Organizations risk losing out on investment due to lack of non-financial information disclosure
London, 3 April 2014
Opting out of reporting non-financial performance is no longer a choice for organizations looking for investment, according to a new report, Tomorrow’s investment rules, released today by EY.
- 89% of global investors report non-financial performance information played pivotal role at least once in decision-making in the last 12 months
- Investors report difficulties in identifying what is material to value creation, peer-to-peer company comparisons, and a lack of connection between non-financial and financial performance
- 70% of the respondents based in emerging markets frequently or occasionally use non-financial information, compared with only 49% of those in developed markets
The global survey of 163 institutional investors conducted by Institutional Investor magazine, on behalf of EY, identifies the key trends and drivers that influence the uptake and use of corporate disclosures of non-financial information. Eighty-nine percent of investors report that non-financial performance information played a pivotal role at least once in their decision-making over the last 12 months. Two-thirds of those investors are using some kind of technique to evaluate non-financial disclosure and of this group only half have a structured evaluation or have a process in place. The report highlights that many are relying on personal judgment of environmental and social data when determining the impact of such factors on value creation and risk.
Juan Costa Climent, EY’s Global Leader of Climate Change and Sustainability Services comments: “The emergence of integrated reporting and a widening appreciation of the risks and opportunities posed by externalities; creates a significant opportunity for organizations that can better inform investors of the non-financial risks and opportunities that their business faces.”
When looking at the sources of non-financial information, annual reports, integrated reports and company websites were ranked as the most important sources by investors, rather than third parties indexes; highlighting the crucial need for organizations to consider how they present their non-financial data to different financial stakeholders.
Many of the investors also pointed out the challenge of finding meaningfully ways to compare companies’ performance, even among peers. A lack of information to understand what issues could materially impact returns for shareholders was a common frustration, with many unable to draw quantifiable links between non-financial and financial performance.
Dr. Matthew Bell, EY Australia Climate Change and Sustainability Services Partner, comments: “What investors are telling us is that they’re using non-financial information to inform their decision-making – whether or not the companies are providing it themselves. They’ve also identified weaknesses in current reporting, and so companies now need to consider a more structured approach. By using an integrated framework companies can report what is material to them, provide further information, and point to where an investor may find the raw or unabridged data that bigger investment teams will find useful.”
The survey also identified geographical differences when it comes to the uptake of non-financial information. Over 70% of the respondents based in emerging markets frequently or occasionally use non-financial information, compared with only 49% of those in developed markets.
With investors looking to minimize risk, 43% of the respondents from emerging markets said that non-financial information was essential to minimize risk, compared with only 29% of those from developed markets; highlighting that the risks posed by environmental, social and governance issues are more prevalent in emerging markets. In markets, such as China and South East Asia, sustainability concepts are critical to the way companies operate, and how quickly they adapt to a shifting landscape, therefore non-financial information is essential to minimize the risk.
The report lists key recommendations for those compiling non-financial information, based on the survey results, including: investing in reporting to unlock the value created from being transparent on environmental, social and governance disclosures; reporting on and highlighting what’s truly material to the organization’s performance; keeping abreast of international developments in terms of reporting guidelines; and finally getting the organization’s governance processes in place.
Bell concludes: “It is no good saying that investors aren’t asking for this sort of information. They’re finding ways of getting this data and they are assessing companies on it, so organizations need to take back the initiative. Companies need to act now or be penalized.”
Notes to editors
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