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.
There are concerns that sustainability momentum is slowing. Data from the 2023 EY Sustainable Value Study found that the median target year for achieving climate ambitions is now 2050, compared with 2036 in the previous year’s study.1
“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,” says Julie Linn Teigland, the EY EMEIA Area Managing Partner.
However, our research suggests that companies in Europe are not driving sustainability as a source of differentiation and growth. In other words, they are not pursuing game-changing opportunities that focus on new sustainability ventures and products or services.
The survey asked respondents to nominate their top value driver when it came to their sustainability agenda. While companies are pursuing legitimate sources of value – such as employee and customer loyalty – the Leaders are less inhibited and are aiming, first and foremost, for business model innovation and the growth agenda. This signals a bolder ambition to reimagine their business model to turn sustainability into a core business advantage.
What are your main objectives when it comes to driving value from your sustainability agenda?
| 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.
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.
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.
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.
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.
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.
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.
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.
Effective oversight and decision-making also demand the right competence. An up-to-date awareness of the key trends, drivers and challenges of corporate sustainability is central to driving innovation; leaders must be agile enough to respond to a fast-changing sustainability landscape. But when the survey asked respondents what internal hurdles stood in the way of generating long-term value through a strong sustainability proposition, the chairperson and board members in the survey named lack of knowledge in key areas one of their top two challenges (selected by 38% of the board director cohort).
In summary, says EY EMEIA Public Policy Leader Andrew Hobbs, “quality time spent by willing boards who have experience and skills in ESG topics is more important to progressing against sustainability objectives than formal structures such as sustainability committees.”
Priority two: Accountability, with a bold approach to sustainability-linked remuneration
Defining “remuneration-grade” KPIs for sustainability objectives — which constitute a meaningful proportion of total reward and help to hold management teams accountable — is challenging. However, there is a compelling case to do so: Implementing effective variable remuneration schemes supports the delivery of outcomes and progress against sustainability objectives.
A robust approach will need to address several challenges:
- Multiyear time horizons: For survey respondents, the number one challenge is the difficulty of aligning the time horizon of annual salary and variable remuneration with sustainability goals that often have five- to 10-year targets (selected by 39% of respondents as one of their main obstacles).
- Unintended consequences: How do companies ensure that including stock options as part of sustainability-focused remuneration supports long-term value creation? If there is too much emphasis on stock, could that lead to the pursuit of short-term performance achievement to increase the share price?
There is also the question of “what matters?”. What topics do stakeholders think leaders should be assessed against? And, once materiality is assessed, it is important to determine priorities — or the weighting of incentive scheme metrics — to drive the right behaviors. Finally, companies also need to consider how metrics can be cascaded through the organization.
These complex issues do raise the risk of inertia or incrementalism. In fact, the research shows that less than half of organizations (47%) have made sustainability a significant element of remuneration today . However, the Experts are much more likely to have an advanced approach:
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.
