A new EY survey of more than 200 companies in 15 European countries has identified a fundamental link between effective sustainability governance at the board level and business performance. The study found that respondents with stronger sustainability governance controls are significantly more likely to expect strong revenue prospects than those with less developed controls.

Of the companies classified as “experts” in sustainability governance, 76% say they feel optimistic about their performance, compared to just 45% of companies classified as “beginners” in sustainability governance.

Experts report being much more likely to avoid accusations of “greenwashing,” where green ambitions do not match reality, by actually meeting their stated climate ambitions. Only 13% of beginners report being “very satisfied” with the progress they have made to date in achieving the climate goals they have set, indicating a potential reputational risk, compared to more than half (52%) of “experts” who report satisfaction with the progress in their own ambitions.

The survey further found that experts are much more likely to take concrete action by increasing their sustainability investments. Nine out of 10 (90%) of these companies report that they plan to increase investments, including nearly a third (29%) who plan to “increase significantly.” This compares to just over half (54%) of “beginners” who plan to make increases, with only 9% planning a significant increase.

“The findings of this survey are clear: there is a critical link between effective sustainability governance at the board level and business performance. Companies with strong sustainability governance are not only more likely to invest more in sustainability and achieve their climate goals, but they also expect better financial growth. We are now in an era where solid sustainability governance and performance are not just ‘nice to haves’ but absolute imperatives for business survival,” explains Julie Linn Teigland, EY EMEIA Area Managing Partner.

While the survey found significant variation among companies in how sustainability is handled at the board level, the vast majority of respondents think there is room for improvement, with only 7% reporting that they feel sustainability issues are fully integrated into their board structures and decision-making processes.

“The ESG paradigm is becoming increasingly complex and regulations are evolving rapidly. Even if the Board has created a Sustainability Committee or Advisory Board, these cannot function in isolation: sustainability issues are multidimensional and involve areas such as remuneration, risks, opportunities, audit, and broader stakeholder engagement. To address ESG holistically and strategically, concerted efforts are required,” says Sonia Tatar, Executive Director, INSEAD Corporate Governance Centre and INSEAD International Wendel Centre for Family Enterprise.

Short-term investor pressure impedes long-term investments

According to the survey, 74% of all respondents say their company must 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 profit pressure from investors was impeding their long-term sustainability investments. This suggests that, despite the clear business benefits of addressing ESG issues, short-sighted investor pressure 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 fast enough on climate issues.

“Stakeholders are pushing companies to lead on sustainability, but drastic changes must be made for this to happen. There are concrete steps companies must take today, from fully integrating sustainability into Board business to bringing more diverse skills to the table and rethinking executive compensation, all to help ensure they don’t fall behind as we move towards a more sustainable future,” says Andrew Hobbs, EY EMEIA Public Policy Leader.

Recommendations for action

The report makes several action recommendations 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 Board and Committee “business as usual.” Only 7% of all surveyed companies felt that sustainability was fully integrated into their Board structures, and 83% of experts reported being effective in managing the Board agenda to help ensure long-term ESG risks and opportunities are always discussed, compared to just over half (52%) of beginners.

• Seeking creative ways to bring additional diverse skills and experiences to Board decision-making, for example, parallel Boards, Advisory Boards, expert advisers, accessing more from management, and refreshing Board composition. Of the surveyed companies, 86% of experts say they felt effective in increasing diversity in the boardroom and ensuring new voices have equal airtime to provide new perspectives on ESG issues, compared to just 36% of beginners.

• Designing an executive compensation policy grounded in ESG-based KPI goals aligned with the organization’s business strategy, including material sustainability goals. Less than half (47%) of surveyed organizations made sustainability a significant element of remuneration, and experts are much more likely to include ESG metrics as a significant element when setting senior executive compensation (61%, versus 29% for beginners).