Survey finds tension between advantages of ESG-driven corporate strategy and leaders’ willingness to support this through corporate governance

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The annual Ernst & Young (EY) Long-Term Value and Corporate Governance Survey, which polled 200 senior leaders from 15 European countries and 25 industries found a tension between the advantages of Environmental, Social and Governance (ESG)-driven corporate strategy to long-term, inclusive growth and leaders’ willingness to support this through corporate governance.

The survey found ‘a significant increase’ from 66% to 84% of board members and C-suite who say the COVID-19 pandemic increased expectations from consumers, employees, governments and broader society that companies will drive societal impact, environmental sustainability, and inclusive growth.

However, there was also an increase – from 28% to 43% – in respondents identifying lack of commitment from the board to make decisions that fully integrate ESG factors that would lead to long-term value.

Julie Linn Teigland, EY EMEIA Area Managing Partner, commented on the findings: “We’ve reached a crossroads in the ESG agenda. The evolution in how businesses and their stakeholders consider this topic has been accelerated by the COVID-19 pandemic as has industry engagement with COP26 and commitment to support climate goals.

“Expectations of businesses have risen from across society, from customers to employees, policymakers to investors. At the same time, inside companies, executives are coming through who are passionate about making a difference to the planet and people and about building their organizations’ resilience.

“Breaking the barriers companies face in establishing ESG as part of their corporate strategy is the next step. ESG agendas that unlock long-term value must be tied to governance initiatives that focus on collaboration.”

Fifty five percent of respondents say there are significant differences of opinion among leadership on how to balance short-term considerations with long-term investments and sustainable growth. That figure jumps to 68% of board chairs and non-executive board directors.

Sixty six percent of leaders combined see the top two advantages to integrating ESG factors in their corporate strategy as first, long-term value through new ESG-driven products and services, and second, resilience to ESG risks. Eighty three percent of respondents said they would like mandatory reporting of ESG performance measures against global standards.

The majority (82%) of respondents feel they have made significant progress in putting in place the controls and risk management systems needed to address material ESG risks. The top two challenges holding businesses back from delivering against ESG according to respondents are externally, near-term economic uncertainty (85%) and internally, lack of commitment from the board (43%).

The EY analysis found that if companies are to be successful in harnessing ESG-related opportunities, boards must strengthen their governance with a new board operating model, composition, and skills, innovative approaches to reward and remuneration and effective ESG reporting and investor engagement.

Andrew Hobbs, EY EMEIA Public Policy Leader, added: “Robust and innovative corporate governance approaches are critical for getting on the front foot with ESG.

“This will be a process of evolution for many companies; the C-suite is closer to customer and other stakeholder needs while boards have a shareholder-focused outlook. There is real impetus now behind sustainability reporting mandates, crucial to a board’s accountability.

“Many markets are making significant moves to require ESG disclosures and drive up the value of reporting, including the EU with its sustainable finance initiative. The suite of ESG reporting standards envisaged as part of it will catalyze the “greening” of the EU’s capital markets.”

More information about the EY Long-Term Value and Corporate Governance Survey is available on the company website.