New analysis from EY suggests businesses with effective sustainability governance in place are more likely to be optimistic about their financial performance
The library of research indicating that corporates that are committed to sustainability tend to enjoy more impressive financial performance welcomed yet another study today, as consultancy giant EY published an analysis exploring how effective board-level sustainability governance is shaping businesses' financial outlook.
The survey of more than 200 companies across 15 countries in Europe identified how respondents with stronger sustainability governance controls in place were significantly more likely to expect strong revenue prospects than those with less well-developed sustainability governance controls.
Of the companies classified as sustainability governance 'experts', 76 per cent reported feeling optimistic about their performance, compared to just 45 per cent of companies categorised as sustainability governance 'beginners'.
The study also revealed a correlation between companies with strong sustainability governance and delivery against corporate climate goals. Just 13 per cent of 'beginners' reported being "very satisfied" with the progress they have made to date in achieving the climate targets they have set, indicating potential reputational risk, compared to 52 per cent of 'experts' reporting satisfaction with progress against their green goals.
This progress is partly a result of the greater willingness among 'experts' to take concrete steps to decarbonise through increased investment. Nine out of 10 of those companies with effective sustainability governance measures in place were planning to increase investments in climate initiatives, including 29 per cent that plan to "increase a lot". This compares to just 54 per cent of 'beginners' who plan to make increases, with only nine per cent planning a significant increase.
"The findings of this survey are clear - there is a critical link between effective board-level sustainability governance and business performance," said Julie Linn Teigland, EY EMEIA area managing partner. "Companies with strong sustainability governance are not only more likely to invest more in sustainability and achieve their climate goals, they expect better financial growth too. We are now in an era where strong sustainability governance and performance are not just 'nice to haves', they are absolute imperatives for business survival."
However, the report also revealed that few firms feel they have optimised their approach to managing sustainability initiatives. Just seven per cent of respondents said they feel sustainability issues are fully integrated into their board's structures and decision-making processes.
Sonia Tatar, executive director at the INSEAD Corporate Governance Centre and INSEAD Wendel International Centre for Family Enterprise, said boards needed to engage with the full spectrum of environmental, social, and governance (ESG) risks and opportunities.
"The ESG paradigm is getting more and more complex, and regulations are evolving quickly," she said. "Even if the board has created a sustainability committee or an advisory board, these cannot work in isolation: sustainability issues are multidimensional and involve areas such as remuneration, risks, opportunities, audit and broader stakeholder engagement. To effectively address ESG in a holistic and strategic way, concerted efforts are required."
The survey also revealed a growing acceptance among business leaders that they need to take a longer term perspective on both ESG and financial performance. Nearly three quarters of respondents said their company should address ESG issues, even if doing so reduces short-term financial performance. However, nearly two-thirds of respondents also reported short-term earning pressure from investors was impeding their longer-term investments in sustainability. "This suggests that despite the clear business benefits of addressing ESG issues, pressure from short-sighted investors remains a serious concern," EY said.
However, these short term financial pressures are countered to some extent by growing pressure from employees for companies to enhance their environmental performance. Over half of respondents said their employees do not feel they are moving quickly enough on climate issues, which represents a significant cause for concern given the tightness of the labour market.
"Stakeholders are piling the pressure on businesses to take the lead on sustainability, but drastic changes must be made to make this happen," said Andrew Hobbs, EY EMEIA Public Policy Leader. "There are concrete steps companies must take today, from fully integrating sustainability into board business to bringing more diverse skills to the table and rethinking executive compensation, all to help ensure they don't get left behind as we move toward a more sustainable future."
The report calls on corporates to better integrate sustainability into strategy and governance structures so that it becomes part of the board and committee 'business as usual'.
It also urges firms to consider creative ways to bring additional diverse skills and experience into the board's decision-making process, such as shadow boards, advisory boards, expert advisors, and refreshing board composition.
And it stresses the important of designing executive compensation policies based on ESG-based targets that are aligned with the organisation's business strategy, including material sustainability objectives. Currently, less than half of respondents said sustainability was a "significant element of remuneration", although sustainability 'experts' were much more likely to include ESG metrics as a significant element when setting the compensation of senior executives.
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