Tomorrow’s investment rules: a global survey
Over the past few years, corporations have started to report more non-financial information, including data on their environmental, social and governance (ESG) performance.
Whether driven by regulation, a desire for market advantage, or to meet the needs and concerns of key stakeholders, this growing trend is changing global business behaviors.
How are the providers of financial capital and, in particular, long-term investors to use this information to better inform their decision-making — if they can use it at all?
EY engaged Institutional Investor for an independent global survey of 163 investors, analysts, and portfolio managers, gaining insight into their current practices and future needs.
We then interviewed a number of these investors to gain further insight into their answers. Over half of the participants in our survey are employed at organizations with equity assets under management of over US$10b.
In this survey, we identify what the key trends and drivers are in the uptake and use of corporate disclosures of non-financial information. The survey provides interesting details on the different practices used to assess the value of ESG information.
The majority of investors use this information when assessing investments and evaluating their current holdings. And they predominantly use information provided directly from the companies themselves, rather than relying on third parties, such as ratings agencies.
However, investors are struggling to find ways to meaningfully compare data, to understand which issues are most material to their sustainable growth and to draw quantifiable links between non-financial and financial performance.
Our key findings:
- Two-thirds of investors use different techniques to evaluate non-financial disclosures. However, only half of this group use guidelines or a structured process to make their assessments.
- Investors were more likely to value information which came directly from the company itself rather than from third-party sources. In addition, among those that never consider ESG information in their decision-making process, the main reason for rejecting it was that they felt it was not material.
- Investors said that, for the most part, they used non-financial performance as a good benchmark for risk. Some risks, such as history of poor governance or the absence of a strategy to create value in the long term, were held to be more important than others.
- Investors said they felt that companies were disclosing their non-financial performance to help build a better corporate reputation. They also told us that those who report in a timely way had an advantage and a competitive edge.
- Geographical location is an important factor: the responses were affected by where the investor is based in the world.
For reporters, this survey not only shows that their investors care about their non-financial performance. It also indicates why, how and when they use this information.
Some of the key recommendations that reporters can draw from these results include:
Invest in reporting
The widespread use of non-financial data and information in all of the markets we surveyed indicates that companies can derive significant value from being more transparent on ESG disclosures. This survey demonstrates that investors and analysts are often using their own judgment to determine whether your company is meeting its expectations.
Report on — and highlight — what’s truly material to your business performance
Investors just can’t tell whether most of the information currently available is important to longer-term value creation. Learning what key stakeholders believe is fundamental to your company’s sustainable business development will be critical in determining what to measure, manage and report.
Keep abreast of international developments
With both the GRI’s G4 Guidelines and the IIRC’s Integrated Reporting Framework now released, and with further developments such as SASB’s non-financial accounting standards, this area of reporting is evolving rapidly. Understanding these areas can be crucial for gaining a competitive advantage and staying abreast of potential new developments.
Act now, or be penalized
It is no good saying that investors aren’t asking you for this sort of non-financial information. They’re finding ways to get data and they are assessing you on it.
Get your governance right
The majority of investors said that they think that a company’s non-financial performance should have audit committee oversight and should be verified. Consider how best to establish governance processes to monitor and manage non-financial performance, and consider the benefits of engaging subject-matter experts and auditors to add rigor and validity to the process.