Institutional investors are raising the stakes when it comes to assessing company performance using environmental, social and governance factors. This is at a time when the rules for capital markets are being rewritten, and the social and economic impacts of the COVID-19 pandemic continue to play out on a global stage.
Research from the 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor survey (pdf) suggests that ESG information has never been more important, with the majority of investors surveyed (98%) signalling a move to a more disciplined and rigorous approach to evaluating companies’ nonfinancial performance.
The research also showed that investors surveyed had become increasingly dissatisfied with the information they received on ESG risks when compared with 2018. A concerning finding as 91% of respondents also said that nonfinancial performance played a pivotal role in investment decision-making. This has led to strong investor appetite to see ESG disclosures underpinned by appropriate governance structures, reviews and controls.
To meet the expectations of investors, companies should look to build strong connections between financial and nonfinancial performance. They should also seek to build a more robust approach to analyzing the risks and opportunities from climate change, and instill discipline into nonfinancial reporting processes and controls to build confidence and trust. Ultimately, companies who ignore the expectations of investors could see their risk profile increase, potentially impacting the ability to access capital.
These insights into investor sentiment on nonfinancial disclosures are drawn from findings from the 2020 EY Global CCaSS Institutional Investor survey.