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Apr 07, 2014

ESG disclosures now play larger role in investment decisions globally

A new EY survey shows investors are using nonfinancial disclosures as a proxy for corporate risk management

Environmental, social and governance (ESG) performance factors are now playing a more pivotal role in institutional investors’ portfolio decisions, according to the results of a recent survey Ernst & Young conducted in collaboration with Institutional Investor magazine.

Of 163 global investors polled, 89 percent said that nonfinancial performance information was a key consideration at least once in their decision-making within the last 12 months. EY also interviewed several participants to probe more deeply into their responses. More than half of the respondents work for an organization that manages equity assets in excess of $10 billion.

‘We were shocked as to how widespread an understanding there is with investors that this information is important and is actually influencing their decision making,’ says Dr. Matthew Bell, a partner at EY who leads its sustainability and climate change practice in Sydney, Australia.

Survey participants said they mostly use information provided directly by companies instead of relying on third parties such as ratings agencies. But they reported how hard it is to identify what is most material to companies’ sustainable growth, make meaningful comparisons between companies, and draw measurable links between non-financial and financial performance.

The report, titled ‘Tomorrow’s investment rules,’ outlines key differences between how critical nonfinancial disclosures are to investors in developed versus emerging economies, as well as disparities between investors in North America versus the rest of the world.

‘The US is dragging its heels somewhat from an investor’s perspective,’ notes Bell. Only 15 percent of US and Canadian respondents said they had frequently taken into account nonfinancial information while making investment decisions over the past year, compared with 31 percent of participants from outside North America, he says.

Of respondents based in emerging markets, 70 percent said they frequently or occasionally weigh nonfinancial information when making investment decisions, versus 49 percent in developed markets.

As an investor, ‘you need to be able to demonstrate you’re capable of managing sovereign risk,’ says Bell. ‘Investors in [emerging] markets are much more aware and use a lot of this data as a proxy for corporate risk management…Investors say when companies disclose information, it reflects well on how they’re effectively managing their risk.’

On March 31, ExxonMobil released two reports to shareholders explaining its business planning and risk assessment practices around its energy assets and said it will report annually on how it is managing its assets for climate-related risk. That includes evaluating the likelihood of stranded assets, which would not be able to be exploited if the world reaches consensus on carbon emission caps.

‘That’s probably a landmark decision for a global organization with regard to long-term asset value,’ says Bell. ‘Two weeks ago, I probably wouldn’t have been so bullish about how organizations are going to react to [growing shareholder requests for more disclosure about stranded assets] as a business driver.’

Bell avers that regardless of whether or not  a company chooses to disclose nonfinancial information, it will inevitably be judged by investors on that decision.

‘What will other organizations do now that Exxon has said it will report? If they do nothing, and investors say they are [considering such disclosures], they will now benchmark those companies against those companies that will disclose that information and give them an important edge,’ he says.

Survey participants said they would reconsider investing in any company if it had a poor history of environmental management, Bell says. Investors indicated they would pay more attention to such a track record at manufacturing  and energy companies -- 81 and 80 percent, respectively -- than at financial services companies (70 percent of respondents). 

‘That’s quite a strong response across the board regarding poor environmental performance [figuring in] investment decisions,’ notes Bell.

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary