Change is a prerequisite for growth. Yet, the discomfort of challenging the status quo often means we do not freely choose it but face it only when force majeure comes into play.
Pressing issues such as environmental degradation, poverty, social injustice, climate change and the COVID-19 pandemic have derailed our speeding economy’s trajectory, demanding change and restructuring. For decades we have conveniently labelled companies as ‘for profit organisations’, perpetuating the idea that financial results, liquidity and profits were the sole success factors of a company. This is now changing.
According to the fifth EY Climate Change and Sustainability Services survey of 298 institutional investors globally, institutional investors are increasing their efforts when assessing the performance of companies using environmental, social and governance (ESG) factors.
The study was undertaken as the COVID-19 pandemic and subsequent measures started to have a global impact. Many might assume this would have a negative effect on the growing role of ESG factors, but this report reveals the opposite.
Investors are increasingly becoming more conscientious in their decisions of where to invest. Almost all (98 per cent) stated that they do evaluate non-financial performance based on corporate disclosures, and 91 per cent say that non-financial performance has played a pivotal role in their investment decision-making over the past 12 months. Seventy-two per cent conduct a structured, methodical evaluation, illustrating a great leap forward from the previous survey (2018 – 32 per cent).
ESG factors are essential for resilience, long-term recovery and driving a genuine sustainability agenda. Companies with strong sustainability functions that focus on what is most material to their long-term success will be more likely to rebound once the crisis is over and deliver long-term value.
These results should push more local companies towards making ESG disclosures. Currently, only a few FDI companies publish such data, yet, many companies are working on their sustainability and would benefit from publishing data on such actions.
Investors are increasingly becoming more conscientious in their decisions of where to invest
In the Malta Attractiveness Survey for the year 2020, 60 per cent of FDIs stated that they are tackling diversity and inclusiveness, while 52 per cent said environmental sustainability. By disclosing such information, these businesses can attract more foreign investors, obtain a level playing field with their foreign counterparts and aim towards more of a long-term value strategy. EY can help by assisting in building sustainable strategies as well as report on the results obtained.
Reporting in a reliable and structured way is imperative. This is because as investors become more attuned to ESG disclosures, the accuracy and reliability of these disclosures becomes key. The study has shown an overall degree of dissatisfaction with the quality of information provided by the companies. Thirty-four percent of investors seem to be dissatisfied with environmental risk disclosures, as opposed to 20 per cent in 2018. Similarly, 41 per cent (from 21 per cent in 2018) and 42 per cent (from 16 per cent) seemed to be dissatisfied with social and governance risk information respectively.
A challenge is that ESG data often lacks the structure, rigorousness and robustness which comes with the traditional financial data. Its qualitative nature also leaves great room for subjectivity. Moreover, investors find it hard to reconcile the non-financial disclosures to the financial data provided, given the great degree of disconnect between the two types of information provided by companies. Forty-six per cent stated that this disconnect is a source of major concern for them and one of the greatest issues highlighted.
Therefore, investors’ appetite for more formal structures, reviews and controls seems to be getting stronger. In order to overcome the concerns of data reliability and objectivity, investors are pushing for more formal structures which companies should use to present their long-term value as well as independent reviewing of disclosures.
Most respondents suggest a more disciplined and rigorous approach in evaluating corporates’ non-financial performance is needed. For instance, 67 per cent of respondents stated that they made ‘significant use’ of the Task Force on Climate related Financial Disclosures (TCFD) framework. Moreover, 75 per cent of investors pointed out that they would find assurance in having an independent lens focusing on the robustness of an organisation’s planning for climate risks.
The EY study has therefore shown that even though COVID-19 might have proven to be a short-term distraction from other challenges being faced by society, it has created the necessary foundations to continue the overhaul of how we view and operate the economy. It has further contributed to the process of building back an economy which is better, stronger and more sustainable.
Further discussion on how to realise a better economy in the future, also looking at ESG factors, will be discussed during EY’s Future Realised Week, taking place between October 20 and 23. For more information and to register visit https://www.ey.com/en_mt/events/future-realised-malta-2020-.
Maria Giulia Pace, Senior at EY Malta