One of the key benefits provided by ESG analysis for investors is risk avoidance and measurement.
Investors demand more from company ESG reports
The investors surveyed said that the most useful source of nonfinancial information for making investment decisions was a company’s own annual report:
- 31% of respondents said a company’s annual report was essential when it came to making investment decisions, and 32% said it was very useful.
- 18% said an integrated report was essential, and 39% said it was very useful.
However, fewer than half of respondents (44%) view company sustainability reports as “very useful” or “essential.” The responses raise questions as to whether sustainability reports are too highly curated and too solution-oriented for investors. Rather than being a source of comfort for an organization, such reports, by nature, should create some discomfort. Otherwise, it becomes easy for the exercise to produce a mostly triumphant message, raising questions as to its long-term credibility.
The appeal of ESG analysis in risk management
One of the key benefits provided by ESG analysis for investors is risk avoidance and measurement. When asked if certain disclosures would make them change their investment plan, 39% of the investors in the survey said that a risk or history of poor governance would force them to rule out an investment immediately, while 32% said they would do the same due to human rights risk from operations and 20% said limited verification of data and claims would rule out an investment. The top reason for reconsidering an investment, at 76% of survey respondents, was risk or history of poor environmental performance, followed by risk from resource scarcity at 75% and risk from climate change at 71%.
The survey also showed that investors have high regard for board and audit committee oversight, which are typically viewed as keys to good corporate governance and risk management. Both mandatory board oversight and audit committee oversight were important to the investors surveyed: similar numbers said both types of oversight were “essential” or “very useful.”
The views of third parties set out in this article are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.
Summary
The third EY survey of institutional investors reveals an increased appetite for companies to disclose their environmental, social and governance risks – an appetite that is not currently being satisfied.
