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 our 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 surveyed investors reported using nonfinancial information fairly uniformly across all stages of their investment decision-making: examining industry dynamics and regulation, examining risk and timeframe, adjusting valuations to account for risk, making asset allocation and diversification decisions, and reviewing investment results. The examining industry stage had the greatest combined percentage of investors “usually considering” and “often considering” nonfinancial information.
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 investors we surveyed: similar numbers said both types of oversight were “essential” or “very useful.”