According to a new survey by global professional services firm EY, nearly all investors now incorporate ESG reporting into their decision-making processes. However, more than three-quarters of investors believe that companies cherry-pick the sustainability data they disclose and will only provide useful disclosures when required by regulators.
According to EY, the poll revealed considerable disparities between companies and investors in areas such as long-term versus short-term sustainability creation and ESG reporting, as well as certain areas of alignment.
For the new report, the EY Global Corporate Reporting and Institutional Investor Survey, the firm polled 1,040 company CFOs and senior finance leaders across 25 countries and 14 industries, as well as 320 institutional investors from 23 countries across the banking and capital markets, insurance, and wealth & asset management segments, regarding their expectations and goals regarding sustainability investment and reporting.
The survey found that nearly all investors (99%) use ESG disclosures as part of their investment decision-making and that the methods used have evolved significantly in recent years, with 74% reporting conducting a "structured and methodical evaluation of nonfinancial disclosures," compared to only 32% in 2019.
Despite increased reliance on ESG reporting, the majority of investors highlight significant gaps in company sustainability disclosure, with nearly three quarters (73%) stating that "organizations have largely failed to create more enhanced reporting, encompassing both financial and ESG disclosures" and 76% stating that "companies are highly selective in what information they provide to investors, raising concerns about greenwashing."
In addition, nearly nine out of ten investors (88%) believe that corporations give little decision-useful ESG disclosures unless they are required to do so by law.
Many companies acknowledge that there is room for improvement in their ESG reporting, with less than half (54%) agreeing that they provide investors with relevant information on sustainability activity and 41% stating that their current ESG reporting does not meet even the most fundamental assurance standards.
Investors and companies largely agreed on the factors that impede the usefulness and effectiveness of current sustainability reporting, citing a "lack of supporting evidence and assurance to provide trust in the information," a "disconnect between ESG reporting and mainstream financial information," and a "lack of information on how the company creates long-term value" as their top three responses.
Tim Gordon, global leader of EY's financial accounting advisory services, stated:
"Businesses that are serious about establishing trust and a reputation for long-term focus must guarantee that sustainability is systemically, strategically, and rigorously integrated into their reporting procedures. Only then will investor cynicism subside and firms feel that their efforts to become more sustainable are being recognised."
The survey highlighted issues that may contribute to the difference in expectations for sustainability reporting on performance, with more than half (53%) of respondents from major organisations stating that short-term pressures from investors inhibit longer-term investments in sustainability. However, just 55% of firm finance chiefs agreed with 78% of investors that companies should make investments to address ESG concerns important to their business, even if it decreases profits in the short term.
According to the EY report, the perceived lack of effective corporate reporting on ESG and the misalignments between investor and company expectations on long-term value creation and sustainable growth could hinder organisations' ability to access capital and make progress toward achieving sustainability objectives.
EY Global Climate Change and Sustainability Services Leader Dr. Matthew Bell stated:
This survey demonstrates that businesses and the investors on whom they rely have vastly different sustainability aims and expectations. But this is much more than a difference in perspective; it is a divergence that threatens the smooth operation of capital markets and, eventually, the fight against climate change.