The proportion of institutional investors using ESG to measure company performance has more than doubled in two years, with the majority using climate risk to drive investment decisions, according to a new EY survey.
EY’s 2020 global institutional investor study has shown close to three-quarters, or 72 per cent of investors conduct a structured and formal review of ESG disclosures, compared to 32 per cent in 2018.
Seven years ago, around a third (36 per cent) said they conducted little or no review of nonfinancial disclosures, in contrast to this year, when that held true for 2 per cent of respondents.
The majority of investors (91 per cent) said nonfinancial performance has played a “pivotal role in their [decision-making] during the last year, either frequently or occasionally.”
Climate risk in particular played a significant part in decision-making – with 73 per cent of investors saying they will devote considerable time and attention to evaluating the physical risk implications of climate change when they make asset allocation and selection decisions.
Around 71 per cent of investors said the same of transitory risks due to climate change.
More than two-thirds (67 per cent) of investors said they make “significant use” of ESG disclosures shaped by the Taskforce of Climate-related Financial Disclosures (TCFD).
The survey of 300 investors across insurance, capital markets and wealth asset management was conducted during the COVID pandemic.
EY Asia Pacific managing partner for climate change and sustainability services Matt Bell said investors are “clearly signalling their expectations of a [green-led] recovery”.
“They are looking at [long-term] risk and [long-term] value and those considerations are aligning with ESG considerations,” Mr Bell said.
“They are looking at climate risk as a way to properly value the [long-term] value of a business.”
He added the modelling shows there does not have to be a “trade-off” between jobs and growth against climate action, commenting the country should be capitalising on a net-zero transition moving forward from the pandemic.
“A [green-led] recovery will set Australia up for the future and create new and relevant job opportunities,” Mr Bell said.
“It would be a very sad outcome – a wasted opportunity – if through the recovery, Australia were to decide that the core responsibility of business does not include environmental, social and corporate governance issues, and that these should take a back seat to what some are calling the basic issues of business survival: taxes, costs, regulation, etc.
“Investors are telling us that the new basic issues of business survival are ESG-related. This is a [once-in-a-generation] opportunity for Australia to lead the world on the new economy.”
The research also found appetite for an independent lens on ESG performance. Three-quarters or 75 per cent of investors said they would find value in assurance of the robustness of an organisation’s planning for climate risks and 82 per cent said it would be useful to have independent assurance of the impact of green investments.
The top challenge to the usefulness and effectiveness of ESG reporting was said to be the disconnect between ESG reporting and mainstream financial information, followed by the lack of real-time data and the lack of information about how the company creates long-term value.
Investors were mostly dissatisfied with how companies disclosed governance risks, with 42 per cent saying reporting was inadequate, compared to 16 per cent in 2018. Similarly, 41 per cent of investors said social risks were not adequately reported and 34 per cent said the same for environmental risks.
Only 2 per cent of investors were found to not see the need for a formal framework to measure and communicate intangible value.
However an unnamed senior ESG executive at a North American asset manager stated in the report that there is still a need for SDG (UN sustainable development goals) information tailored to the need of the investment community.
Around 34 per cent of issuer reports from corporates were found to have mentions of the SDGs in 2020, rising from 8 per cent in 2016.
“However, while the information may be very interesting to other stakeholders, it does not necessarily give us the data and information that we can use in our assessment of a company,” the executive stated.
HESTA head of impact Mary Delahunty is quoted in the EY report stating while the COVID-19 pandemic has taken away attention from the societal challenges in the short-term, it will be crucial to how corporates respond.
“How companies respond quickly to the pandemic – addressing the risks and thinking about them strategically – is exactly the way they need to respond to climate, governance and social risks,” Ms Delahunty said.
“The S in ESG is vital in managing this crisis and how companies demonstrate their responsibilities through their behaviour.”
But the investment community needs to practice what it preaches, she added.
“We can’t be critical of others unless we’ve got our own house in order,” Ms Delahunty said.
It also warned the government will need to be more ambitious in its climate plans before it will invest more in Australian renewable assets.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
Investment organisations are not learning from their past experience when it comes to improving investment committee practices and governanc...
Half of Australian investment management professionals believe the coronavirus pandemic will trigger unethical behaviour in the industry, ac...