Exclusive: EY’s European boss on why ‘prioritising net zero over profit is not always sustainable’
In an exclusive interview, EY's European chief Julie Teigland discusses investors' dilemma of balancing short-term profits versus long-term sustainability
Is there a critical link between effective board-level sustainability governance and business performance?
Yes, that is certainly the case, according to Julie Teigland, who - as managing partner for Europe, the Middle East, India and Africa at global professional services giant EY - leads a team that comprises more than 115,000 people across 68 countries.
In an exclusive sitdown with Net Zero Investor, Teigland argues that companies with stronger sustainability governance controls in place are significantly more likely to expect strong revenue prospects than those with less well-developed sustainability governance controls.
But she also warns balancing short-term profits vs long-term sustainability is not a 'black and white issue' with unique challenges, investor pressure and multiple corporate risks all playing their part.
Businesses and investors increasingly seem to align their priorities with most saying corporates should address net zero issues relevant to their business, even if doing so reduces short-term financial performance and profitability. Is this a clear result of more engagement and investor pressure?
It is a simplification to say that businesses are only addressing net zero issues because of investor pressure. Nearly two-thirds of businesses surveyed for EY said 'we face short-term earnings pressure from investors, which impedes our long-term investments in sustainability.'
So, in practice, investors understandably feel conflicted about the question of short-term profits vs. long-term value. A significant 80% of investors also said 'too many companies fail to properly articulate the rationale for long-term investments in sustainability', so again, investors do not want to see ‘sustainability at all costs’, but they would rather be given a compelling reason to invest in a company’s sustainability initiatives.
When you look at the wider trend among corporates and asset owners, is there a green wind blowing and is a sole focus on profits taking a backseat?
No, I do not think so. Within companies, there are growing divisions among leadership teams looking to balance short-term considerations with long-term investments and sustainable growth. ‘Significant differences of opinion’ on the balance are up. It is not a black and white issue and, ironically, prioritising net zero over profit is not always sustainable.
The long-term impact of Covid-19 and the war on Ukraine has made it a very challenging couple of years for businesses. Staff shortages, supply chain disruption, and mounting energy costs are just three of the knock-on effects. And there is often a lag between these things being experienced and impacting the bottom line.
Long-term value ‘solutions’, be it clean tech or simplified supply chains, can bring benefits to a company’s bottom line as well as the planet. Across different industries, we are seeing policies introduced to phase out unsustainable practices, and from that perspective, long-term value is good business.
Nevertheless, data from your firm found that a vast majority of investors believe the companies they invest in should make more efforts to address net zero challenges, even if reduces profits in the short term. This follows similar comments by Aviva Investors' CEO and other movers and shakers within the industry. What is driving this trend?
Beyond, of course, the corporate social responsibility and moral obligation companies hold. An increasing number of regulations require companies to report their carbon emissions, meaning there is no hiding place for poor net zero performance.
It sounds paradoxical, but by not investing in net zero in the interests of short-term profits, companies risk a reputational backlash that stands to impact bottom lines. In some industries, the financial cost of not prioritising net zero is particularly severe, such as the automotive sector, where the EU has banned the sale of all new petrol and diesel cars from 2035, so companies in this sector cannot afford to deprioritise net zero.
And where do asset owner engagement come in?
Yes, tellingly, nearly two-thirds said 'we face short-term earning pressure from investors, which impedes our longer-term investments in sustainability', suggesting that investors may perceive themselves as supporting a longer-term sustainable future, but that this is not the experience of the businesses they are investing in.
Do you see that more and more investors take a pro-active engagement approach?
Investors have always wanted to see a ROI and in this respect pressure from investors is nothing new. I do not see investors trying to wield any kind of undue influence, after all, they have an active stake in the business they are investing in and it is right that they hold boards to account.
There are obvious implications here when considering long-term ESG value, and how long investors are prepared to wait to see a profit. In many ways, a company’s net zero transition is analogous to companies undergoing digital transformations. They do not happen overnight and that can be challenging for investors wanting to see immediate returns.
Many investors and corporates are saying that there are significant differences of opinion within leadership teams on how to balance short-term considerations vs long-term investments and sustainable growth. How should companies go about that?
There are two things I would point out. The first is that we must remove blame. In an ideal world, of course, we would all be advocating for short-term profits and long-term sustainability. But it is a far from an ideal world; these compromises are seldom black and white.
And second, it goes to finding ways of using sustainable initiatives as a vehicle for driving short-term profits as well as long-term value. What efficiencies can a business make to its supply chain, for example, that will reduce waste and cut costs? What green tech could it implement that will cut costs and help save the environment?
As we discussed today, tensions between financial and sustainable progress are widespread. However, only a tiny fraction feel that sustainability is fully integrated into their board’s structures and decision-making processes. Do you think this will change in the years to come?
It must change. Companies need strong and competent boards that can make informed decisions about sustainability and yet only 7% of senior business leaders feel that sustainability issues are fully integrated into their board’s structures and decision-making processes.
Net zero should not exist as an afterthought in a risk or compliance team, but be deeply embedded and woven into the fabric of all business units. Companies must integrate sustainability into strategy and governance structures so that it becomes part of the board and committee ‘business as usual’.