5 minute read 8 Mar 2017
Ecologist using digital tablet surveying surface coal mine site

How to provide investors the information they need

By

Matthew Bell

EY Asia Pacific Climate Change and Sustainability Services Leader

Climate change and sustainability leader. Engaging in purposeful change and creating long-term value for global organizations. Savvy in science and technology.

5 minute read 8 Mar 2017

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As investors come to see nonfinancial information as increasingly significant, they expect it to be both timely and verifiable.

Nonfinancial information is increasingly published by organizations globally, ranging from sustainability reports, strategic reports, management reports and integrated reports, in response to a range of stakeholder needs. In addition, digital reporting is increasing, allowing for an interactive use of information and customized reporting.

Investors say, “Tell me more.”

While the amount of nonfinancial information is growing and is increasingly being used in decision-making, evidence shows that at the same time, there is a dissatisfaction from investors with the quality of information available from companies. Although companies are gradually starting to improve the quality of nonfinancial information, it is not improving at a fast enough pace to keep up with the higher expectations from investors. As investors come to see nonfinancial information as increasingly significant, they reveal higher expectations for it to be timely, comparable and verifiable. However, investors note that the available nonfinancial information is often of poor quality, inconsistent or not verified, and is often not comparable with that of other companies.

In responding to the increasing information needs from a combination of legislation, stock exchanges, peer pressure and rankings on benchmark listings, companies are including more and more nonfinancial information in their reports. This has created a risk of information overload and makes it difficult for stakeholders to properly identify the information that is relevant to them. In addition, there can be a disconnect between a company’s strategy and the related financial and nonfinancial performance information.

This may create confusion for intended users, in particular investors, because it is difficult for them to follow the corporate story the report is trying to tell. A misaligned approach can occur as different types of disclosures are prepared and distributed via separate channels, with no clear sense of the overall performance picture and with different governance mechanisms. This may also lead to communication of inconsistent, and potentially contradictory, information.

Can your current reporting environment deliver the right information, in a reliable and efficient manner, at the right time?

The transformation to high-quality nonfinancial information is an investment in time and resources that could unlock improved communication of business value and create a robust and reliable performance story. Connecting financial information with nonfinancial information may provide your investors and other stakeholders with a powerful tool. 

This may help them to make balanced and integrated decisions as they are more able to interpret your strategy in the context of the opportunities and risks your company faces. Enhancing the effectiveness of your reporting and focusing on what is really required for decision-making given your business model, strategy and environment in which you operate could also reduce your reporting burden.

Three ways to move forward

Given the current demand for nonfinancial information, you may benefit from assessing your current reporting environment to address whether it is fit for purpose for decision-making, both internally and externally. We believe the actions split into three main areas:

1. Meet investors’ and prospective investors’ expectations

  • Take a long-term view
    Meet investor needs by informing them of the significant environmental, social and economic aspects that could impact your company’s ability to generate value over the longer-term — and determine what steps you are taking to manage them.
  • Consider the global megatrends
    Understand what could be shaping and disrupting your industry over the coming decades. Balance current risks with future opportunities to show investors your business model is future-ready.
  • Address climate risks
    With a framework to decarbonize the global economy by mid-century, many investors expect you to rethink your climate disclosures. Not only will you likely be expected to report on the direct impacts of your business on greenhouse gas emissions, you will also likely be required to articulate potential physical impacts of climate change on your assets and supply chain, and how your business model could be sustained in a zero-carbon future.
  • Allocate capital and infrastructure to environmental, social and governance performance
    Many investors agree that environmental and social aspects of performance are important and for too long have been overlooked. Evaluate the adequacy of your allocated capital to put processes and procedures in place to address ESG issues and regulations.

2. Seize the opportunity to tell the organization’s performance story

  • Trust the evidence
    Academic research now reveals that companies with strong sustainability performance outperform their peers, and the market in general. Investing in understanding the opportunities of managing environmental and social risk could pay dividends.
  • Set the agenda
    Investors understand just how important ESG information is to your business’s performance but still largely review this information and data informally. This provides an opportunity for your company to lead the way in highlighting your understanding and management of the risks and opportunities you face.
  • Engage stakeholders
    Involve a broad cross-section of your stakeholders in determining what aspects of your business are of most importance and keep them informed on progress.
  • Engage the board
    Investors tell us they expect the board of an organization to have signed off on strategy and disclosures. Engaging the Board in the process early should reduce the likelihood of heading in a direction inconsistent with their expectations.

3. Address the essentials

  • Materiality matters
    Avoid being seen as “green-washing” in your sustainability disclosures by applying a robust materiality process. A well-considered report should articulate the environmental, economic and social risks and the opportunities most important to your stakeholders, and the ability of these risks and opportunities to impact your business now and into the future. Focusing on the positive, but ultimately less material information, may undermine your credibility with readers.
  • Be transparent
    Investment decisions are being made on the ESG performance of your business whether you report on it or not. Transparency on challenges you face, and how you are managing them, will likely be more beneficial than producing a report that just highlights the positive aspects of your performance. Reporting on ESG aspects should also be a challenging process. If not, you should question whether you’re actually telling investors something they don’t already know.
  • Value third-party verification
    Having independent verification as part of your reporting process is important, as over two-thirds of all investors say it is very useful or essential. This verification of material issues, data and information will likely add significantly to the credibility of your reporting not just with investors, but with all stakeholders.

Summary

The transformation to high-quality nonfinancial information is an investment that could unlock improved communication of business value.

About this article

By

Matthew Bell

EY Asia Pacific Climate Change and Sustainability Services Leader

Climate change and sustainability leader. Engaging in purposeful change and creating long-term value for global organizations. Savvy in science and technology.