Tomorrow's investment rules - Global survey of institutional investors on non-financial performance

A global survey based research paper that shows the importance of qualitative information such as environmental, social and governance (ESG) reporting to investors and other key stakeholders in their decision- making process. 

The last few years, corporations have started to report more non-financial information, including data on their environmental, social and governance (ESG) performance. The growing trend driven by regulation, market advantage or meeting the needs and concerns of key stakeholders is changing global business behavior. The survey was conducted amongst investors, analysts and portfolio managers. 

A number of these investors were interviewed to gain a deeper understanding of their answers. Key trends and drivers for the uptake of ESG information are identified in the paper. 

Most investors use this information when assessing investments. They mostly use the information provided directly by the company themselves, rather than relying on third parties, such as ratings agencies. However, they are having difficulties in meaningfully comparing data and drawing quantifiable links between non financial and financial performance. 

Two-thirds of the investors used different methods in evaluating their non-financial disclosures and only half of this group uses guidelines to make their assessments. Amongst those that never consider ESG information in their decision making process, the main reason for not utilizing it was that in their opinion it was not material. Investors also said that they mostly used non-financial performance as a good risk benchmark. Risks such as poor governance history or the lack of long term strategy, were considered to be more important as the others. 

Investors said that they interpreted the disclosure of non-financial  performance as a means by companies to improve their corporate reputation. 

As the ESG information is considered more and more important, there is also a request from the investors to get a level of accountability of the information, preferably through independent audit verification but also through approval by the board and shareholders.

This could enable for investors to weigh their portfolios according to all sustainability risks. Almost half of the investors mentioned that an unclear strategy could make them completely rule out a company from their investment decision. Also a history of poor governance was emphasized as especially important as a deal breaker.

For reporters, this survey not only shows that their investors care about their non-financial performance. It also indicates why, how and when they use this information.

The key recommendations that reporters can draw from the results of the survey include:

• Invest in reporting
• Report on and highlight what’s truly material to your business performance
• Keep abreast of international developments
• Act now, or be penalized
• Get your governance right

Prepared by EY