Non-financial reporting in the spotlight, as investors seek out companies with high ESG ratings

Thursday, 6 April 2017

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  • 82% of institutional investors surveyed say ESG risks have been ignored for too long by businesses
  • 81% say non-financial risks that could affect a company’s business are not adequately disclosed
  • 68% say non-financial performance plays a pivotal role in investment decisions

Against the backdrop of recent environmental and social scandals, and a greater call for organisations to create long term value, institutional investors are increasingly considering Environmental, Social and Governance (ESG) factors when making investment decisions. According to recent research by EY however, many organisations are not meeting their expectations around non-financial disclosures.

EY’s third Climate Change and Sustainability Services (CCaSS) survey, Is Your Nonfinancial Performance Revealing the True Value of your Business to Investors, found almost two-thirds of institutional investors globally (60%) don’t think companies are adequately disclosing their ESG risks – an increase of more than 20% on the previous year’s survey.

Based on a survey of more than 320 global institutional investors on non-financial reporting and the role ESG issues play in their decision making, the report shows investors often believe disclosures aren’t adequately linked to material risks and opportunities and don’t articulate environmental and social challenges clearly enough.

Other interesting emerging trends from the survey included:

  • 92% of institutional investors globally agreed ESG issues could have real and quantifiable impacts for organisations over the long term
  • Of those surveyed, 81% said they now pay closer attention to revelations of non-compliance with ESG expectations than in the past
  • 92% say that CEOs should set out a strategy for long term value creation AND directly affirm the company’s board has reviewed it
  • 28% say that there should be mandatory board oversight in non-financial reporting
  • 27% expect to see dramatic improvements in disclosures about companies’ practises and risk management strategies as a result of the Paris Agreement from COP21
  • Stranded assets remain a concern, with 62% of investors reporting decreasing their holdings or monitoring holding closely due to a stranded asset risk.

Matt Bell, EY Oceania Climate Change and Sustainability Services Leader said the survey findings were a timely reminder of the impact of environmental and social factors on company value and investment decisions.

“The evidence is clear: firms’ social licences to operate are under greater scrutiny than ever before. Institutional investors have developed a greater appreciation for the value of ESG factors in the past few years and this growing investor appetite for more integrated, predictable and strategic ESG disclosures, means companies need to focus on increasing the transparency of their non-financial reporting,” Mr Bell said.

“This trend is not only apparent in our survey but is strongly supported by world leaders and we have seen a number of cases recently where investors world-wide have reacted strongly to high profile social and environmental scandals. Locally, recent announcements from APRA and the AICD have also highlighted the importance of ESG considerations.

“More and more, non-financial information is being directly linked by institutional investors to company value and performance. With increasing evidence that sustainable companies out-perform their peers, investors are seeking information that provides the confidence that the management and boards of their investees are thinking long term. For high performing ESG companies, this is an opportunity to tell and sell your performance story. For others, it is time to address the essential issues.”

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About the survey

Is your nonfinancial performance revealing the true value of your business to investors? is the third consecutive survey of more than 320 institutional investors globally, including managing directors, equity analysts, portfolio managers and CIOs on their views about the availability and quality of corporate nonfinancial information and on how, if at all, they use this information when making investment decisions. The survey and in-depth interviews with respondents were carried out in summer 2016 by Institutional Investor’s Research Lab. Survey respondents represent high-level investment decision-makers and 50% of respondents work for institutions with US$5 billion or more in assets under management.