The state of sustainability: Ernst & Young’s take

The world has entered a period of economic uncertainty. Is a global recession in the offing? Can inflation be tamed? And what of geopolitics rearing its ugly head, putting a cap on ‘the end of history’ as we enter an age once more marked by ‘the tragedy of history’. But in all of this uncertainty, progress made on the sustainability front in more stable times must not be negated. Economic growth must remain on this sustainable path, and there must be rightsizing rather than downsizing. 

Where does this leave the Chief Sustainability Officer?

One person who has insightful views on this question is Steve Varley, the Global Vice Chair - Sustainability at Ernst & Young. He laid bare for us some of the conversations that CSOs ought to be having with CEOs as we all navigate these eco-nomic headwinds. He sees three pressing issues.

First is how businesses should react to the game-changing public policies that have been put in place over the last year to scale clean energy. Varley notes the context: “Change is afoot in the US with huge subsidies, tax credits, and other incentives for green tech made in the country through the somewhat misleadingly named Inflation Reduction Act (IRA). European Commission President Ursula von der Leyen outlined plans for a European Union (EU) Green Deal Industrial Plan, including the Net-Zero Industry Act to focus investment and deliver new state aid to support green tech.”

Companies are sure to feel the effects of this new, muscular approach from government: “These policies and others in the pipeline will have a huge impact on companies’ competitiveness. Leading CSOs are now incorporating economics, policy, geopolitics, and corporate affairs into their remit, advising CEOs not only on potential impact to business, but also on advantages and benefits that may be gleaned.”

There is even the possibility that a green trade war kicks off, with major trade blocs competing by offering subsidies. This, though, need not be a zero-sum game. Ultimately, the planet stands to benefit if there is more green investment. The CSO will have to be cannier in navigating this climate of heightened tension. Companies should take pains to assess what these policies could mean for their operations, competitiveness, and supply chain.

Secondly, companies should work harder to show that sustainability policies are in everyone’s interest, especially in terms of the bottom line. Varley notes: “There’s a real risk that current policies and actions will not limit global warming to the 1.5°C target to minimise the most extreme impacts of climate change. In short, we’re not doing enough.”

Businesses have a strong role they can play here: “RE100 – a global coalition of businesses committed to renewable electricity – has been particularly effective at confirming market demand for renewables to governments. The importance of strong market signals was a key theme of the panel I was on with Volvo Group and Vestas at Davos, where we discussed how this is helping to scale critical technologies. By being transparent, sharing carbon ambitions, and committing to purchasing decisions with suppliers, you can give them the confidence to invest in emerging technologies ahead of the curve.”

In short, businesses must evaluate opportunities for where their organisations could commit to more transparency and purchasing commitments with suppliers. 

Strong climate disclosure requirements

Finally, CSOs should keep an eye on disclosure, which will soon be a vital force in operations if not already – as noted by Varley: “While net-zero plans, converging standards, and more detailed reporting are underway, third-party assurance on disclosures (including emissions) is coming. The EU is well ahead, with mandatory sustainability reporting and ‘limited’ assurance requirements in the Corporate Sustainability Reporting Directive (CSRD), adopted in November 2022. The US is expecting stronger climate disclosure requirements, including assurance from the Securities Exchange Commission, but may become embroiled in litigation given the current political climate.” Regulations are on their way.

Companies must adapt to this emerging reality, and there are many tough questions that must be asked: “Robust conversations need to happen at an operational and board level. How far ahead of the curve does the C-suite want to be? What’s your risk appetite? What are the cost implications, the investments needed to improve your impact on the environment, and the value opportunities? Where are you at with quality data, transparency on policies, the right technology, and assurance to verify emissions? When do you want to undertake preparation?”

With all of this on the agenda, companies must take a conciliatory approach and not shy away from the challenges ahead. Collaboration should imbue the day: “Collaboration is critical to get to scale in time. These new policies represent an unprecedented level of collaboration between government and the private sector, which I find energising. Ultimately, we need to fire the muscle of capitalism to get investment and action underway. There are plenty of synergies at play here, and opportunities for governments and companies alike to make this a win for people, profits, and the planet.”