For both business and legal reasons investors are demanding more environmental, social, and governance (ESG) information. The sustainability information that they seek includes data about climate change, water issues, ethical business practices, CSR performance, and supply chain management.
The level of interest in nonfinancial information is growing dramatically. This is due to its ability to offset risk (brand risk, reputation risk, supply/commodity risk, regulatory risk, etc.), deliver efficiency gains; and/or add revenue/market share (via innovation and/or brand building/reputational equity).
A PwC report titled 10 Minutes on Integrated Reporting, found that investors are increasingly considering non-financial factors such as resource scarcity and looking at a company’s integrated reporting to assess the risks and returns of a company. In this survey 75 percent of global CEOs say that measuring and reporting total non-financial impacts contributes to long-term success.
We have seen a significant increase in the availability of sustainability data. Since the dawn of the millennium the number of corporate sustainability reports has grown from several hundred per year to several thousand
According to a 2014 Ernst & Young survey of more than 160 investors, analysts, and portfolio managers around the globe, nine out of 10 respondents stated that nonfinancial performance had played a pivotal role in their investment decision-making in the past 12 months.
Nonfinancial information is increasingly perceived as part of an investors’ fiduciary duties. A PwC report chronicles the rise of sustainability issues for investors as they seek to integrate environmental and corporate responsibility factors in both current and future investment practices. Most investors anticipate considering sustainability concepts in at least some aspect of the investment decision-making process. In a PwC’s Sustainability Investor Survey, 82 percent of respondents considered climate change and/or resource scarcity in future investment decisions, while 79 percent of investors considered social responsibility and/or good citizenship.
A total of 87 percent expecting to consider climate change and/or resource scarcity over the next three years and 84 percent of investors expecting to do the same for social responsibility and/or good citizenship. More than half are looking at such data to enhance performance returns.
However, the study also shows that there is strong demand for better sustainability information. A total of between 74 and 82 percent of Investors polled indicated that they are dissatisfied with transparency and reporting for US securities particularly with regard to risk and comparability.
As explained by Robert C. Eccles and Jean Rogers, The SEC and Capital Markets in the 21st Century: Evolving Accounting Infrastructure for Today’s World, Governance Studies at Brookings, pg. 5 (Sept. 2014).
From a business perspective this information has operational relevance. It is also directly related to financial performance, brand perception and corporate reputation. Legally it is about regulatory compliance and ESG factors.
This data can help investors with their economic analysis. This includes industry trends and related externalities that directly impact value creation and capital formation.
The information contributes to an industry analysis including factors that drive competitiveness and the potential for sustained value. It is about assessing portfolio risks through an appreciation of the externalities that affect other industries
Such sustainability disclosures shed light on management quality and corporate strategy, and evaluate a company’s ability to respond to emerging trends.
Finally nonfinancial information helps to contextualize traditional valuation parameters and assumptions, including cash flow and weighted average cost of capital, to reflect performance on material sustainability issues.