ESG goals and preferences are evolving
The types of ESG information that investors seek have evolved from the early days of nonfinancial reporting, which some companies started as early as the 1990s.
Years ago, investors would often emphasize worker health and safety information from companies in heavy industry, such as the mining or oil and gas sectors, and liabilities associated with safety performance.
Today, the information is still important, but companies release the information and manage the risk in the course of normal business, and the investors’ focus has shifted to other ESG issues, such as changing societal expectations, impacts of disruptive technologies, changing demographics, scarcity of water and other resources, climate change and post financial-crisis executive pay.
The way that investors use ESG information is also evolving. Where investors previously favored an approach that strictly separated the ESG and financial aspects of portfolio management, and with separate teams of analysts, now more investors are integrating ESG factors into their normal investment analysis.
Investors are also taking a more in-depth view of risk and potential opportunities from ESG considerations. The most important nonfinancial issue for investors in the survey was in relation to “good corporate citizenship and issuers’ policies on business ethics,” with 35% of respondents calling the issue “very important” and 57% saying it was “important.”
Client demand for more information was nearly on the same level, with 31% calling it “very important” and 60% “important.”
Given that nonfinancial performance periodically played pivotal roles in their investment decisions, a surprisingly small percentage of the investors in our survey reported that they conduct structured reviews of environmental and social factors.
Of the surveyed investors, 51%, said that their evaluation of environmental and social impact statements and disclosures was informal. That compared to 26% who said their evaluation was structured and methodical, and 22% who conducted little or no review.
When asked why they don’t consider nonfinancial issues in their investment decision-making, 42% of the surveyed investors answering the question said that nonfinancial measurements are seldom available for comparison with other companies, and the same number said the information is often inconsistent, unavailable or not verified. Only 16% said that nonfinancial disclosures seldom have a financial impact or are material.