How CEOs juggle transformation priorities – the art of taking back control

The world saw another year of climate extremes in 2023 with exceptional heat waves and droughts, extreme storms and catastrophic floods. The global average temperature was 1.48 degrees Celsius above the pre-industrial average, with impacts across geographies and sectors. Agricultural output has been squeezed, while waterborne supply chains have been closed or restricted. Power supplies have been challenged by both heat-induced demand and the impact on infrastructure.

In that context, most CEOs remain committed to decarbonizing their business to reach net zero, with over half (54%) of the global survey population saying it is a higher priority now than it was 12 months ago. However, a quarter have de-prioritized sustainability, mainly in the face of short-term financial or economic headwinds, which will be disappointing for those who look to companies to set the tone on this topic.

While years of business investment have led many companies to make progress on sustainability, the 2023 EY Sustainable Value Study suggests that the period of early wins, with progress on early phase initiatives focused on “low-hanging fruit,” is coming to an end.

The majority of CEOs agree that sustainability issues will increasingly impact their supply chain and ecosystem partners (77%); that coordinated and consistent action by governments worldwide is crucial for effectively addressing the impacts of climate change (76%); and that technology and AI hold the answers to many of the key sustainability challenges they face (75%).

CEOs are also aligned on the danger of stranded assets or partial impairments caused by environmental, social and governance (ESG) factors, such as new regulations, with 74% agreeing. Future-proofing portfolios, particularly through a sustainability lens, necessitates striking a delicate balance so that operations are both resilient and reflective of global sustainability trends.

Two-thirds (67%) of institutional investors also fear that their portfolio faces risks from investee companies with stranded assets or partial impairments caused by ESG factors, such as new regulations.

For institutional investors, there are similar and related areas of agreement. More than three-quarters (78%) are aligned on the importance of coordinated and consistent action by governments. But institutional investors also say that regulators and politicians are increasingly scrutinizing investors’ ESG investment strategies (74%), and that consumer behaviors are still not aligned to sustainability goals and more needs to be done by business, government and NGOs to effect change (73%).

Both cohorts of respondents recognize that greater collaboration between governments and regulators in setting policy can better address the impacts of climate change. Half of CEOs (50%) say that policymakers and regulators have proactively sought and incorporated their sector input when forming major sustainability-related regulations. Another 45% acknowledge moderate engagement, and just 5% report minimal engagement. We see similar numbers across institutional investors – with only 7% saying they have not been consulted in that matter.

The world’s journey, however, to a new energy future will not be linear or singular. EY modeling of global trends, technology breakthroughs and consumer engagement highlights the complexity and diversity of the changes ahead. There is not one energy transition, but multiple, unfolding at different paces and in different ways across the world.

Institutional investors are also broadly positive about the need for governments to focus on supporting infrastructure investment. More than three-quarters (77%) agree that government investment in infrastructure is vital for economic growth in their main markets, and 80% agree that governments should prioritize infrastructure investments in projects to boost growth in local economies.

They also agree that new infrastructure investment opportunities – such as electric vehicle charging networks – carry higher risk than “traditional” infrastructure investments, and that while there is enough capital available to invest in infrastructure, there are not enough investable projects.

Investors also agree that while public-private partnerships (PPPs) are the optimal funding model for infrastructure projects, there is an issue with the current models and that governments are asking the private sector to commit to a disproportionate share of capital for PPP projects.

The path to achieving net-zero emissions is a challenge that requires collaborative efforts from all stakeholders, including companies, investors and governments. Each plays a crucial role in accelerating the sustainability journey, and their cooperation is essential for achieving meaningful progress.

Companies, as major contributors to greenhouse gas emissions, have the responsibility to implement sustainable goals throughout their operations and supply chains. Institutional investors, with their financial resources and influence, can drive positive change by directing capital toward sustainable initiatives and companies that prioritize sustainability as a core pillar of their strategy. Governments, on the other hand, have the authority to create and enforce regulatory frameworks that promote sustainability and provide incentives for environmentally responsible behavior.

Transitioning to a low-carbon economy will require significant investments and technological advancements, which can be better facilitated through partnerships between companies, investors, and government. Only through collective action and a shared commitment to sustainability can a prosperous and resilient planet for generations to come be achieved.

CEOs are looking at M&A as a key lever to address their near-term priorities, with deals largely driven by the desire to acquire technology, new production capabilities or innovative startups. They are also looking at their current portfolio of assets and operations and considering what will help their longer-term ambitions. The spike in intentions to divest assets over the next 12 months, which is broad based across geographies and sectors, highlights how far CEOs are along their path to future-proofing for a different environment.

There were US$796b of deals announced in the first quarter of 2024, a healthy 36% increase over the same period in 2023. At a headline level, this is good news. There were areas of significant strength, particularly in the US and in the energy and life sciences sectors, globally. There was also an uplift across Europe, especially in the UK, and an acceleration of dealmaking in financial services and a return of technology asset acquisitions.

Aligned to their overall strategy, CEOs’ top M&A priority is accessing the technology or new product capabilities needed to stay ahead of innovative competitors, as well as acquiring innovative startups.

Institutional investors are also upbeat about the deal market, where a majority (61%) anticipate a stable deal environment but a third (34%) expect an acceleration of deals.

M&A is another area where CEOs and institutional investors can work better together to help create long-term sustainable value.

The message from institutional investors is clear: CEOs need to make a very clear case as to how deals can either accelerate growth or unlock new opportunities.

There also needs to be a very clear roadmap that shows how any returns on deals are significantly better than other, less risky investments.

Three actions to balance short-term priorities and long-term ambitions:

Strength in numbers: by working together – particularly in what remains a challenging market – companies can access the necessary funding and incentives from investors and governments, enabling them to accelerate their transition toward more sustainable operations. Investors can leverage their influence to drive positive change within the companies they invest in, while governments can create an enabling environment that fosters innovation and encourages the adoption of sustainable practices.

Don’t get stranded: CEOs have to be an active participant in engaging with governments as key stakeholders when deciding sustainability policy. They are well informed and ideally placed to advise on what could be the most effective mechanisms to support policy objectives while minimizing economic downsides.

Tell a better story: investors are broadly positive about the outlook for dealmaking. But they would prefer that companies clearly articulate why returns on acquisitions will be higher than organic investments in a more compelling way.