E&Y Releases Climate Change and Sustainability Services Survey

Interview with John DeRose, Ernst & Young

“Is your nonfinancial performance revealing the true value of your business to investors?”

That’s the main question asked in Ernst & Young’s Climate Change and Sustainability Services (CCaSS) survey of more than 320 global institutional investors’ attitudes to nonfinancial reporting. For this third consecutive annual survey, senior decision-makers at global, buy-side investment institutions were polled to improve understanding of the role integrated reporting practices can play in highlighting a company’s value creation story.

The conclusions: investors, more than ever, are using nonfinancial performance to draw conclusions on value and to better inform their decisions.

Key highlights include:

82% of institutional investors surveyed state that ESG risks have been ignored for too long by businesses.
81% felt nonfinancial risks which could affect a company’s business are not adequately disclosed.
68% consider nonfinancial performance when making investment decisions, up from 58% in 2015.
59% stated that in the absence of a direct link between ESG initiatives and a business strategy to create value in the short, medium and long term, they would reconsider investment.
58% of investors would reconsider investment following disclosure of risk or history of poor governance.

I spoke with John DeRose, Executive Director and Practice Leader for Non-financial Reporting Assurance and Advisory Services, Climate Change and Sustainability Services at E&Y, about the survey. We talked about how incorporating ESG practices and providing disclosure is impacting investor’s decision-making and strategy—Jason Howell

3BL:  What do you feel are the key takeaways from the survey?

JD:  The amount of respondents taking ESG factors into account when making investment decisions, the breadth and size of the investing base involved, and how investors view the impact of incorporating ESG into corporate strategy.

Years ago, people were only looking for a certain rating from the GRI for an A, B, or C level for guidance. Now, investors are taking ESG information more seriously and using ESG factors and disclosure to make investment decisions.

Ernst & Young’s CCaSS group is a leader in non-financial reporting and advisory services, which includes government disclosures, additional reporting based disclosures, and verification of data. We are developing guidance for businesses on sustainability.

3BL:  What are necessary steps for businesses to incorporate ESG practices and provide full disclosure and what are the major challenges?

JD:  Investors must be asking these questions at the board level to hold them accountable and then use this information to make investment decisions. It’s time for companies to become more reliable about disclosure and transparency.

The biggest challenge is the lack of ESG reporting controls, processes, and automation, which makes the information harder to aggregate and report. This, in turn, causes most companies to do all their information and data aggregation until after fiscal year-end.  ESG reporting, in a manner consistent with quarterly financial statements, is likely some time away.

3BL:  From conversations with clients, do they feel that most companies are adapting to the increased requests for disclosure and a long-term strategy, which includes ESG factors? If not, do they see this being a necessary adaptation at some point in the future?

JD:  Client reaction runs the gamut. In terms of ESG reporting, a mature organization is able to get information out more quickly; other companies are still using Excel to put together reports. That being said, companies across the board are getting smarter about reporting and incorporating ESG goals into a strategic framework and now are understanding how to incorporate sustainability into operations. The next step will be providing timely (quarterly) information for real-time decision making, as opposed to three-to-five years ago where disclosure did take place, albeit much after year-end and not annually.

3BL:  Are CEOs/Board of Directors allocating capital to ESG initiatives and incorporating ESG factors into long-term strategy?

JD:  They are, and if they aren’t, it will happen in the near future. Leaders are looking to deliver results based on ESG factors and quantify what is the impact on customer demand and return on investment. For instance, companies will now look at the ESG impact of relocating businesses, taking into account human rights, environmental footprints, etc., into consideration as well as financial motives.

3BL:  Currently, there are external providers of ESG ratings/research, yet the survey showed that nonfinancial information is either not available, inconsistent, or seldom available for comparison. Are larger investors relying on outside sources or performing due diligence “in-house” with research teams?

JD:  Investors are doing much of the research on own. They feel they cannot get all the necessary ESG information from company’s disclosures. Some investors are using public information beyond that provided by the company: for instance social media sites such as Glassdoor, Facebook, etc. Many investors feel more information is needed to make investment decisions in order to gain a competitive advantage and are clamoring for details not yet being provided from companies.

There are currently initiatives from investors to make CEOs/Boards more accountable for incorporating ESG factors in their operations and reporting. Boards are definitely more engaged when considering and taking ESG factors into account.

3BL:  Investors focusing on ESG have increased substantially over the last few years and large money managers are now starting to allocate assets to this sector. What is your view on this trend and do you see further allocations/growth going forward?

JD:  Yes, we think there will be continued growth in the sector as investors will look at more information as a good thing. Additional information equates to strong corporate governance and transparency allows for investors to better assess business risk (human rights, carbon emissions) and thus, investment risk.

3BL:  Where do you see the industry in three-to-five years and what level of disclosure do you expect?

JD:  Over the past year or so, there seems to be more movement in the marketplace, driving demand and use for this additional disclosure information. The trend is definitely up. For instance, shareholders are taking a larger role in promoting transparency, GRI is reorganizing itself, and SASB is more involved. This all lends to a better market presence for corporations and investors alike. Going forward, in the next three-to-five years, we expect companies to develop more sophisticated systems to collect information, assess impact, and further increase reporting.