6 minute read 10 Mar 2023

The region’s ESG disclosures need to be more focused, accountable and transparent to meet market expectations.

Bridge with beautiful sunset

How Asia-Pacific companies can bridge the ESG trust gap with investors

Authors
Terence Jeyaretnam

EY Asia-Pacific Climate Change and Sustainability Services Leader

Change maker. Sustainability adviser. Networker and connector. Reconciliation leader. Board member and academic contributor. Karate sensei and basketballer.

Simon Yeo

EY Asean Climate Change and Sustainability Services Leader; Partner, Assurance, Ernst & Young LLP

Assurance and transaction advisory professional. Provides sustainability advisory services to public and private sectors.

6 minute read 10 Mar 2023

Show resources

  • Global reporting survey report 2022 (pdf)

The region’s ESG disclosures need to be more focused, accountable and transparent to meet market expectations.

In brief
  • EY research finds ESG disclosures by companies in Asia-Pacific falling short of the information investors need to make informed decisions.
  • Investors expect companies to invest in improving ESG outcomes and offer detailed explanations of their strategies, targets and results.
  • ESG data and reporting should be independently assured and disclosures expanded to align with global reporting standards.

The Asia-Pacific findings in the latest EY Global Corporate Reporting and Institutional Investor Survey show a significant gap between what companies are reporting in their environmental, social and governance (ESG) disclosures and what investors expect. Investors feel strongly that they are not getting the data-driven insights they require to evaluate a company’s growth and risk profile. It’s an information gap that threatens to stifle access to capital for many organizations and, ultimately, could hinder progress on decarbonization.

This year, the report combined research from both finance leaders and investors, drawing together data from two surveys to give a fresh perspective on corporate reporting and sustainability from both the issuers and users of disclosure. It reveals that investors are critical of the way Asia-Pacific businesses are disclosing information about their sustainability activities. In particular, they frown on the practice of “cherry picking” what companies choose to make public. Reflecting on the information they see companies in the region provide, three-quarters (75%) of investors believe that Asia-Pacific organizations are ‘highly selective’ about the information they provide.

A massive 91% of investors believe that, unless there is a regulatory requirement to do so, most companies will provide only limited decision-useful ESG disclosures. In particular, where businesses do make long-term investments in sustainability, 80% of investors say that they often fail to explain their rationale, making such investments hard to evaluate and raising concerns about greenwashing.

Instead, what investors want and need to see is how ESG strategies are actually bringing about positive change.

While companies are starting to make progress on sustainability objectives, investors still feel strongly that they are not getting the quality of ESG data required to evaluate a company’s strategy and risk profile. It’s an information gap that threatens to stifle organizational access to capital and, ultimately, slow down decarbonization progress.

Increasing scrutiny from investors who want to see more ESG action

The 53% of Asia-Pacific executives who think investors are putting even more scrutiny on their performance against ESG goals are absolutely right. Asked about their level of scrutiny, 73% of investors said they are evaluating nonfinancial disclosures in a “structured and methodical” manner. Only 2% said they conduct little or no review.

When it comes to ESG, investors believe organizations should be playing the long game. According to the survey, almost three-quarters of the region’s investors (74%) say companies should invest in improvements relating to ESG matters – even if it dents their short-term profits. But only 58% of Asia-Pacific business leaders hold the same view.

The survey does highlight some common ground between businesses and their investors.

Interestingly, many businesses do seem to recognize that there is room for them to improve their approach to reporting. Just over half (54%) of the organizations surveyed said they provide investors with relevant information on sustainability activity, leaving a significant percentage who recognize that they do not. Two-fifths (41%) of finance leaders interviewed also admitted their current ESG reporting would not stand up to the scrutiny of basic assurance standards. 

Ultimately, both sides agree on the weaknesses of current reporting standards, noting that issues include the following:

  • Lack of requirements for supporting evidence
  • Separation of ESG reporting from mainstream financial reporting
  • Lack of forward-looking disclosure

Companies need to take immediate action to close the trust gap 

To better meet investors’ expectations, our research shows that Asia-Pacific companies need to take the key actions below.

1.  Build a better understanding of investors’ sustainability expectations, and how disclosures can address material ESG issues and earn stakeholder trust.

  • Focus – Investors are working to align their portfolios to net zero. Companies should respond with robust insights into the important opportunities and risks, including transition risk, physical climate risk and climate scenario analysis – as well as the bottom- and top-line potential of a company’s climate investments. Organizations should focus their efforts on prioritizing materiality, benchmarking disclosures against peers and preparing for the new International Sustainability Standards Board (ISSB) standards.
  • Accountability – Companies should meet investor requirements for robust governance and board oversight around sustainability. That might mean moving from ESG pledges to progress and results. Or it might mean a clearer focus on ESG stewardship. Investors also expect continual engagement with company leaders around the organization’s material progress against sustainability goals. Boards and executive teams will therefore require meaningful and credible sustainability data and insights to demonstrate how the company is making informed decisions and measuring and managing progress.
  • Transparency – Companies should also respond to investors’ calls for more consistent, comparable and reliable ESG disclosures. This means getting ahead of emerging global reporting standards, improving ESG data quality and using assurance to build trust. In Asia-Pacific, 92% of investors believe it’s important that ESG reporting and data receives independent review and assurance.

2.  Begin integrating sustainability reporting with finance.

Eventually, uptake of the ISSB standards mean financial and sustainability reporting will become integrated. As a starting point, finance leaders and teams should more closely connect with the sustainability reporting agenda:

  • Address the data challenge – Finance functions will need to gather, clean, analyze and visualize nonfinancial data to both support reporting and decision-making.
  • Collaborate across organizational boundaries – Finance teams will be required collaborate with sustainability teams and the broader enterprise to transform the quality and accessibility of ESG data and solve how to calculate the P&L impact of nonfinancial information.
  • Upskill the finance team – Finance people should be embedded in sustainability teams to learn about the nuances, limitations and implications of nonfinancial information.

A company’s sustainability disclosures provide vital insights to help the region’s investors understand the impact of sustainability issues on a business’s performance, risks and long-term growth prospects.

Asia-Pacific organizations that are serious about securing trust and a reputation for long-term ESG focus must ensure sustainability is built into their reporting processes – systemically, strategically and rigorously. Only then will we see investor skepticism in the region subsiding and businesses being recognized for their efforts to become more sustainable.

Show resources

  • Download the full report: EY Global Corporate Reporting and Institutional Investor Survey

Summary

ESG reporting is a crucial part of investment decision-making. To be seen as credible, Asia-Pacific companies must provide ESG disclosures as robust as their statutory financial reporting. This will support both the smooth running of capital markets and the fight against climate change.

About this article

Authors
Terence Jeyaretnam

EY Asia-Pacific Climate Change and Sustainability Services Leader

Change maker. Sustainability adviser. Networker and connector. Reconciliation leader. Board member and academic contributor. Karate sensei and basketballer.

Simon Yeo

EY Asean Climate Change and Sustainability Services Leader; Partner, Assurance, Ernst & Young LLP

Assurance and transaction advisory professional. Provides sustainability advisory services to public and private sectors.