Companies with better sustainability governance more optimistic about financial performance
A new EY survey of over 200 companies across 15 countries in Europe has identified a critical link between effective board-level sustainability governance and business performance.
The study found that companies with stronger sustainability governance controls in place – categorized “experts”, are significantly more likely to expect strong revenue prospects, with 76% reporting feeling optimistic about their performance, compared to just 45% of companies with less well-developed sustainability governance controls – categorized as “beginners”.
Experts report being significantly more likely to avoid accusations of “greenwishing” – where green ambitions don’t match up to reality – by actually delivering on their stated climate ambitions. Just 13% of beginners report 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 more than half (52%) of “experts” reporting satisfaction with progress on their own ambitions.
The survey further found that experts are also much more likely to take concrete action by stepping up their sustainability investments. Nine out of ten of these companies said they were planning to increase investments, including close to a third (29%) that plan to “increase a lot.” This compares to just over half (54%) of beginners planning to make increases, with only 9% planning a significant increase.
Julie Linn Teigland, EY EMEIA Area Managing Partner says: “The findings of this survey are clear – there is a critical link between effective board-level sustainability governance and business performance. Companies with strong sustainability governance are not only more likely to invest more in sustainability and achieve their climate goals, they expect better financial performance too. We are now in an era where sustainability governance and performance are not just “nice to haves”, they are absolute imperatives for business survival.”
While the study found significant variation between the companies in the way sustainability is handled at board level, the vast majority of respondents think there is room for improvement, with just 7% reporting that they feel sustainability issues are fully integrated into their board’s structures and decision-making processes.
Sonia Tatar, Executive Director, INSEAD Corporate Governance Centre and INSEAD Wendel International Centre for Family Enterprise, says: “The ESG paradigm is getting more and more complex, and regulations are evolving quickly. 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.”
Short-term investor pressure impedes long-term investments
According to the survey, 74% of all respondents say their company should address environmental, social and governance (ESG) issues, even if doing so reduces short-term financial performance. However, nearly two-thirds of respondents (64%) also reported that 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.
Companies are also feeling pressure from their own employees, with more than half (55%) of all respondents saying that their employees do not feel they are moving quickly enough on climate issues.
Recommendations for action
The report makes a series of recommendations for action that companies can take to improve sustainability governance and move from being beginners to experts. These include:
- Integrating sustainability into strategy and governance structures so that it becomes part of the board and committee “business as usual.” Just 7% of all companies surveyed felt that sustainability was fully integrated into their board structures, with 83% of experts reporting that they are effective at managing the board agenda to ensure long-term ESG risks and opportunities are always discussed, compared to just over half (52%) of beginners.
- Looking for creative ways to bring additional diverse skills and experience into the board’s decision-making, e.g., shadow boards, advisory boards, expert advisors, accessing more of management and refreshing board composition. Out of the companies surveyed, 86% of experts said they felt effective when it comes to increasing boardroom diversity and ensuring new voices are given equitable speaking time to provide fresh perspectives on ESG topics, compared to just 36% of beginners.
- Designing executive compensation policy based on ESG-based KPI targets that are aligned with the organization’s business strategy, including material sustainability objectives. Less than half (47%) of organizations surveyed made sustainability a significant element of remuneration, with experts much more likely to include ESG metrics as a significant element when setting the compensation of senior executives (61%, as opposed to 29% in the case of beginners).