It is clear from the latest EY research that there is a general, global trend toward increased interest in nonfinancial information on the part of investment professionals. But are investors getting the environmental, social and governance (ESG) information they need?
The Paris Conference of Parties meeting in December 2015 to negotiate a global climate agreement (subsequently signed by 194 nations) is the most prominent of a number of events that have propelled ESG to the top of the global agenda. The third EY survey of institutional investors, examining their views on the use of nonfinancial information, found that meaningful ESG analysis is increasingly important. However, the survey (which gathered responses from 320 decision-makers at buy-side institutions around the world, a third of which have more than US$10b assets under management) also reveals that they are disappointed by companies’ ESG disclosures:
60% of respondents believe that companies don’t disclose ESG risks that could affect their business and that they should disclose them more fully.
This represents an increase of 21 percentage points on the previous survey.
The suggestion that investors’ demands in this area are not being met is troubling because, as the latest survey shows, there is broad support for ESG-related themes.
Investors who remain skeptical about the value of nonfinancial factors tend to disregard any causal relationship between a company’s ESG performance and financial performance. However, it’s commonly understood that serious reputational and environmental risks can and do surface, and that they can have very real impacts on the bottom line. Investors who used ESG factors in their analysis point to the long-term benefits of investing in companies that pay close attention to ESG factors, as well as the lower investment risk with those companies.
What motivates companies’ nonfinancial reporting?
If investors want more issuers to report on their ESG activities, what motivates companies to disclose that information? According to the investors surveyed, the biggest motivating factor for most companies remains building their corporate reputation with customers, followed by complying with regulatory requirements. Investor demands play a role as well, along with the incentive of improving stock valuations, but to a much lesser degree.