The 2021 EY Global Institutional Investor Survey reveals that a growing number of institutional investors in Canada and around the world are placing greater emphasis on environmental, social and governance (ESG) performance in their decision-making. Most investors (74%) indicated they are more likely to divest from companies with poor ESG track records, but concrete action is still lacking despite the urgent need for better quality disclosure from companies.
“The COVID-19 pandemic has been a powerful catalyst to laser focus on all facets of ESG, putting pressure on both companies and investors to assess risks effectively and meet increasing stakeholder demand on addressing climate, social and governance issues,” says Thibaut Millet, EY Canada Climate Change and Sustainability Services Leader. “While quality nonfinancial disclosures and a clearer regulatory landscape — coupled with more sophisticated data analytics capabilities — are important to realizing the full potential of ESG performance, companies cannot wait. There needs to be bolder steps taken all on fronts to put ESG performance at the heart of decision-making.”
The race is on to get to net zero and decarbonization through emissions reduction, carbon sequestration and offsetting programs. In fact, the report shows that 86% will invest in companies that have an aggressive carbon footprint reduction or a low carbon footprint. A further 90% of investors now attach greater importance to ESG performance in their decision-making than they did before the COVID-19 pandemic, and 92% say they have made decisions over the past 12 months based on the potential benefits of a “green recovery”.
And yet despite the sharpened focus on ESG performance, less than half have taken action to update their investment policies and frameworks (49%) or revamp risk management strategies (44%).
“Although there are clear intentions to look more closely at ESG risks across portfolios and investment targets in the future, institutional investors have been relatively slow to make concrete changes to the way they operate,” explains Millet. “In the absence of a clear and consistent regulatory framework, investors looking to build an ESG-driven culture should start by reviewing current investment
strategies for individual funds and portfolios and updating processes, systems and controls, while putting bold and forward-looking data analytics strategies in place.”
In addition, as organizations look for new ways to provide the long-term value insights that stakeholders seek, a lack of regulation has investors concerned about the quality and transparency of ESG reporting from companies they’re considering. Half of those surveyed say they don’t believe companies are reporting adequately on financially relevant ESG issues, such as revenue growth or required capital and risk, ultimately pushing 89% of investors to call for mandatory global standards.
“Uniform global standards are critical to build accountability and deliver transparent measurement and high-quality disclosures around ESG performance, which in turn can underpin good business management and help to build and preserve stakeholder trust,” suggests Millet.
To support the acceleration of standards and best practices, EY Canada is a proud research collaborator of Climate Engagement Canada, a finance-led initiative that drives dialogue between the financial community and corporate issuers on climate change risks and opportunities.
View the full EY Global Institutional Investor Survey for more insights.