Nonfinancial disclosures are essential to most institutional investors

Singapore, 27 December 2018

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  • 97% of institutional investors conduct an evaluation of target companies’ nonfinancial disclosures, frequently impacting investment decisions
  • 59% say better accounting standards for nonfinancial information highly useful to establish benchmarks
  • 70% say national regulators best suited to close the gap between investors’ need for nonfinancial information and issuers’ information

Institutional investors are now highly focused on long-term value, with 97% saying they conduct either an informal evaluation or a structured, methodical evaluation of a target company’s nonfinancial disclosures when deciding future investments, up from 78% in 2017. Nearly all investors surveyed (96%) say that such information has occasionally (62%) or frequently (34%) played a pivotal role in decision-making, and 89% believe that environmental, social and governance (ESG) will become more valuable in the event of a market downturn or correction. This is according to the fourth EY Climate Change and Sustainability Services (CCaSS) survey of 220 institutional investors globally, 40% of whom have assets under management of US$10b or more.

Institutional investors’ demand for prescriptive nonfinancial accounting standards is also on the rise. Fifty-nine percent of investors surveyed say that better accounting standards for nonfinancial information would be very beneficial, a dramatic uptick of 26 percentage points from the survey in 2017. Additionally, the risk or history of poor governance practices would cause 62% to rule out an investment immediately, compared to 27% in 2015.

Respondents also say that ESG data must be standardized to create a useful basis of comparison, to establish benchmarks and to mark trends. Looking at investor approaches for achieving ethical investment goals and meeting investment objectives through the use of tilting and screening, findings show that investors are keen on both strategies to achieve a balanced portfolio. Investors surveyed say that negative screening yields excess return (85%) and lowers risk (67%) vs. a benchmark or target, while positive screening lowers risk (79%) and achieves important nonfinancial objectives of a portfolio. For those using tilting strategies, investors say that underweighting for negative ESG attributes lowers risk (67%) and yields excess return (68%) vs. a benchmark or target, while overweighting for positive ESG attributes achieves important nonfinancial objectives of a portfolio (72%) and lowers risk vs. a benchmark or target (69%).

Mathew Nelson, EY Global Climate Change and Sustainability Services Leader, says:
“Investors are requesting more and higher-quality nonfinancial data from public companies, and seeking consistent, investment-grade information to support their decision-making. With the greater focus on long-term value creation, companies need to get ahead to meet these disclosure demands so that their organizations are best positioned for receiving investment.”

Simon Yeo, Partner, Climate Change and Sustainability Services at Ernst & Young LLP says:
“The survey results are coming at a time when Singapore is playing an active part in the global scene by ratifying the Paris Agreement, supporting the Financial Stability Board’s (TCFD) initiatives and introducing the carbon tax. As well, the Singapore Exchange has made it mandatory for all listed companies to report their ESG practices from financial year ended 31 December 2017.

“While many companies are publishing ESG disclosures, it is key to note that the hallmark of good reporting is combining metrics and qualitative measures in the context of their long-term strategies. The most useful ESG reports come from companies that understand the concept of materiality and identify the nonfinancial factors that are most important to their business and industry. Another common observation is the lack of accountability, and in light of this getting the alignment that investors seek is a challenge for both listed entities and regulators.”

Calls for increased regulation
Seventy percent of institutional investors surveyed say that national regulators are best suited to lead efforts to close the gap between an investor’s need for nonfinancial information and the information actually provided by issuers. Additionally, respondents say they are seeking intelligent collaboration among themselves, regulators and organizations such as trade groups and nongovernmental organizations to establish appropriate and effective reporting standards and ensure access to better data.

Nelson says: “If institutional investors are saying that increased regulation is the only way to get more robust data, it is a clarion call to issuers that they need to address this gap fast. And with such a focus on how companies report ESG and long-term value, it really is an opportunity to engage a range of stakeholders so that the strong foundations of nonfinancial reporting are set and work for all.”

Additionally, institutional investors find that issuers are getting better at assessing materiality, but there is still a long way to go as there are inconsistencies in regions. Eighty-seven percent of institutional investors surveyed report that issuers assess environmental, social and governance (ESG) materiality adequately. The top-four factors that most motivated institutional investors to report on ESG or nonfinancial activities are regulatory compliance (90%), risk management (87%), explaining strategy to general long-term value (78%) and competitive pressures (70%).

Nelson says: “Overall, these findings confirm that investors are using data to help their decision-making process, as it helps identify risks and provides broader information at a time of uncertainty. It also provides an indication of how well an organization is being run, in addition to its financial performance.”

For further leading edge thinking and insights around climate change, sustainability and nonfinancial reporting, please visit the new EY Sustainability Impact Hub.

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Notes to Editors

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About the survey
Is your nonfinancial performance revealing the true value of your business to investors? is the fourth consecutive survey of more than 220 institutional investors globally, including managing directors, equity analysts, portfolio managers and CIOs on their views about the availability and quality of corporate nonfinancial information and on how, if at all, they use this information when making investment decisions. The survey and in-depth interviews with respondents were carried out in summer 2018 by Institutional Investor’s Research Lab. Survey respondents represent high-level investment decision-makers and 40% of respondents work for institutions with US$10 billion or more in asset under management.