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EY: Nonfinancial Disclosures are Essential to Institutional Investors

EY: Nonfinancial Disclosures are Essential to Institutional Investors

Institutional investors are now highly focused on long-term value, with 97% of them saying they conduct either an informal evaluation or a structured, methodical evaluation of a target company’s nonfinancial disclosures when deciding future investments, up from 78% in 2017. Nearly all investors surveyed (96%) say that such information has occasionally (62%) or frequently (34%) played a pivotal role in investment decision-making, and 89% believe that environmental, social and governance (ESG) will become more valuable in the event of a market downturn or correction. This is according to the fourth EY Climate Change and Sustainability Services (CCaSS) survey of 260 institutional investors globally, 40% of whom have assets under management of US$10b or more.

Institutional investors’ demand for prescriptive nonfinancial accounting standards is also on the rise. Fifty-nine percent of investors surveyed said that better accounting standards for nonfinancial information would be very beneficial, a dramatic uptick of 26 percentage points from the survey in 2017. Additionally, the risk or history of poor governance practices would cause 62% to rule out an investment immediately, compared to 27% in 2015.

Respondents also said that ESG data must be standardized to create a useful basis of comparison, to establish benchmarks and to mark trends.

Calls for increased regulation

Seventy percent of institutional investors surveyed said that national regulators are best suited to lead efforts to close the gap between an investor’s need for nonfinancial information and the information actually provided by issuers. Moreover, respondents say they are seeking intelligent collaboration among themselves, regulators and organizations such as trade groups and nongovernmental organizations to establish appropriate and effective reporting standards and ensure access to better data.

Additionally, institutional investors find that issuers are getting better at assessing materiality, but there is still a long way to go as there are inconsistencies in regions. Eighty-seven percent of institutional investors surveyed reported that issuers assess environmental, social and governance (ESG) materiality adequately. The top-four factors that most motivated institutional investors to report on ESG or nonfinancial activities were regulatory compliance (90%), risk management (87%), explaining strategy to general long-term value (78%) and competitive pressures (70%).

Commenting on the findings of the report by EY, Andreas Avraamides, Partner and Head of Assurance Services of EY Cyprus, said: “Society and investors are increasingly focusing on the long-term value of companies and are consequently seeking detailed and coherent nonfinancial information on which to base their decision making. According to our latest survey, they also believe that increased regulation will help address this need. Corporations need to rise to the challenge and provide concise nonfinancial information giving a full and clear picture of their prospects.”  

 

For further leading edge thinking and insights around climate change, sustainability and nonfinancial reporting, please visit the new EY Sustainability Impact Hub.

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