In order to make informed decisions, investors need access to non-financial information so they can assess the health of potential investments, former mayor of New York City Michael Bloomberg has said.
In an article co-written for the Financial Times with Mary Schapiro, former chairman of the US Securities and Exchange Commission, he said, “The most valuable currency in financial markets is reliable information. Without it, investors are unable to make informed decisions about where to allocate their capital, which hurts companies’ ability to attract it and puts a drag on economic growth. Transparency is an economic engine.”
Bloomberg and Schapiro argue that if investors rely solely on financial information, they will be left with an “incomplete picture” of a company’s health. The article notes that many other factors affect the sustainability of a business, but often investors struggle to obtain comparable information.
The pair add, “Take climate risk, for example, and consider two property development companies, both valued at $1 billion. If one owns buildings that are in a costal flood plain and the other does not, do you – as an investor – want to know? Of course you do.
“Similarly, investors want to know which automobile companies are making the most progress in developing alternative fuel vehicles; and which insurance companies have identified how much vulnerability their insured assets face as sea levels rise, storms intensify and business is interrupted.”
The article cites a recent report from consultancy firm EY. The study found that whilst almost nine out of 10 institutional investors say non-financial performance information plays a pivotal role in some of their investments, very few have a process in place for assessing it.
One of the issues raised in the analysis was that investors were finding it difficult to meaningfully compare the data and understand which issues are more material to their sustainable growth. Another problem was difficulty in drawing quantifiable links between financial and non-financial performance.
As a result, Bloomberg and Schapiro argue that a way of providing standardised information to investors and improving transparency is required. In April, the European parliament voted through new legislation requiring large companies to disclose non-financial information, partly addressing some of the problems facing investors.
Improved transparency with the investment and wider financial services sector can also have additional benefits. First State Investment claims that transparency is key to improving investor trust.
Meanwhile, consultancy firm PwC has previously predicted that incoming regulation and increasing interest from investors will mean all investment activity and products, across all levels, will be fully transparent by 2020.
Bloomberg and Schapiro conclude, “Adopting non-financial reporting standards will be an important step forward for transparency in our capital markets. It will help set out companies on a course for long-term growth.
“In the process, it will also make our economy more resilient and competitive, protecting it against costly risks that – once they are known and properly valued – can be avoided.”
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