It’s not new, indeed a year ago we published our white paper on what data is necessary to close the gap between information required by investors and that provided by companies. It would seem that the views we collated are still relevant. In fact, now more than ever, and this trend is only set to grow.

The recent survey carried out by EY to identify the key trends and drivers from investors uptake and use of corporate disclosures of non-financial information was the result of a collaborative research programme between EY and the Institutional Investor Custom Research Group, covering more than 160 financial institutions.

The interest by investors in ESG is perhaps the missing link between regulation setting mandatory disclosure requirements and companies using reporting under voluntary frameworks to help their stakeholders gain a picture of how they are performing. Interestingly, the new FRC guidance issued in relation to the UK reporting requirements under the Companies Act 2006 places an emphasis on integrated reporting and an investor focused approach. The survey confirmed that investors want non- financial reports from companies themselves, not third parties. Equal weight was placed on information gained from integrated reports from companies as from the company’s websites.

So what are investors doing, given that lots of companies I have spoken to seem to indicate that their investors never ask questions about ESG information? The survey tells us that ½ the investors’ surveyed either don’t evaluate non-financial disclosures or rely on their own personal ideas about the data. What frameworks are needed to help investors assess ESG information?

What value do investors place on non financial performance of information?

Of the half of the investors surveyed only a 1/3 of use a structured evaluation or have processes in place for evaluating ESG, 90% of investors surveyed stated that non-financial performance information has played a pivotal role in their decision-making in the last 12 months.

It would be useful to have been able to see from the survey why, if this was the case, less investors use a structured approach to evaluating ESG. Is it the lack of experience or understanding of how to handle and assess ESG data? Or again, the lack of proper frameworks?

A key motivation for considering ESG performance is to help consider risk and the impact of regulation. These were the top two concerns. The other concerns were improved valuation and being a good corporate citizen. The trend of increased mandatory reporting of non-financial information globally will see to it information becomes more help standardised.Investors value reporting in a timely manner- they believe it makes investment opportunities more attractive.

So what information are they looking for?

Investors are increasingly looking for a high level of accountability over the organisation’s non-financial information. Audit committee oversight with independent verification was rated as most important.

What, besides assurance is seen as key?

– Reporting on information material to the organization– as determined by the companies themselves

– Linking the information to the financial performance of the company (a risk based analysis of the information)

What is more notable is how disclosures on certain issues affect the prospective investments. The most important is absence of a clear strategy to create value in short, medium and long term. This is followed by a history of poor governance and human rights risks from operations. There is also risk in supply chain not being addressed, no link to financial performance, poor history of environmental performance and risk of climate change. Is this list surprising? It shouldn’t be, but then are the majority of companies globally really tackling these issues in an integrated way? It would seem not.

Interestingly, the report identifies that the location where investors are based will impact on how they perceive ESG information. North America lags behind but does not state who leads.

So what are the takeaways from this survey? 

The interest in both investors and stakeholders being able to assess ESG information does not look to be diminishing. The challenge, however, is how to gain consistent information in reporting that can be benchmarked, the provision of frameworks and most importantly for companies and investors alike to consider how they can tackle material issues in ESG performance to drive value in their business and improve investments.

Colleen Theron is a tri-qualified solicitor in England and Wales, Scotland and South Africa. Since 1996 she has advised on environmental issues in complex property and corportate transactions and recently founded sustainability consultancy CLT envirolaw.

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