Can ESG data and information deliver long-term value?

According to EY’s 2021 Global Survey of Institutional Investors. This is an annual survey commissioned by the EY Global Climate Change and Sustainability services team from a third party with the primary purpose of examining institutional investors’ views on the use of non-financial information in decision making. investment decision.

The survey finds three important themes that stand out: (1) the COVID-19 pandemic has been a powerful ESG catalyst; (2) there is a growing focus on the transition to a net zero economy, and climate change is increasingly at the heart of investment decision-making; and (3) higher quality non-financial information and a clearer regulatory landscape, coupled with sophisticated data analytics capabilities, will enable ESG to realize its potential.

THE COVID-19 PANDEMIC ACTING AS A POWERFUL CATALYST
Investor attitudes towards ESG have evolved rapidly under the pandemic. It is now considered a central part of the decision-making process for investors.

Survey data shows that since the start of the pandemic, 90% of investors place greater importance on companies’ ESG performance when making investment decisions, and 86% of respondents said that a robust ESG program had an impact on analysts’ recommendations.

Additionally, COVID-19 made investors more likely to divest due to poor ESG performance, with 74% saying so, while around 86% said strong ESG performance had an impact on their decision to keep an investment.

The way the pandemic has highlighted past and current issues on social inequality has also amplified the importance of social considerations, with consumers mobilizing on social issues and investors paying greater attention to the “S” element. of the ESG. The top 5 social concerns that take center stage, according to the survey, are: (1) consumer satisfaction, (2) diversity and inclusion, (3) impact on local communities , such as job creation, (4) public and workplace safety, and (5) labor standards and human rights along the value chain.

For this reason, the investment industry faces a major challenge moving forward on how to access and analyze the data needed to link social impact to financial performance. Without this information, it will be difficult to achieve full integration of these factors into portfolio decision-making processes.

CLIMATE CHANGE AT THE HEART OF DECISION-MAKING
When the pandemic hit, many feared it would end growing investor interest in climate change. This fear did not materialize.

The significant progress that has occurred in the investment industry stems from the fact that the pandemic has provided a stark and tangible example of what can happen when we fail to address systemic risks in our society. Investors could see what might happen to the economy if efforts to tackle climate change fail. This situation has been further aggravated by the results of the Sixth Assessment Report (AR6) of the Intergovernmental Panel on Climate Change (IPCC), which concluded that without “immediate, rapid and large-scale reductions” in emissions, limiting global warming to 1.5°C or even 2°C above pre-industrial levels by 2100 would be “out of reach”.

Investors are increasingly aware of the risks posed by climate change and want their investments to reflect their preferences. As there is increased pressure to deal with the impact of climate change, investors surveyed said they were paying close attention to their portfolios’ exposure to climate risk, with 77% saying they were spending time assessing the impact of physical risks, while 79% say they will spend time assessing the implications of transition risks in their asset allocation and selection decisions.

Since decarbonization is crucial for investment decision-making and in order to move towards net zero, it is essential that companies and investors undertake robust scenario planning. This translates theories related to the impact of climate change into practice and helps to ground the discussion about integrating decarbonization factors into an organization’s strategies so that it is not just an afterthought when planning. review of investment opportunities or transaction risks.

PERFORMANCE TRANSPARENCY AND ANALYTICS ARE THE FUTURE OF ESG INVESTING
While investors see ESG performance as central to their decision-making, there are two priorities that could help realize its full potential.

First, better quality ESG data from companies and a clearer regulatory landscape. These two factors allow investors to make a more structured and methodical evaluation of the information provided.

This is crucial as investors are increasingly concerned about the usefulness of key aspects of companies’ ESG information, with 51% of investors saying that current non-financial information is unable to provide insight into how companies create long-term value, which was only 41% in 2020. Moreover, despite the importance of ESG performance reports for the industry, the transparency and quality of ESG information, mainly around materiality, were an ongoing concern, with 50% of investors surveyed expressing concern. about a lack of attention to material issues – an increase from 37% in 2020.

In addition, the investor and corporate communities largely agree on the importance of uniform standards and believe it would be helpful if risk transparency, reporting and assurance of disclosures were mandated by the Politics. As many as 89% of investors surveyed said they would like reporting of ESG performance metrics against a globally consistent set of standards to become a mandatory requirement.

This will result in higher quality information on ESG performance, which in turn can underpin good corporate management to help build and maintain stakeholder trust. Actions related to the formation and official launch of the International Sustainability Standards Board (ISSB) at COP26 are a step in the right direction towards more globally consistent standards.

Second, building data analytics capabilities and improving data management would be key to helping companies produce reliable ESG performance reports, with investors needing to incorporate this information into their investment decision-making process.

Technology and data innovation can help companies improve how they collect, aggregate and own their data and help investors integrate ESG data into investment analysis.

ACTIONS FOR COMPANIES AND INVESTORS
Because ESG factors play an important role in economic health and recovery, there are a number of important actions for companies that publish ESG reports and investors who will use this information.

Companies should consider (1) having a better understanding of the climate risk disclosure element in ESG reporting, as companies are under increasing pressure to do more, (2) strategically using sustainability and finance functions to help inject rigor and consider materiality into ESG reporting, primarily because investors are concerned about the veracity and credibility of companies’ ESG performance data, and (3) deepen engagement with investors and understand how non-financial information helps differentiate an entity from its competitors.

Investors should consider (1) updating investment policies and frameworks for ESG investing alongside building an ESG-focused culture, (2) updating risk management approaches to understand the potential consequences of climate risks over different time horizons, and (3) put in place a bold and forward-looking data analysis strategy.

As companies increasingly expect companies to create, protect and measure value across a broad group of stakeholders, they can fully embrace ESG by ensuring that the risks it involves being managed and taking full advantage of the resulting opportunities. This way, companies can better articulate how they create long-term value for all stakeholders.

This article is provided for general information only and does not replace professional advice when the facts and circumstances warrant it. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Katrina F. Francisco is Senior Director of Climate Change and Sustainability Services at SGV & Co.

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