Good business sense: How can boards support management to effectively integrate sustainability into strategy.

Boards have a huge amount on their radar today – as I highlighted in my last post. Geopolitical tensions, a testing economic climate and ongoing supply chain disruption are among the major challenges they face. Yet, although they’re juggling many competing priorities, they should still maintain a laser focus on sustainability.

This was the overriding message from the European Corporate Governance Conference 2024, which explored the opportunities and challenges associated with sustainable value creation. As Sandra Gobert (she/her) , Executive Director of GUBERNA - Instituut voor Bestuurders/Institut des Administrateurs , rightly said at the event: “There is no corporate governance today without sustainability.”

So, what should boards consider as they support management teams to integrate sustainability into business strategy??Here are my main takeaways from the conference:

1. Opportunity is the flip side of risk and compliance. Through the process of transforming their business models, companies have a huge opportunity to drive innovation, operate more efficiently, better manage their risks, benefit from tax incentives and access cheaper capital – all of which enables them to gain competitive advantage.?In fact, research by EY organization, cited at the conference, has found that the companies taking the most action to address climate change are 1.8 times more likely to report higher-than-expected financial value from their initiatives, compared with those taking the least action. As well as creating value, sustainability can be a powerful talent magnet since younger generations increasingly want to work for organizations that positively impact society and the planet.?
2. To be truly resilient, business needs to have a visionary approach to risk management. The better companies are at managing their risks, the more value they can deliver to their stakeholders. Adriana Cavaliere ,?Senior Risk Manager at Belgian air traffic control company skeyes , told the conference that the threats posed by today’s complex business environment mean that businesses need to adopt ‘visionary risk management’, an approach that integrates risk with strategy and leadership. In practice, this means having a strategy-driven and integrated risk-management approach, with scenario planning used to identify the different risks – and opportunities – the company could be exposed to over the long term. This approach also requires the implementation of effective internal controls to mitigate any potential risks that could impact on strategy execution.?Speakers and members of the audience also suggested that there is a role for policy makers in clarifying the expectations of directors in this arena. Stronger risk management could increase the attractiveness of European companies to investors, helping to reduce the cost of capital.
3. Supply chain due diligence is not about ticking boxes – it is about creating a more sustainable supply chain with a lower impact. The EU’s proposed Corporate Sustainability Due Diligence Directive (CSDDD) is a major shift in the journey towards removing some of the most adverse social and environmental impacts in businesses’ value chains. Some stakeholders believe it does not go far enough, however, while many businesses are concerned that the CSDDD will impact their competitiveness. Discussions at the conference suggested that businesses should see the directive as an opportunity to better manage their risks and build trust with their stakeholders through positive engagement with their suppliers. Reporting is the first step towards a more sustainable supply chain, but companies must genuinely commit to the due diligence process if their reporting is to have any value. Effective due diligence needs to be done on a continuous basis through screening and by engaging with suppliers on the ground.
4. Sustainability reporting is a journey. Compliance with the Corporate Sustainability Reporting Directive (CSRD) is a major focus area for EMEIA boards and particularly their audit committees. The directive is being phased in over four years, with companies in the first phase required to report on their 2024 data. As the conference highlighted, companies are on a major learning curve, and at different stages of maturity, when it comes to sustainability reporting and compliance with the CSRD. They face challenges around data, resources, looking ahead and considering their whole value chain. Boards are familiarizing themselves with the ‘alphabet soup’ that is the language of sustainability. Meanwhile, audit committees are developing new skills and expertise to provide constructive challenge around the sustainability reporting being produced by their companies. Boards should be aware that the governance, policies and internal controls around sustainability will require continuous improvement over the months and years ahead. In addition, rather than seeing the CSRD as a compliance exercise, they should encourage their companies to embrace it as an opportunity to improve strategic focus, enhance data-led decision making and learn more about their operations.

In the driving seat

Last year was the hottest year on record and the impact of climate change on business is becoming more noticeable all the time – a good example being the drought that has disrupted the Panama Canal, one of the world’s busiest shipping channels. Yet, despite the urgent challenges we face, and the fact sustainability is increasingly recognized as a critical issue, companies’ sustainability efforts appear to be slowing down, rather than speeding up. The 2023 EY Sustainable Value Study found that the median target year for companies globally to achieve their climate targets has fallen back to 2050, compared with 2036 in the previous year’s study.

So, what’s the role of corporate governance in turning things around?

Boards have an opportunity to make a real difference on the sustainability agenda by getting out of the back seat and into the front seat, and proactively driving change. As the 2024 EY Europe Long-term Value and Corporate Governance Survey highlighted, boards can challenge management to develop an ambitious strategic vision around sustainability – one that moves beyond pure compliance and enables the company to gain market advantage. They can also help to ensure that capital flows to the most transformative projects and explore the potential of emerging technologies, such as AI, to accelerate progress.

By setting the right tone at the top, boards can show exactly why sustainability is a strategic imperative. Because it makes sound business sense.

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.