A burgeoning number of institutional investors around the world are placing greater emphasis on ESG performance in their decision-making and 74% are now more likely to divest from companies with poor ESG track records. However, concrete action is still lacking, and there is an urgent need for better quality disclosure from companies, according to the 2021 EY Global Institutional Investor Survey.
The report, now in its sixth year, canvasses the views of 320 institutional investors across 19 countries. It shows that 90% of investors say they now attach greater importance to ESG performance in their decision-making than they did before the COVID-19 pandemic; and that 92% say they have made decisions over the past 12 months based on the potential benefits of a “green recovery”.
There are also clear intentions among the majority of investors, to look more closely at ESG risks across their portfolios and investment targets in the future. More than three- quarters (77%) of those surveyed say that, over the next two years, they plan to step-up their analysis of “physical” risks – the impact of climate change on a business’ ability to provide its products and services. This is an increase from 73% in 2020. Similarly, 80% will be doing more to evaluate “transition” risks – which are the market impacts that might result from the move to a low carbon economy – up from 71% in 2020.
Laura Ciobanu, Manager, Climate Change and Sustainability Services, EY Romania: “ESG principles have never been more essential to both institutional investors and the corporate community, and while it is clear that ESG has taken center stage, our study also evidences continuing concerns regarding the transparency and quality of companies’ ESG disclosures, particularly when it comes to materiality and the lack of focus on material issues. Moreover, the collection of such data can present a real challenge, because while many companies have well-documented underlying processes in place for financial data, together with the added assurance of multiple management signoffs, these processes are frequently much more basic when it comes to ESG data. As this data is practically used in formal dialogues with investors, its truthfulness becomes even more important, so corporates should enhance the way they gather, aggregate, and assume management responsibility for their own data.”
The survey shows that institutional investors are taking some steps to establish whether companies are able to deliver on ESG goals. Respondents say they look at several factors when making investment decisions, including whether there is an ESG representative – such as a Chief Sustainability Officer – reporting directly into the CEO and executive team (53%); whether organizational culture is aligned with ESG goals (52%); and whether the company has independent assurance for its ESG reporting (48%). However, only 42% worry about whether boards have oversight of ESG performance, or whether executive compensation is tied to it.
Despite the sharpened focus on ESG performance and ambitions to do more, the survey shows that institutional investors have been relatively slow to make concrete changes to the way they operate. Just 49% have taken action to update their investment approaches and only 44% have revamped their risk management strategies. Only 44% believe that they have a “highly mature” approach in relation to climate risk.
Many investors are concerned about the quality and transparency of ESG reporting on the part of the companies that they consider. Half of those surveyed (50%) say they don’t believe companies are reporting adequately on financial material issues. That is a marked increase from 37% in 2020.
However, there is a clear hope that the introduction of global standards will help on this front – and 89% of the investors surveyed say they want these standards to become mandatory.
If there is going to be real progress in the years ahead, investors need to make ESG performance part of their strategic planning; and companies must act fast to provide clearer and more detailed disclosure on ESG risks. But there’s no escaping the fact that we urgently need a clearer regulatory landscape, with consistent global standards that investors and companies alike will need to follow.