Organizational Change
EY:
Boards Must Embolden C Suites to Embed Sustainability

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.

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:

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 organizations to balance the sustainability opportunity of AI with its environmental, societal and ethical challenges.