Companies need to provide non-financial disclosures, investors say

Thursday, 22 October, 2015

Companies need to provide non-financial disclosures that outline visible, measurable risks to the company’s performance or risk losing their potential investment, according to a survey of institutional investors conducted by EY.

‘Tomorrow’s Investment Rules 2.0’ is a survey of more than 200 global institutional investors, looking at their views about the use of non-financial information in investment decision-making. The findings show that nearly two-thirds (63.6%) of respondents believe that companies do not adequately disclose the environmental, social and governance (ESG) risks that could affect their current business models.

Institutional investors also no longer regard ESG risks as specific to the energy and resources sectors, with 61.5% of all respondents globally considering non-financial data to be relevant to all sectors today — nearly double the 33.7% of respondents from the 2014 survey. At 82.6%, investors in Australia were the most likely to see non-financial data as relevant across all sectors.

The survey found significant increases in the number of investors embedding non-financial disclosures into their investment decision-making, with 79.1% undertaking some form of assessment of companies’ environmental and social impact statements (up from 64.4% in 2014). An increasing number of investors are conducting structured, methodical evaluations of this information — 37% in 2015, nearly double the 19.6% in the 2014 survey.

The survey also revealed a sharp focus on stranded assets — increasingly a risk in nearly every industry but most recently associated with the energy and resources sectors.  Nearly two-thirds of respondents (62.4%) expressed concern over stranded asset risk and more than a third (35.7%) said their funds had divested holdings of a company’s shares in the past year due to the risk of stranded assets, while another 26.7% expect to monitor it closely in the future.

The top areas causing investors to reconsider prospective investments are risk or history of poor environmental performance (75.6% would reconsider the investment) and not addressing risks in the supply chain (72.6% would reconsider). The greatest increase in focus for investors is climate change and human rights.

“As non-financial concerns continue to emerge as material to investment decisions, companies will likely be increasingly expected to provide this information alongside financial information in integrated reports,” said EY Oceania’s climate change and sustainability leader, Dr Matthew Bell.

“The real leaders in this space understand there is capacity to create value from this in the long term, which is really what investors need to know.

“Boards and CEOs that offer investors the type of information they want, the way they want it, can potentially gain greater investor attention and, ultimately, an advantage over peers in the capital markets.”

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