Institutional investors increasingly making decisions based on non-financial performance
The focus of institutional investors on long-term value creation is driving a greater interest in companies’ non-financial performance and, also importantly, how they talk about it, according to a new study by EY.
The consulting firm identifies environmental, social and governance (ESG) issues, such as climate change, sustainability, diversity and board effectiveness, as key drivers behind the interest in non-financial performance - but says investors are concerned by the inconsistency of ESG reporting.
68 percent of institutional investor respondents say non-financial performance frequently or occasionally played a pivotal role in their decision-making last year, compared to 52 percent the year before.
Ninety-two percent of respondents agree or strongly agree that ESG issues have real quantifiable impacts on a company’s performance. Almost the same number (89 percent) agree or strongly agree that a sharper focus on ESG issues will generate sustainable returns over time.
‘If a company isn’t already addressing sustainability matters and reporting on them, they’re just not caught up to the current day and age,’ says John DeRose, executive director of EY’s Americas climate change and sustainability services.
‘INCONSISTENT, UNAVAILABLE OR UNVERIFIED’
Although ESG issues have become more important in guiding investors’ decisions, the percentage of respondents who describe information from companies about their non-financial performance as often inconsistent, unavailable or not verified has doubled since 2013 – from 20 percent then to 42 percent last year.
‘As investors come to see non-financial information as increasingly material, they reveal still higher expectations for it being timely, comparable and verifiable,’ the authors write in the report.
Investors have grown increasingly concerned about ESG risks. Eighty percent of respondents say companies did not disclose risks adequately last year, compared to only 64 percent of respondents in 2015.
‘Companies are getting better about pulling information together but there’s a huge gap in terms of what they need to do to pull it up to the level of financial reporting,’ DeRose says. ‘Companies are trending towards measuring this more [in] real time, but there’s still a large portion of companies that wait until year-end and then calculate the data in Excel spreadsheets. You might as well have a pen and ledger paper – that’s how antiquated it is.’
Investors find annual reports, integrated reports and press coverage to be the three best sources of non-financial information before making an investment decision, the research finds. Eighteen percent also see equity research and advice from broker-dealers as essential for making decisions.
EY points to several industry-level governance frameworks that are trying to bring a degree of standardization to ESG reporting. ‘We know that organizations such as the International Integrated Reporting Council, the Global Reporting Initiative, the Sustainability Accounting Standards Board and the Financial Stability Board’s Task Force on Climate-related Financial Disclosures are each establishing crucial benchmarks and standards designed to better define what’s effective, credible and comparable,’ the report authors write.