Many corporations don’t realize the connection between nonfinancial performance and investor behavior. To bridge the gap, Ernst & Young (EY) surveyed more than 320 senior decision-makers at buy-side investment institutions around the world for its third annual Climate Change and Sustainability Services (CCaSS) survey. The survey aims to improve understanding of the role integrated reporting practices can play in highlighting a company’s value creation story.
The research revealed that investors are increasingly using nonfinancial performance to draw conclusions on value and to better inform their decisions, since it’s often a sign of operational excellence if a company shows they are handling environmental, social and governance (ESG) issues well. Over the long term, 92 percent of respondents believe that ESG issues — ranging from climate change to diversity to board effectiveness — have real and quantifiable impact.
Eighty-one percent of respondents say they now pay closer attention to nonfinancial disclosures as a result of recent compliance revelations of ESG expectations. And 89 percent agree that a sharp focus on ESG issues can generate sustainable returns over time.
“Recent corporate environmental and social scandals and a focus on longer-term value versus short-term dividend payouts are clearly pushing nonfinancial reporting up institutional investors’ agendas. This leads to a disconnect between investors who see ESG as having real and quantifiable financial impacts and companies that do not see ESG risks as core to their business,” said Matthew Nelson, Global and Asia-Pacific Climate Change and Sustainability Services Leader for EY.
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The survey found that in the last 12 months, 68 percent of respondents said a company’s nonfinancial performance had played a pivotal role in their investment decisions, up from 58 percent in 2015. Sixty percent of institutional investors say that their clients are now demanding ESG information; however, 73 percent said they conduct only informal assessments or no review at all.
Fifty-nine percent said that in the absence of a direct link between ESG initiatives and business strategy to create value in the short, medium and long term they would reconsider investment. Fifty-eight percent of investors would reconsider investment following disclosure of risk or history of poor governance.
With the 2015 Paris Climate Conference and other stewardship codes being introduced, the pressure on companies from investors to report more consistent and verifiable ESG information will continue to increase. Fifty-eight percent of investors say they expect at least a moderate increase in disclosures of company climate practices and related risk management strategies, with a further 27 percent expecting dramatic improvements in this area.
“We know that climate change represents a significant economic shift following the Paris Agreement. Investors are growing impatient with companies that are not adequately disclosing how a two degree Celsius future impacts their business and how they’ll navigate the risks and opportunities,” Nelson added.
“Given there is now evidence that sustainable companies outperform their peers, investors are seeking information that provides the confidence that management and the boards of investees are thinking long term. They want board-reviewed strategies laid out each year and they want a third-party oversight. We know that in the absence of clear, consistent and verifiable data, investors are taking matters into their own hands — some are starting to underweight these companies in their portfolios.”