Institutional investors are increasingly interested in non-financial information about the companies they invest in. Analysing environmental, social and governance (ESG) factors, investors want to obtain a clearer picture of an investment’s risk and opportunities to determine the sustainability of returns. In their paper Is your nonfinancial performance revealing the true value of your business to investors?, Ernst & Young outlines a continually increasing demand for non-financial disclosure. By now, more than 80 percent of professional investors agree that ESG issues have real and quantifiable business impacts and that environmental and social aspects offer both risks and opportunities.
However, an increasing share of 60 percent of investors also states that companies are not adequately reporting on their ESG results. Disclosure seems unrelated to material risks and opportunities, does not reflect the firm’s values fully, or fails to articulate social and environmental challenges adequately, leaving investors disappointed by today’s disclose practices.
Investors believe that many companies provide sustainability reporting to improve their reputation with customers (74%) or due to external pressure by regulators (62%) and investors (38%). Only 37 percent of investors believe that companies do so to demonstrate their risk management, to explain their business strategy more clearly (30%) or to illustrate returns on ESG investments (22%).
Companies must enhance their disclosure to remain investable. For more than a fourth of investors, the non-financial performance frequently plays a vital role in decision making. Further 41 percent consider ESG issues occasionally.
Doing so, investors are particularly concerned about risks and poor historical governance, human right risks from operations as well as the limited verification of data and claims. 39 percent, and respectively 32 and 20 percent, rule out investments due to these three problems. About three-fourths of investors would reconsider investments due to environmental risks or poor historical performance as well as risk from resource scarcity or climate change.
Disclosing on ESG matters, companies must show their good corporate citizenship as well as evidence of lower risks, increased returns and improved future valuations from their ESG investments.