Boards must embolden management to embed sustainability, according to new report

• New EY survey finds boards must lean in and play a challenger role to establish sustainable business models
• Less than 10% of non-executive directors and chairs reported complete satisfaction with their companies’ business rationale for ESG
• Bolder approaches in adopting regulation and AI governance are needed

Boards must challenge management to incorporate sustainability into business models and strategies or risk facing increased intervention from policymakers, according to the fourth edition of the EY Long-Term Value and Corporate Governance Survey, published today. The survey analyzes governance's role in creating sustainable business models, with this year's edition focusing on how boards can encourage their companies to embrace sustainability as a crucial business priority.

The survey’s results are based on the responses of 200 directors, chief executive officers (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, with policymakers potentially introducing severe and stringent measures to manage sustainability crises like ecosystem collapse and resource scarcity. 

Julie Linn Teigland, EY EMEIA Area Managing Partner says: “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. 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."

Embedding sustainability as crucial business priority

Research shows that companies' commitment to sustainability is wavering. 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. 

This latest survey suggests that European companies are not driving sustainability as a source of differentiation and growth, and many are not pursuing game-changing opportunities that focus on new sustainability ventures, products or services.

The research found that the vast majority of companies do not have a robust business case showing how sustainable priorities like net zero will drive business - just 24% 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% reporting complete satisfaction – indicating a significant gap between the views of boards and the rest of their businesses.

Andrew Hobbs, EY EMEIA Public Policy Leader says: “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.”

A bolder approach to regulation is needed

The report recommends that boards should insist on a more ambitious, strategic approach to the policy and regulatory agenda, where it can be turned into a competitive advantage.

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% and 40% 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% 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 to 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 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.

AI as a driver of sustainable transformation

According to the report, artificial intelligence (AI) has the potential to be an important driver of sustainable transformation, but it requires effective and responsible technology governance in order to build stakeholders’ confidence.

While most companies report “initial progress” in AI governance, there are not many that are a step ahead with a robust approach already in place. Just a third (33%) of respondents said they had a governance framework in place for the responsible use of AI, while a worrying 21% of respondents said they had “not started” this critical piece of work.

While developments in AI, particularly generative AI (genAI), 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.

To read the full report, please visit here.

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