Focusing on sustainability in today’s operating environment is clearly
challenging; and EY sees worrying signs that company commitment to
sustainability in the EU is cooling at a time when global warming is still
unchecked.
The 2024 EY Europe Long-Term Value and Corporate Governance
Survey
suggests that European companies are not driving sustainability as a means of
differentiation and growth; and many are not pursuing game-changing
opportunities that focus on new sustainability ventures, products or services.
The survey’s results are based on the responses of 200 directors, CEOs and
C-suite heads across 15 European countries and 25 industries. It finds that an
absence of clear, strategic action on sustainability could cost businesses — as
policymakers introduce severe and stringent measures to manage sustainability
crises including ecosystem collapse and resource scarcity.
Embedding sustainability as crucial business priority
This fourth annual edition of the Long-Term Value and Corporate Governance
Survey examines the role of governance in sustainable business model
innovation. While EY’s 2023 research
focused on the most effective models and practices of effective sustainability
governance, this year it looks at how Boards can challenge their companies to
embrace sustainability as a true business imperative and utilize policy and
technology developments to accelerate progress.
Unpacking the potential and challenges of AI
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The research found that the vast majority of companies do not have a robust
business case showing how sustainability priorities such as net
zero
will drive business — just 24 percent reported they had a clear strategic view
of how tackling environmental, social and governance (ESG) priorities will help
create value. Non-executive directors and chairs are particularly skeptical
about the business rationale for sustainability at their companies, with only 8
percent reporting complete satisfaction — indicating a significant gap between
the views of Boards and the rest of their businesses.
“Boards have a crucial role to play in maintaining focus on sustainability and
they must be vocal and help their companies embrace sustainable business as an
absolute imperative,” says Julie Linn
Teigland, EY EMEIA Area Managing
Partner. “We are seeing a cooling of company commitment when it comes to
sustainability, and Boards have a duty to help reinforce a business culture
where sustainability is seen as mission critical.”
A beyond-compliance approach to regulation is needed
The report recommends that Boards should insist on a more ambitious, strategic
approach to the impending policy and regulatory agenda for sustainability, where
it can be turned into a competitive advantage. Without decisive action,
companies could face a constrained future where policymakers have introduced
increasingly stringent measures to manage sustainability crises.
Encouragingly, almost all organizations surveyed are making changes in response
to the EU’s Corporate Sustainability Due Diligence Directive
(CSDDD)
and Corporate Sustainability Reporting Directive
(CSRD)
— with approaches that either look to optimize their capability or fundamentally
transform. However, less than half of companies reported taking a bold,
“transformative” approach to the CSDDD and CSRD (48 percent and 40 percent,
respectively).
Regarding the EU Green
Deal,
companies found to have better sustainability governance capabilities were also
found to have made more progress in responding to it, according to the survey.
However, just 40 percent of survey respondents said they felt they understood
how to access funding and incentives through the initiative.
According to the report, companies taking a bolder approach to regulation will
be better placed to turn their climate ambitions into action, reduce the risk
of
greenwashing,
and improve their access to sources of sustainable finance. More ambitious
companies will also be better placed to provide a compelling story to investors
and financial markets about how sustainability can deliver economic
value
— creating a positive impact on the valuation of the business.
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.
“Boards need to respond by leaning in — embedding sustainability as a business
imperative, and rationalizing investment decision-making so that capital
allocations flow to projects that have the largest impact,” says EY EMEIA Public
Policy Leader Andrew Hobbs.
AI as a driver of sustainable transformation
The report also highlights artificial
intelligence
(AI) as a potentially important driver of sustainable business
transformation;
but it requires effective and responsible technology governance in order to
build stakeholders’ confidence.
While most companies report “initial progress” in AI governance, not many are a
step ahead with a robust approach already in place — just a third (33 percent)
of respondents said they had a governance framework in place for the responsible
use of AI, while a worrying 21 percent of respondents said they had “not
started” this critical piece of work.
While developments in AI — particularly, generative
AI — are moving
extremely quickly, it is important that a company continues to evolve its
technology governance in parallel. According to the report, a proactive approach
to governance offers significant advantages when it comes to unlocking value.
Based on the 2024 analysis, EY offers three key areas where Boards can establish a leading position:
-
Proactively challenge management to embed sustainability into the business
strategy — demanding an ambitious strategic vision from management teams and
critically scrutinizing supporting business cases.
-
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.
-
Exploit AI’s sustainability potential — AI, sustainability and governance
are linked in ways that need to be explored. Responsible governance will
allow organizations to balance the sustainability opportunity of AI with its
environmental, societal and ethical challenges.
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Sustainable Brands Staff
Published Mar 6, 2024 2pm EST / 11am PST / 7pm GMT / 8pm CET