The acceptance of ESG factors as a factor behind long-term investment performance has approached critical mass in the past year, leading more investors to ask companies for non-financial information. But as it turns out, getting the answers they want isn’t so easy.
In its newly released Climate Change and Sustainability Services Survey, global consulting firm EY found that 97% of institutional investors say they conduct an evaluation of target companies’ nonfinancial disclosures, including 65% who usually perform informal reviews of nonfinancial disclosures and 32% who perform a structured, methodical evaluation. Overall, it represented a nearly 20% increase over 2017.
"Investors have a more sophisticated understanding of the positive link between a business' environmental, social and governance (ESG) impact and their financial performance," said Thibaut Millet, EY Canada Climate Change and Sustainability Services Leader. “Nonfinancial information is playing a pivotal role in investment decision-making, and will increasingly continue to weigh on Canadian investor minds as they take a step back to focus on a business' value creation to sustain long-term growth.”
A similarly overwhelming majority (96%) said that such information has either occasionally (62%) or frequently (34%) been pivotal in their investment decision-making. And in the event of a market downturn or correction, 89% believed that ESG and nonfinancial information will become either much or somewhat more valuable, suggesting that they see it as a way to get downside risk protection.
In what kinds of investment evaluations were investors more likely to weigh nonfinancial information? Investors said they were more likely to occasionally or frequently consider such information when adjusting valuation for risk (70%), examining industry dynamics and regulation (63%), and when reviewing investment results (61%).
But in spite of the growing dependence on information that goes beyond ESG scoring — integrated reports and annual reports were both cited by a 94% majority as an either useful or essential source of nonfinancial information — over half of the respondents (56%) say that nonfinancial company disclosures are either not available or not adequate to meaningfully compare with other companies.
“Many organizations have taken an active role in disclosing what policies and practices are in place, but what's often missing are measures of accountability,” Millet said. “Investors no longer want to know what the company is doing, but how they're doing it – and how their ESG impact stacks up against others.”
To make that happen, Millet said, there have to be better accounting standards for nonfinancial information that enables standardized data and consistent metrics cross-industry. While 70% of institutional investors agreed that national regulators are in the best position to spearhead efforts to close the existing gap, the report also suggested a role for trade groups in defining material sustainability disclosures that are relevant to their industry.
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