Investors warn non-financial disclosures are inadequate

Thursday 22 October 2015

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  • Significant shift in number of global investors now assessing companies’ non-financial disclosures in their investment decision-making
  • Australian investors most likely to see non-financial data as relevant across all sectors
  • 62.4% of investors concerned about stranded asset risk

Institutional investors say companies need to provide them with non-financial disclosures that outline visible, measurable risks to the company’s performance or risk losing their potential investment, according to a new EY survey released today.

Tomorrow’s Investment Rules 2.0 is EY’s second annual survey of  more than 200 global institutional investors, including in Australia, looking at their views about the use of non-financial information in investment decision-making.

The findings show that nearly two-thirds (63.6%) of respondents believe that companies do not adequately disclose the environmental, social and governance (ESG) risks that could affect their current business models.

Institutional investors also no longer regard ESG risks as specific to the energy and resources sectors, with 61.5% of all respondents globally considering non-financial data to be relevant to all sectors today, nearly double the 33.7% of respondents from the 2014 survey. At 82.6%, investors in Australia were the most likely to see non-financial data as relevant across all sectors.

EY Oceania’s Climate Change and Sustainability Leader, Dr Matthew Bell, says the survey findings are a clear signal to all companies that investors’ expectations and attitudes to non-financial reporting have shifted.

“There is an enormous opportunity for companies to capitalise on a growing thirst for integrated and value-driven reporting, that demonstrates just why their business will create value and provide returns for shareholders in the longer term,” says Bell.

“Companies that are able to provide the type of non-financial information that investors want may enjoy greater investor attention and, ultimately, be better positioned to attract and retain investors’ capital.”

Investors want more robust non-financial reporting

The survey found significant increases in the number of investors embedding non-financial disclosures into their investment decision making, with 79.1% who undertake some form of assessment of companies’ environmental and social impact statements (up from 64.4% in 2014). And an increasing number of investors are conducting structured, methodical evaluations of this information – 37% in 2015, nearly double the 19.6% in the 2014 survey.

It also revealed a sharp focus on stranded assets – increasingly a risk in nearly every industry but most recently associated with the energy and resources sectors.

Nearly two-thirds of respondents (62.4%) expressed concern over stranded asset risk and more than a third (35.7%) said their funds had divested holdings of a company’s shares in the past year due to the risk of stranded assets, while another 26.7% expect to monitor it closely in the future.

“The risk of stranded assets gets to the heart of what investors are telling us they want to see in non-financial disclosures – they want board-level oversight on this reporting and they want reporting that has a forward-looking view on performance and risk. Ultimately they want robust information on how companies are planning for future growth,” says Bell.

Impact on investments

The top areas causing investors to reconsider prospective investments are risk or history of poor environmental performance (75.6% would reconsider the investment) and not addressing risks in the supply chain (72.6% would reconsider), but the greatest increase in focus for investors is climate change, and human rights.

The survey findings show 40.7% of respondents would immediately rule out an investment if there was no clear strategy to create value in the short, medium and long term. A further 52.2% would reconsider the investment.

Despite the clear desire for better information, just 23.7% of respondents said that non-financial performance frequently plays a pivotal role in their investment decisions.

Tellingly, nearly half (46.4%) of those investors who do not consider non-financial disclosures in their investment decision making do not do so because they question the materiality of the current disclosures, or whether there is a financial impact on the companies they are evaluating. A further 28.6% do not use it because they regard it as inconsistent, unavailable or unverified.

Opportunity to gain first-mover advantage

Bell says the EY survey illustrates a significant gap between the non-financial reporting that investors want and that which companies are offering.

“Intangible assets now out-value tangible assets at most companies here in Australia and globally, so investor demand for more robust non-financial reporting is only going to grow,” he says.

“As non-financial concerns continue to emerge as material to investment decisions, companies will likely be increasingly expected to provide this information alongside financial information in integrated reports – the introduction of specific disclosures on environmental, social and economic sustainability risks in the ASX Corporate Governance Principles introduced for FY15 reporting, while voluntary, reflect these changing attitudes.

“The real leaders in this space understand there is capacity to create value from this in the long-term, which is really what investors need to know.”

“Boards and CEOs that offer investors the type of information they want, the way they want it, can potentially gain greater investor attention and, ultimately, an advantage over peers in the capital markets.”

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Notes to Editors

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