Almost nine out of 10 institutional investors say that non-financial performance information plays a pivotal role in at least some of their investments, according to a new report from consultancy firm EY. However, many are relying on personal judgement rather than having a process in place.
EY’s global survey questioned 163 institutional investors, over half of which have over $10 billion (£5.9bn) in equity assets under management. They were asked about their current investment practices and future needs, and the results showed that 89% considered non-financial information when making decisions.
The trend for incorporating environmental, social and governance (ESG) performance in analysing risks and opportunities has been growing in recent years. Assessing the long-term sustainability of a company you invest in can allow greater returns and stability and the EY report suggests that institutional investors have recognised and embraced this.
Interestingly, the survey reveals that ESG factors take a more prominent role in developing nations. Some 43% of emerging market respondents said non-financial information was “essential” for minimising risk. This compares to only 29% within developed markets.
EY explained this is potentially connected to the fact that the landscape in emerging markets shifts faster as they are developing and growing. As a result, how quickly companies can adapt is critical.
Juan Costa Climent, EY’s global leader of climate change and sustainability services, said, “The emergence of integrated reporting, and a widening appreciation of the risks and opportunities posed by externalities, creates a significant opportunity for organisations that can better inform investors of the non-financial risks and opportunities that their business faces.”
The willingness of investors to incorporate ESG issues is being hampered by lack of knowledge and access to data. The report says that investors are struggling to find ways to meaningfully compare the data and understand which issues are most material to their sustainable growth. Many are also finding it difficult to draw quantifiable links between financial and non-financial performance.
Only a third of respondents have a structured evaluation or process in place for evaluating non-financial disclosure. This means that two-thirds of investors either don’t evaluate non-financial disclosure or rely on their own personal judgement to assess environmental and social data.
Despite the challenges, investors are making the effort to find the information, even if companies are not providing it.
Matthew Bell, EY Australia climate change and sustainability services partner, commented, “What investors are telling us is that they’re using non-financial information to inform their decision making – whether or not the companies are providing it themselves.
“They’ve also identified weaknesses in current reporting, and so companies now need to consider a more structured approach.”
EY called on companies to invest in reporting in order to unlock the value created by being transparent on ESG factors and to highlight what is material to the organisation’s performance.
Bell concluded, “It is no good saying that investors aren’t asking for this sort of information. They’re finding ways of getting this data and they are assessing companies on it, so organisations need to take back the initiative. Companies need to act now or be penalised.”
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