Investors look closely at ESG disclosures

Nearly all institutional investors (98 per cent) evaluate nonfinancial performance based on corporate disclosures, and three-quarters look for robustness of an organisation’s planning for climate risks.

The figures come from the fifth EY Climate Change and Sustainability Services (CCaSS) that shows that institutional investors are increasingly looking to ESG factors.

The survey of 298 institutional investors globally, and demonstrates a marked acceleration from earlier surveys –72 per cent say they conduct a structured, methodical evaluation of non-financial and ESG issues, a rise from the 32 per cent who said they used a structured approach in the survey’s fourth edition in 2018.

At the same time, investors are increasingly holding companies accountable, with ESG factors playing a central role in their decisions. Investors say that non-financial performance has played a pivotal role in their investment decision-making over the past 12 months (91 per cent), either frequently or occasionally, with the proportion of investors that say this happens frequently jumping to 43 per cent from 34 per cent in 2018.

Climate change in particular plays a significant part in investors’ decision-making process, with 73 per cent responding that they will devote considerable time and attention to evaluating the physical risk implications of climate change when they make asset allocation and selection decisions.

The survey also identifies a growing disconnect between the increased focus on evaluating ESG performance from investors and the availability and robustness of standardised and rigorous non-financial data from corporates, an area that has frequently been highlighted in these pages.

The number of investors that are dissatisfied with environmental risk disclosures has jumped to 34 per cent from 20 per cent in 2018. At the same time, the percentage of respondents who say that companies do not adequately disclose the social and governance risks that could affect their business models increased to 41 per cent (from 21 per cent in 2018) and 42 per cent (from 16 per cent) accordingly.

The EY research found significant appetite among investors for an independent benchmark on ESG performance with three-quarters (75 per cent) saying they would find value in assurance of the robustness of an organisation’s planning for climate risks.

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