Do you have the energy to keep up with the pace on sustainability?

For my next article in the series discussing what’s important for CEOs in the Eurozone, I want to explore the implications of ongoing economic disruptions for the sector that has taken center stage – energy – where prices have soared, outpacing inflation levels that are already elevated. This follows on from my previous article "Are social factors now top of the ESG agenda for Eurozone CEOs? "

A growing priority in the Eurozone

Rising prices are likely to only accelerate industry trends and compel CEOs to chart new courses with their business strategies, including mergers and acquisitions (M&A).

According to the recent Eurozone CEO Outlook Survey , 99% of Eurozone CEOs are using M&A to accelerate their sustainability agenda and around 26% cite environmental, social and governance (ESG) as the key reason for pursuing acquisitions. This compares to 20% of global CEO’s.

Three-fifths of ESG-driven Eurozone deals in 2021 were in the energy sector. And the region leads in?investments targeted towards the renewable sector, accounting for more than one-fifth of the total renewable investments in 2021 globally (compared with the US and Greater China which accounted for 16% each respectively).

In fact, Eurozone allocated more than three-fifths of its ESG-driven investment towards renewables (compared to the US allocation of 37%). Looking at its recent track record, ?Eurozone CEOs?are really setting the gold standard in ESG credentials.

Where is investment focused??

According to an EY analysis, input prices were rising across value chains throughout 2021. While many companies have been successful in passing on costs to customers, new price increases in 2022 may be harder to manage.

Other than renewable energy investments, trends such as the circular economy agenda, electrification and shared mobility, the demand for ESG data and technology, and several social issues are driving sustainable M&A, according to EY research. With the energy transition in mind, even oil and gas exploration and production companies are heavily engaged in dealmaking for renewable projects to strengthen or diversify their portfolio towards green energy.

Though acquisition of operational capabilities, technology and innovation remain the key drivers for CEOs embarking in M&A. Companies are increasingly tying their ESG goals to inorganic growth as M&A offers a suitable and agile bridge to meet sustainability targets, enabling firms to bring new products and capabilities quickly to market.

What’s driving this shift in strategy?

From EY analysis, consumers will likely be squeezed by sharp increases in energy prices, reducing potential consumption in other areas, including services. This is causing consumers and businesses to adjust their long-term thinking on demand for energy.

We already see changing energy strategies in part through the tremendous uptick in the sustainability-focused M&A in the Eurozone, which is primarily the result of a combination of consumer and stakeholder expectations – but also regulatory obligations. This is good news for policymakers, showing that regulatory changes don’t have to lag behind the curve and can lead to faster, significantly improved sustainability outcomes.

Examples from across the European Union are picking up steam:

·??????Last year, EU policymakers unveiled an ambitious plan to tackle climate change, aiming to turn green goals into concrete action this decade, leading the way for the world's other big economies.

·??????The EU commission also adopted a series of legislative proposals setting out how it intends to achieve climate neutrality in the EU by 2050 including the intermediate target of an at least 55% net reduction in greenhouse gas emissions by 2030.

·??????As EU policymakers clamp down on carbon emissions, private sector has ratcheted up plans to decarbonize and develop and embrace low-emission technologies – so as to avoid regulatory costs. For example, numerous leading car manufacturers have announced targets for electrical vehicle production as part of a broad transition away from internal combustion vehicles, which is moving much faster in Europe than in other regions.

So, what does this all mean in the end for Eurozone CEOs? The recent progress from the public and private sector show that movement towards energy diversification and sustainability is accelerating. In my opinion, there is little reason to expect momentum to slow down, especially as both sectors set ever more aggressive energy and emission reduction targets, and considering the strong support for action amongst stakeholders, including consumers. Expect these trends to pick up speed and for the Eurozone energy to continue to lead the way over its peers in other parts of the world. Now is the time to act, to ensure your business keeps up.

In my next article, I add another piece to the jigsaw on how Eurozone businesses are using M&A to drive their sustainability transformation.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.