees and the regulatory framework — from technology and climate risk to social justice movements — must be integral to strategy development to identify forward-looking, resilient business strategies and deliver long-term value.

Almost half of investors identified the integration of material environmental, social and governance (ESG) opportunities into strategy as among the biggest drivers of strategic success. These investors believe that if companies are effectively monitoring and managing ESG factors, those efforts can uncover new strategic opportunities and business model needs, position the company to be more agile and competitive as sustainability risks and stakeholder demands continue to change, and strengthen the company’ s social license to operate.

Investors discussed diversity — both across the workforce and in the boardroom — as being central to a company’ s ability to innovate and embrace change, and 42% identified diversity as a significant driver of success. While investors largely focused on diversity's link to performance, profitability and innovation, some also pointed out that the business case intersects with the broader social movement around racial justice. If companies are not leading on social change and responding to the national conversation on race, there is an opportunity cost: a failure to act could impact the company’ s relationships with employees, customers and other stakeholders.

EY - Three biggest drivers of strategic success in the next three to five years

Climate risk, business model disruption and changing customer demands viewed as biggest threats

More than half of investors said climate risk and natural resource constraints are among the biggest threats facing companies over the next three to five years, with most of those investors specifically focused on climate risk. The physical risks of climate change are front and center for many who noted that severe climate‑related events are happening faster, more often and more severely than expected, and will broadly impact sectors and markets in different ways across the globe.

EY - Three biggest threats to strategic success in the next three to five years

Further, investors noted a heightened attention during COVID‑19 to severe, systemic risks related to exogenous events, and pointed to climate change as the next such challenge on the horizon. Some investors stressed that climate change will further accelerate other systemic risks (e.g., biodiversity loss, economic inequality) and suggested that it has the power to disrupt traditional notions of corporate preparedness. In other words, investors are looking beyond the basics of climate risk in the supply chain. To be successful going forward, these investors said companies will need to be more future‑oriented. They will need to integrate climate and other sustainability risks into the business strategy, and to focus on having the culture, values and people in place to continually look forward and build resilience.

Business model disruption more broadly was the second‑most‑cited key threat, chosen by nearly half of investors. Most of these investors highlighted the need for companies to innovate and disrupt in order to adapt to the rapidly shifting business context and meet changing stakeholder needs. Investors pointed to extensive sources of disruption and pressure on business models, including accelerating technology change, the transition to a low‑carbon economy, regulatory changes, new entrants and the broad impacts of the pandemic on work, travel and consumption.

It’ s not surprising that close on the heels of business model disruption, 30% of investors identified changing customer demands and expectations as a top threat. Many of them highlighted that this goes beyond changing customer demands to the changing demands of stakeholders more broadly. And those demands span numerous dimensions, from expectations around how technology can enable new ways of working and consuming to how businesses impact the environment, communities, privacy, politics and culture.

Key board takeaways

  • Assess how the strategy is delivering long-term value for the multiple stakeholders on which the company depends and strengthening its social license to operate.
  • Consider the role of purpose in the company’s strategy and decision-making, and how the company can strengthen its business resilience and growth opportunities by becoming part of the solution for global challenges.
  • Confirm that the company has the right leadership team and board, culture and values to innovate and lead.
  • Challenge how the company is being resilient in all aspects of strategy, risk management and capital allocation.

Summary

Investors want to understand how companies are charting a course through recovery to long-term-value creation. They see climate risk as a major systemic threat across sectors and geographies. They believe a successful human capital strategy and diverse workforce are essential to creating competitive advantage and resilience.

About this article

By Jamie Smith

EY Americas Center for Board Matters Investor Outreach and Corporate Governance Specialist

Trusted resource on corporate governance and institutional investor trends. Researcher and analyst. Lifelong learner. Mother and nature enthusiast.

Contributors