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A bold approach to sustainability by boards can deliver long-term strategic value to organisations.
In brief
- Organisations that take a proactive approach to sustainability can avail of significant market advantages.
- Boards need to encourage management to go beyond mere compliance when new sustainability regulations are introduced.
- AI has the capacity to support organisations on their sustainability journeys and boards need to ensure its potential is unlocked.
While global warming continues at an alarming pace, there are some worrying signs of a cooling in corporate commitment to sustainability. Data from the 2023 EY Sustainable Value Study shows that the median target for achieving net zero ambitions has been pushed out to 2050 from 2036 in the previous year’s study. This faltering ambition risks pushing policymakers to intervene with more stringent measures to enforce progress on decarbonisation and other aspects of sustainability.
Organisations that fail to put sufficient resources into sustainability efforts also run the risk of missing out on value creating opportunities and on capital raising opportunities. They may also fall behind competitors who are able to deliver on investor and consumer expectations in an increasingly conscious market for environmental, social, and corporate governance (ESG).
The EY Ireland CFO Survey 2024 revealed that there’s acceptance that new regulations and reporting requirements are coming, and they will need to be dealt with. The survey, however, highlighted that while proactive ESG reporting is relatively high, it is mainly driven by compliance factors.
Urgent need to boost support for sustainability
In these circumstances, boards need to play a more active role in the debate and challenge management to embed sustainability into the business strategy. They also need to insist on a more ambitious, strategic approach to the policy and regulatory agenda to move beyond compliance and pinpoint where the organisation can find a strategic advantage over the competition.
Our research suggests that organisations in Europe do not view sustainability as a source of differentiation and growth. This appears to be linked to an inability to develop robust business cases to demonstrate how investing capital and resources in net zero will unlock and deliver value.
Indeed, less than a quarter of survey respondents (24%) said they were “completely satisfied” that they have a clear strategic view of how tackling their material ESG priorities will achieve value-creating objectives¹. Non-executive directors and chairs were particularly sceptical about the business rationale with only 8% completely satisfied. This indicates a significant sustainability data and information gap at the board level.
A more robust articulation of long-term value potential, backed by a credible business case, is, therefore, required to build support for sustainability investments. Boards have a critical role to play in leading a shift in thinking by setting expectations that these business cases can and must be developed. In short, boards need to foster an organisation culture where sustainability is seen as mission critical.
They also need to encourage management to embed sustainability as a business imperative and ensure that capital allocations flow to projects that make a real difference to the organisation’s sustainability credentials.
Beyond compliance
When a new regulation like the Corporate Sustainability Reporting Directive (CSRD) is introduced, organisations face a choice. They can seek to unlock the potential competitive advantage it offers or aim for a de minimis compliance approach.
The former option offers a number of significant benefits by allowing organisations to examine the investment required to achieve compliance and explore how it can build on that investment to unlock an advantage and drive innovation.
For example, those taking this approach will be able to position themselves to avail of the grants and incentives available through the European Green Deal. However, the survey found that a significant number of organisations are not yet fully engaging with the Green Deal. This could reflect a reluctance to take part in public policy initiatives or a lack of understanding of the incentives on offer and how to avail of them.
In light of the fact that the Green Deal and other policy and regulatory initiatives are only likely to grow in scale, boards should consider how their organisations can develop a better understanding of public sector dynamics. This could mean bringing individuals with public sector experience onto the board.
Boards also need to ask if management has reviewed the organisation’s strategic choices by reference to the availability of the different grants, tax exemptions, loans and financial instruments that are part of the EU Green Deal.
The benefits go beyond the Green Deal. Organisations with an ambition to achieve more than compliance can realise 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 on the capital markets. At the same time, more ambitious organisations 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.
In these circumstances boards need to look at how their organisation can systematically identify and exploit strategic opportunities presented by sustainability regulation and ask if the processes and resources are in place to monitor and analyse policy and regulatory developments on a continuous basis.
Exploit AI’s potential for sustainability
Boards also need to exploit the sustainability potential of artificial intelligence (AI). They must push management to explore the potential of AI to support the achievement of sustainability objectives while being mindful of the technology’s environmental, societal and ethical challenges.
The technology has significant potential to create positive sustainability outcomes and accelerate an organisation’s sustainability transformation, but the opportunities must be balanced against the challenges.
AI can analyse vast volumes of structured and unstructured data to provide insights into climate change, helping in predictive modelling and informing better environmental policies. But advanced AI systems consume significant amounts of energy contributing to larger carbon footprints. There are also ethical and societal risks to be taken into consideration. This will require a difficult balancing act on the part of organisations using the technology as well as other stakeholders.
Against this backdrop, boards need to examine how AI solutions can be implemented that align with the organisation’s sustainability objectives while mitigating associated risks. In addition, they should look at the governance practices that need to be adopted to responsibly harness AI for sustainability.
Key questions for boards
Summary
Embracing sustainability can help organisations achieve their value creating objectives. This requires them to go beyond compliance with existing and new regulations and to leverage technology to support their sustainability journeys. Boards have a key role to play in this by pushing management to adopt a proactive and bold approach to sustainability.
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