The reporting of environmental, social and governance (ESG) results by companies is becoming very important in the assessment of investors

Institutional investors are increasingly evaluating companies’ performance including environmental, social and governance (ESG) factors, according to the fifth edition of EY’s Climate Change and Sustainability Study (CCaSS), in which 298 investors from everyone.

The vast majority of investors (98%) say they evaluate non-financial performance from company reports, with 72% saying this evaluation is methodical and structured. This is a substantial jump from the previous edition of the study, conducted in 2018, when the percentage of those who said they used a structured non-financial performance assessment was 32%. 

In an age where investors weigh short-term financial results against long-term company goals, it is essential that organizations pay more attention to non-financial performance. ESG (environmental, social and governance) factors are becoming increasingly important in investment management, so ESG information is growing in relevance in reporting. That is precisely why we are happy to note that recently the business environment in Romania has started to consider environmental, social and governance aspects, realizing that they can play a major role in the long-term success of the organization. 

Laura Ciobanu
Manager, Climate Change and Sustainability

The fact that ESG factors are starting to play an increasingly important role in investors’ decisions makes companies increasingly responsible. Investors said that non-financial performance played a key role in their decision-making process in the past 12 months (91%), either frequently or occasionally. The percentage of investors who said this happens frequently jumped to 43%, up from 34% in 2018.

Climate change in particular is a significant factor in investor decision-making, with 73% stating that they will devote a significant amount of time and attention to assessing the risk implications of climate change when making asset allocation and selection decisions.

Mathew Nelson, EY Global Climate Change and Sustainability Services leader, said: “The rules of capital markets are being rewritten, impacting the drivers of investors as they direct capital to support the economic recovery. We observe that, instead of falling back on short-term performance models, institutional investors are focusing on long-term value creation and are more demanding in terms of evaluating companies’ performance in terms of ESG factors”.

Growing ESG Performance Discrepancy
The study also identified a growing discrepancy between the increased attention investors pay to assessing ESG performance and the availability and robustness of standardized and rigorous non-financial data reported by companies.

The proportion of investors dissatisfied with environmental risk reporting jumped to 34%, up from 20% in 2018. At the same time, the percentage of respondents who consider companies’ reporting of social and governance risks that could affect their business model to be inadequate increased to 41% (from 21% in 2018) and to 42% (from 16%), respectively.

When asked about issues related to the usefulness and effectiveness of current ESG reporting, 46% of investors identified the discrepancy between ESG reporting and traditional financial information as the main problem. Added is the lack of real-time information (41%) or information about how the company creates long-term value (41%), as well as the absence of forward-looking reporting (37%) and lack of attention to the material aspects that really matter (37%) ).

Mathew Nelson said: “Maintaining the gap between issuer and investor expectations is a significant issue. Given the transformations taking place, it is increasingly important for investors to trust non-financial performance information. To effectively assess ESG reporting, investors need standardized and rigorous non-financial data supported by appropriate structures, reviews and controls.”

Investors want independent assessment of ESG performance
The EY study shows an increased investor appetite for independent assessment of ESG performance, with three-quarters of respondents (75%) adding that it would be useful to confirm the robustness of the organization’s climate risk plans. Respondents also consider it highly necessary to strengthen the degree of confidence in reporting on green investments, with 82% stating that independent confirmation of the impact of green investments would be useful.

ESG performance reporting generally lacks the rigorous systems and controls that characterize financial reporting. As a result, investors and companies cannot guarantee the accuracy and reliability of non-financial reports. Establishing effective governance practices and auditing non-financial processes will help build trust and transparency.

Overall, these findings show that addressing pressing environmental and climate change threats is more important than ever for investors. While many companies are now dealing with the COVID-19 crisis, those with strong sustainability functions that focus on their long-term success will be more likely to recover after the crisis is over and deliver long-term value.” .

 

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