• Adrian Nathaniel

Is Your Non Financial Performance Revealing the True Value of your Fund?

Environmental, social and governance (ESG) or nonfinancial factors have become integral to the investment decision-making process.

The EY 2018 Global Climate Change and Sustainability Services study of institutional investors reveals a global consensus that ESG information is now critical to investor decision-making. Investors around the world have come to expect broader, more useful reporting of material nonfinancial performance information, which they are increasingly using to assess the creation of long-term value.

After years of sporadic, often promotional reporting of nonfinancial information, issuers have risen to the challenge of meeting investors’ demands for high-quality nonfinancial disclosures. Their first step in doing so is to better understand the material topics for an organization or an industry: that is, determining which topics, measured with which metrics, will yield the most useful view of the risks and opportunities that drive the long-term value of their companies. Greater transparency and consistent, comparable data on these topics can also help restore trust in business  at a time when the credibility of corporate institutions is at risk.

Investors surveyed in this year’s study affirm that, while companies have improved their ability to discern what is and what is not material to valuation, both issuers and investors look forward to consensus on how to report and value performance on these material topics. Such consensus is likely to require intelligent collaboration between government, industry groups and investors in the years ahead and it couldoffer business the opportunity to deliver greater certainty to investors, shareholders and customers alike.

An increasing reliance on ESG

After several years of growing evidence of the impact of commerce on climate change, scandals tied to poor corporate governance and a new appreciation for the social impact of business, institutional investors are increasingly likely to use nonfinancial performance information as an essential component in investment decision-making. Nearly all investors who responded to this survey (97%) say they conduct either an informal (65%) or a structured, methodical evaluation (32%) of a target company’s nonfinancial disclosures.

Investors are evaluating company's nonfinancial disclosures 97% of investors who responded to this survey say they conduct either an informal or structured evaluation.

This represents a rise of nearly 20 percentage points since the 2017 Global Climate Change and Sustainability Services investor survey where 78% of respondents said they conducted either an informal or structured evaluation. In 2018 only 3% of respondents say they conduct little or no review of nonfinancial disclosures, compared to 22% in 2017 and 48% in 2015.

Versatile application of ESG factors

ESG information plays an increasingly important role in the investment decision-making process, and respondents believe that ESG factors can help mitigate downside risk. Nearly all respondents (96%) say that such information has occasionally (62%) or frequently (34%) played a pivotal role in decision-making.

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