European companies face hurdles linking sustainability to growth, survey finds

Businesses are making changes in their sustainability governance capabilities.

This is according to the fourth edition of the EY’s ‘long-term value and corporate governance’ survey, surveying approximately 200 directors, chief executive officers and C-suite heads across 15 European countries and 25 industries.

Just 24% of respondents reported that they had a clear strategic view of how tackling their material environmental, social and governance (ESG) priorities will achieve their value-creating objectives.

The analysis categorises the respondents as ‘followers’ and ‘leaders’, with the latter being a group of professionals with more advanced governance and greater sustainability ambitions.

While the leaders are focusing on catalysing growth strategies and market expansion as their main objectives to drive value from the sustainability agenda, the followers reported boosting customer loyalty and price premium as their foremost objectives.

Additionally, while 20% of ‘followers’ feel confident about the efficiency of their ESG metrics in enabling the board to oversee the capital allocation to ESG priorities, nearly double that amount (40%) of ‘leaders’ feel confident about their metrics.

The survey highlights that non-executive directors and chairs remain skeptical about the business rationale for ESG priorities, with only 8% of board members feeling ‘completely satisfied’.

EY EMEIA’s area managing partner Julie Linn Teigland said: “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.”

The report recommends that board members advocate for a more ambitious and strategic approach to ESG policy and regulation in order to unlock competitive advantages and business growth.

EU Regulation

With new EU regulations anticipated to come into force this year, including the Corporate Sustainability Due Diligence Directive (CSDDD), and some regulations already in place, such as the Corporate Sustainability Reporting Directive (CSRD), businesses are making changes in their sustainability governance capabilities.

Nevertheless, the survey notes that less than half of the surveyed companies are taking a ‘bold’ and ‘transformative’ approach to the regulatory frameworks.

Both the CSRD and the CSDDD aim to significantly increase transparency within corporate sustainability, with the latter requiring businesses to perform environmental and human rights due diligence.

EY suggests that companies taking a ‘bolder’ approach to regulation have a better chance of turning their climate ambitions into action, reducing the risk of greenwashing and improving access to green finance.

The ‘bolder’ approach includes assessing the company’s current strategy against the funding and incentives that are available, as well as building an understanding of the laws and stakeholder frameworks that govern public-sector decision-making, in order to respond to a fast-changing policy and regulatory environment more effectively.

The CSDDD is due to be discussed at the final JURI meeting on Thursday (7 March). The European Parliament is required to approve the CSDDD by 15 March for it to be adopted prior to the elections.

EY cautions that based on current evidence, businesses will not take required action to transition to a green economy of their own volition if the Directive is not passed.