EY study finds large companies leading on sustainability action likely to exceed financial targets. Whilst separately, SMEs say they require more help from government to address their environmental challenges

A new study has found that companies leading on climate action are more than twice as likely to exceed financial targets. Yet, a separate survey of British SMEs finds they are crying out for government assistance to address sustainability challenges

Published

November 16, 2022

Sustainability leaders seeing above-expected returns across five sources of value

A new study from EY has highlighted the benefits that sustainability action can bring, with headline findings that so-called climate ‘pacesetters’ are more than twice as likely to report significantly higher-than-expected financial returns on climate initiatives than companies taking few climate actions[i]. The survey of more than 500 companies, each with a valuation of $1bn or more, looked at the measures taken to reduce emissions across the value chain, measuring 32 actions across five core areas: measurement and reporting, governance and oversight, operations and supply chain, customers and product offering, and suppliers and third parties. This then allowed the creation of an index that segmented respondents into high action (pacesetter), medium action (explorer) and low action (observer)[ii].

Of those companies classed as ‘Pacesetters’, it was found that 52% have captured significantly higher financial value than expected over the past year. According to the study, much of their success lies in the fact that they are leading in the development of new business models or services. It was also found that companies are much more likely to save money in operational costs due to energy and material efficiencies and avoid fines for non-compliance.

Overall, 93% of the surveyed companies have made public commitments, and typically these were found to have a specific emissions reduction target, but just 11% had more ambitious goals like achieving net-zero emissions. When looking at GHG (Greenhouse Gas) emissions, it was reported that the average respondent plans to slash these by 41% (excluding carbon offsets), and positively, most respondents are over halfway toward achieving this goal, with the average survey respondent reporting an emissions reduction of 28% to date (excluding carbon offsets). “Companies have made a start reducing their emissions and will invest further: 61% of our survey respondents plan to increase their spend next year to address climate change.”

Figure one: Companies’ commitments and target dates for change

Source: EY

EY refers to the UN Intergovernmental Panel on Climate Change, which has called for the world to cut emissions by 45% by 2030 and achieve net-zero emissions by 2050 to keep global warming below 1.5 degrees Celsius above preindustrial levels. However, EYs study finds that businesses are failing to align with recognised targets:

“In our survey group of leading companies, only 29% use accredited science-based targets and only about four in 10 plan to reduce emissions by 45% or more (excluding carbon offsets). While offsets will be needed for emissions that are most difficult or expensive to reduce, businesses should prioritize curbing emissions to the greatest extent possible. Planned reductions are also unlikely to happen soon enough to meet global goals. Just 35% of companies have a commitment milestone on or before 2030, and only 38% have laid out intermediate targets toward their long-term goals. Despite this gap with the UN’s stated goals for 2030, 70% of respondents are confident their organization is being ambitious enough to make a meaningful impact on climate change.”[iii]

The full results of EY’s research can be found here.

UK SMEs require more government support on sustainability

Whilst EYs study suggests climate-conscious corporations are seeing financial benefits from their sustainability action, smaller companies in the UK are crying out for support from the government. According to a recent report by Sage and the ICC (International Chamber of Commerce), failure to help SMEs transition risks overlooking a significant part of the UK economy- their ‘SME Climate Report’ states that SMEs account for 50% of gross value added to GDP and that their operations are responsible for 44% of national non-household emissions. Of the 2,000 businesses they surveyed, over half (53%) said that environmental sustainability is either “a priority in” or “central to” their strategy and operations, with the most common actions being taken, including reducing waste material and improving energy efficiency[iv]. Yet, 90% of the businesses surveyed said they face barriers to taking climate action, with the most common barriers being financial constraints and difficulty finding the right solutions.

A further study by financial services provider Novuna, which polled 1,228 decision-makers at SMEs, found that despite the tough economic climate, 85% of small businesses are seeking to put green issues higher up the agenda within their enterprise[v]. However, it also found that 80% of survey respondents said they do not believe that the national government or local authorities are doing enough to champion the need for climate action from small businesses[vi]. When considering the actions businesses could take to achieve net zero, fewer than one in five SMEs said the Government had been influential in helping identify steps or measures they could take to reduce emissions. Just 20% cited the influence of Government advice on their move to use renewable energy, 19% for electric vehicles, 12% for using less packaging, 11% for cutting down on business travel, and just 9% when weighing up the relative benefits of staff car sharing schemes (9%)[vii]. Survey respondents also suggested that they wanted more guidance on engaging suppliers, with almost a third (28%) saying that the UK Government would do well to publish guidelines on supplier engagement in decarbonisation.

Joanna Morris, Head of Insight at Novuna Business Finance, said:

"Successive Governments have done a great deal to support Net Zero and the green agenda but, despite the current and immediate economic challenges, now is the time to maintain a focus on the climate commitments made in recent years. The global debate on climate change often focuses on major businesses and their role as change agents. Yet it is clear from our research that the small business community has a vital role to play. Combined they employ three fifths of the UK workforce and their relative size and agility means they can adapt more quickly. Furthermore, whilst many small businesses are making good progress on the road to becoming Net Zero and sustainable, they expect Government to take a lead - to devise policies, offer support and frame guidance that small businesses can follow."[viii]