How will ESG

performance shape
your future?
Why investors are making ESG an imperative
for COVID-19 and beyond

Climate Change and Sustainability Services (CCaSS)

Fifth global institutional investor survey

July 2020
 Contents
03   Foreword

04   Executive summary

06   Investors raise the ESG stakes

16   The ESG performance disconnect: environmental risk in the spotlight

22   Investors are holding companies accountable

28   The future of ESG performance: trusted and credible

32   What next?

34   About this research

35   EY contacts

2 How will ESG performance shape your future?

 Foreword

The latest EY investor survey comes performance is to investment is supported by the EY Megatrends
at a time when the rules for capital decisions. All investors in our research 2020 report1, which highlights the
markets are being rewritten. As the say that ESG information plays a importance of taking a future-back
social and economic impacts of the pivotal role in decision-making, but a approach. By creating multiple future
COVID-19 pandemic continue to play significantly higher number this year scenarios, businesses can help to
out on the global stage, we are left say their investment direction is more reframe their future and capture new
wondering how investors will direct frequently influenced by it. Given this growth alongside the development
capital to support economic recovery. shift, there is a more pressing need for of business models to deliver long-
For me, at least, the question of investors to have confidence and trust term value.
the relevance and importance of in the credibility of information on
This is echoed in the market, where
environmental, social and governance nonfinancial performance. We found
research has shown that climate-
(ESG) factors to that audience has strong investor appetite for ensuring
focused stocks outperformed others
never been more pressing. I am that ESG disclosures are underpinned
between the start of the crisis and
pleased, therefore to be able to by appropriate structures, reviews
through the major period of market
introduce this fifth edition of EY and controls.
volatility in Q1 20202. And, as we
research into investor perspectives on
In what is fast becoming a critical move into the long-term recovery
ESG performance and the central role
decade for us all to address urgent stage, we will likely find that
it plays in their decision-making and
environmental and climate change consumers and employees have very
long-term investment management.
threats, and while society and the different expectations and behaviors.
This year’s study was undertaken economy are still reeling from the This change in consumer behavior has
as the COVID-19 pandemic and COVID-19 pandemic, these issues are already been tracked in the EY Future
subsequent measures started to even more important. Although many Consumer Index3, which found that
have a global impact. It reveals that organizations are in crisis-response one third of consumers surveyed said
institutional investors are raising the mode, wider ESG issues remain their choices would be guided by their
stakes when it comes to assessing critical and are essential to resilience, environmental and social concerns.
company performance using ESG long-term recovery and driving
I would like to extend my thanks to
factors. Where some may have a genuine sustainability agenda.
the nearly 300 institutional investors
questioned whether investors would
In fact, I believe that organizations that participated in this year’s
retreat to short-term performance
with strong sustainability functions research. As all of us are aware, we
models, the research suggests
will be more likely to rebound once are at a critical point in our history;
that that ESG has never been more
the crisis is over and deliver long-term careful stewardship of people,
important. Indeed, the majority are
value. Businesses that consider what environment and resources has
signaling a move to a more disciplined
is most material to their organization’s never been more important.
and rigorous approach to evaluating
long-term success, and take a macro
corporates’ nonfinancial performance.
view of emerging megatrends, will
Continued gaps in expectations likely be better equipped to respond
between issuers and investors are to the societal upheaval and anxiety
a significant concern, given how caused by systemic issues such as Mathew Nelson
fundamental nonfinancial pandemics and climate change. This EY Global CCaSS Leader

1 “Are you reframing your future or is the future reframing you?” EYGM Limited, 2020
2 “ESG Stocks Did Best in COVID-19 Slump, Insights, HSBC.” Global Banking and Markets, https://www.gbm.hsbc.com/insights/
global-research/esg-stocks-did-best-in-corona-slump, HSBC, Paun, Ashim. 27 Mar. 2020.
3 “Future Consumer Index: As consumers keep adapting, how will your business keep changing with them?, EYGM Limited, 2020.

How will ESG performance shape your future? 3



Executive
summary
Investors raise years, to the extent that it represented
the ESG stakes just seven of the investors surveyed this
year (see figure 1).
This year’s research finds that
investors are stepping up the game Investors are also building their
when it comes to assessing the understanding of the ESG reporting
performance of companies using universe, factoring in disclosures made
nonfinancial factors. Overall, 98% as part of the Task Force on Climate-
of investors surveyed evaluate related Financial Disclosures (TCFD)
nonfinancial performance based framework. In fact, this research found
on corporate disclosures, with 72% strong evidence that investors see the
saying they conduct a structured, TCFD framework as a very valuable
methodical evaluation. This is a major approach for wider nonfinancial
leap forward from the 32% who said disclosures, beyond climate-related
they used a structured approach information. And, as they look to
in 2018. When this research series build insight into long-term value,
began back in 2013, more than investors expressed a strong desire for
a third of investors said that they a formal framework for measuring and
conducted “little or no review of communicating intangible value, and a
nonfinancial disclosures.” This cohort closer connection between mainstream
has dropped significantly over the financial and ESG reporting.

Figure 1: Very few investors do not conduct a detailed review

of nonfinancial disclosures

Which of the following statements best describes how you and your investment
team evaluate nonfinancial disclosures that relate to the environmental and
social aspects of a company’s performance?

Percentage of respondents who say they conduct little or no review

of nonfinancial disclosures

36%

21%

22%

3% 2%

2013 2015 2016 2018 2020

4 How will ESG performance shape your future?

The ESG performance a significant part in decision-making: • First, build a stronger connection
disconnect: environmental 73% of investors surveyed say they between nonfinancial and financial
will devote considerable time and performance. Investors can focus on
risk in the spotlight
attention to evaluating the physical building more credible and nuanced
For formal evaluation of ESG risk implications of climate change approaches to understanding what
performance to be more effective, when they make asset allocation influences long-term value for
investors need more standardized and selection decisions; 71% say certain sectors and companies, while
and rigorous nonfinancial data from the same of the transitionary risks corporates themselves can focus
corporates to support their approach. due to climate change. A significant more on their materiality — reporting
However, investor dissatisfaction number of investors surveyed are also on what environmental, social and
with the information they receive making extensive use of exclusionary economic factors are most relevant
on ESG risks has increased since screening, with positive screening of to their stakeholders and could
2018: for example, the number of growing importance in sustainable impact their ability to create value
investors that are dissatisfied with investment decision-making. over the longer term.
environmental risk disclosures has
increased 14 percentage points since The future of ESG • Second, build a more robust
performance: trusted approach to analyzing the risks and
2018. This is a concern, given the
opportunities from climate change
focus investors are placing on robust and credible
and the transition to a decarbonized
environmental risk insights. This
Credible information strengthens future, and communicate this more
appetite is reflected in the fact that
confidence in companies and markets. comprehensively through TCFD
investors identify the climate-focused
Investors need ESG disclosures reporting. Critical actions range
TCFD framework as the most valuable
that are clear and transparent, from understanding the resilience of
way that companies can report their
founded on high-quality data, and business strategies and assets under
nonfinancial performance. However,
produced using robust and reliable a range of possible climate scenarios,
more must be done to meet this
processes and systems. The research to assessing avenues for capitalizing
need for environmental risk insight.
found significant appetite from on the economic opportunities of
In particular, investors surveyed feel
investors for an independent lens a decarbonized future – including
more should be done by corporates
on ESG performance. For example, attracting and accessing capital.
to provide robust insight into how
75% said they would find value in
they identify, assess and manage key • Third, instill discipline into
assurance of the robustness of an
climate and other ESG risks. nonfinancial reporting processes
organization’s planning for climate
and controls to build confidence
Investors are holding risks. They also see a strong need to
and trust. Establishing effective
companies accountable build confidence and trust in green
governance practices and seeking
investment disclosures, with 82%
The importance of strong alignment independent assurance of
saying it would be useful to have
between corporates and investors is nonfinancial processes, controls
independent assurance of the impact
reinforced by the central and decisive and data outputs can help build trust
of green investments.
role that ESG plays in investment and transparency with investors.
decisions: 91% of investors surveyed What next? This is an area where CFOs and
say that nonfinancial performance their finance teams — which have
Action in three areas is suggested for extensive experience in establishing
has played a pivotal role in their
companies to meet the expectations processes, controls and assurance
investment decision-making over the
of investors and ensure their ESG of financial information — can bring
past 12 months, either frequently
performance plays a critical role in their best practices and experience
or occasionally. And, the proportion
a crisis-hit world: to bear. The input of CROs and risk
of investors that say this happens
frequently jumped to 43% from 34% in teams can also be valuable, as can
2018. Climate risk in particular plays treasury function input when green
finance is involved.

How will ESG performance shape your future? 5

 1 Investors raise
the ESG stakes

6 How will ESG performance shape your future?

 “
It is our conviction that companies
that perform well on ESG are
generally less risky, better positioned
for the long term, and possibly better
prepared for uncertainty.
Vincent Triesschijn
Director Sustainable Investing, ABN AMRO

Most investors are moving According to some, this presents Mary Delahunty, Head of
toward more rigorous an opportunity to rebuild a more Impact at HESTA, the Australian
sustainable, decarbonized economy. superannuation fund for the health
ESG evaluation
and community sector, also believes
Adrie Heinsbroek — Principal,
This is a critical time for ESG. As part that, while the pandemic has taken
Responsible Investment, NN
of the recovery from the COVID-19 attention away from other societal
Investment Partners, the stand-alone
pandemic, capital markets are challenges in the short term, it is
asset manager of NN Group,
reflecting on the potent impact crucial to how corporates respond.
the biggest Dutch life insurance
that environmental disruption can “COVID-19 has meant some of
company — posits that, while the
have. Despite “infectious diseases” the immediacy of the climate
COVID-19 pandemic might prove a
featuring in the top 10 risks of the emergency is not front of mind for
short-term distraction from other
World Economic Forum’s Global some, because the voices of those
societal challenges, ESG performance
Risks Report 2020 (published on advocating change are somewhat
remains critical to drive long-
15 January 20204) in terms of lost in the emergency response,”
term resilience and a sustainable,
"impact", it did not meet the same she says. “But how companies
prosperous future. “COVID-19
list for “likelihood.” This failure to respond quickly to the pandemic —
discussions may shift a little bit of
consider environmental and social addressing the risks and thinking
attention away from other long-
risks adequately due either to their about them strategically — is exactly
standing issues that we need to solve
perceived longer-term impacts or the way they need to respond to
as a society, like climate change and
the reduced likelihood of occurrence, climate, governance and social risks.
water distress, as people focus on
has left many wondering how well Early in the pandemic, we worked
the survival of the economy,” he
prepared capital markets are for such through our active engagement
says. “But we should try and make
shocks. At the same time that society or ownership to set principles for
use of this opportunity to build back
and regulators alike are looking to the immediate actions we wanted
better — making the economy even
corporates to play a leading role in to see from companies. The ‘S’ in
stronger and more sustainable in the
rebuilding our global economies, ESG is vital in managing this crisis
future. And that will probably help
investors are increasingly asking and how companies demonstrate
us to future-proof and be resilient
whether risks such as climate change their responsibilities through
in the face of any other destructive
will be adequately addressed. their behavior.”
pandemics or other issues.”

4 “Global Risks Report 2020 — Reports — World Economic Forum.” Global Risks Report 2020, http://reports.weforum.org/global-risks-report-2020/
shareable-infographics/. 29 May 2020

How will ESG performance shape your future? 7



In this environment, the scrutiny

The COVID-19 pandemic underscores the of ESG factors is high, and capital
market sentiment and practices have
importance of the “Social” in ESG and the changed significantly. This study — the
need for more robust disclosures fifth research report over the past
seven years — finds that investors
surveyed are stepping up the game
According to a vice president “It’s something that we have
when it comes to assessing the
responsible for ESG investment discussed in consultation
performance of companies using
at a major North American asset with regulators, especially in
ESG or nonfinancial factors. Overall,
manager, today’s pandemic North America, around the need
98% of investors surveyed evaluate
situation underscores the for companies to really give us
nonfinancial disclosures, either
importance of the social dimension more disclosure around human
formally or informally.5
of ESG. “I think what this crisis capital. While so many companies
has done is shed a light on the say employees are their biggest The research is also showing a major
importance of the human capital asset, it’s really been hard to commitment from investors to move
dimension of ESG,” they told us. measure that. A good example is to more rigorous evaluation. Today,
“This is something that the ESG that, often, basic turnover rates 72% of investors surveyed say they
community has been talking about are just not disclosed. There’s a lot conduct a structured, methodical
a lot, but which maybe hasn’t risen of rhetoric around employees and evaluation of nonfinancial disclosures
to the top of people’s agendas. human capital, but COVID-19 has — a significant jump from the 32% who
There’s been a lot of focus on really put that under the spotlight said they used a structured approach
climate change — and that will in terms of how companies are in 2018 (see figure 2). Moreover,
continue, given it’s a long-term addressing this issue with their many of those who currently use an
systemic risk that could have employees and making the tough informal approach plan to move to
similar impacts to COVID-19 in decisions they need to reach.” a more rigorous regime: much more
the long term — but I think there’s than a third (39%) say they will move
been a real lack of disclosure on to a more formalized approach over
the human capital side.” the next two years.

Figure 2: The vast majority of investors say they usually conduct a structured and formal review of ESG disclosures
Which of the following statements best describes how you and your investment team evaluate nonfinancial disclosures that relate
to the environmental and social aspects of a company’s performance?

2020 72% 25% 2%

2018 32% 65% 3%

We usually conduct a structured, methodical evaluation of nonfinancial disclosures

We usually evaluate nonfinancial disclosures informally
We conduct little or no review of nonfinancial disclosures

5 Note: Due to rounding, the numbers presented throughout this report may not add up exactly to the totals provided, and percentages may not reflect
the absolute figures precisely. Throughout this report, "0%" and "zero" refer to a numerical value between 0 and 0.5.

8 How will ESG performance shape your future?

For Jacob Michaelsen, Head of This significant shift is part of a the quality of the information that is
Sustainable Finance Advisory at journey that investors have been captured through these consistent,
Nordea, this trend reflects a wider on for some time now. The EY approved processes, as well as the
shift in philosophy from both historical data graphically illustrates ability to make nuanced decisions on
companies and investors. “On how investors are moving to a more investments and the scale of those
the corporate side, over the last robust approach to the evaluation investments. While we’re encouraged
10 years or so, sustainability has of disclosures. As figure 3 shows, by the mindset shift, in reality, there
moved from the fringes into the for example, only 27% of investors is still more to be done in terms of
core of the business,” he says. “It’s surveyed were conducting a formalizing a detailed approach and
extended from the communication structured and methodical evaluation securing high-quality data.”
or investor relations team into in 2016, but use of this rigorous
operations and strategy. And that is approach has accelerated over the
also now happening more generally past four years.
with investors, and especially fund
managers. While it is certainly true
Of course, while the research shows 72% of investors
surveyed say
a directional shift in philosophy
that some of the more advanced
toward a structured approach, it is
investors have worked with this for a
long time, I think it is fair to say that,
the quality of the structured approach
that is critical. “It’s encouraging to
they conduct
broadly, the focus has been more
on ‘socially responsible investment’
see more organizations taking the
first step, which is to go from informal
a structured,
that, to a large extent, has relied on
exclusions as the main tool. However,
to more formal processes,” says methodical
Mathew Nelson, EY Global CCaSS
today, sustainability is fundamental
to how we in financial markets
Leader. “However, there’s a lot more evaluation of
need to undertake our investment
to do to truly embed a high-quality
structured approach. You should nonfinancial
analysis going forward. Investors are
recognizing that and saying, ‘this
start by formalizing and setting out
the process you go through to do
disclosures.
needs to be fundamental to our entire
assessments. The next step will be
investment strategy.’”

ABN AMRO’s Vincent Triesschijn

also sees ESG having moved from a
specialist area to a place at the heart Figure 3: Increasing numbers of investors embracing structured review
of investing. “Within our firm, ESG of nonfinancial disclosures
investing grew from a niche strategy Which of the following statements best describes how you and your
to mainstream investing today. In all investment team evaluate nonfinancial disclosures that relate to the
our investing activities, ESG takes environmental and social aspects of a company’s performance?
a prominent role in the investment
process and in eventual decisions to Percentage of respondents who say they usually conduct a structured,
invest in a company. In total we rate methodical evaluation of nonfinancial disclosures
over 10,000 companies and more
than two million securities on ESG. 72%
With this, almost all companies in
our investment universe have an ESG
rating. This allows us to integrate ESG
in the quantitative assessment of the
companies that we invest in and
monitor progress closely.” 32%
27%

2016 2018 2020

How will ESG performance shape your future? 9



Asset owners practising what they preach: ESG at super fund HESTA
The investment community is sustainability charge. “We can’t be portfolio. This is really important
not only looking to corporates critical of others unless we’ve got our in terms of integrity, especially
to focus on ESG issues but also own house in order,” she says. “And in the area of climate. Having
are practicing what they preach. that’s why I'm leading on our own an authentic approach is crucial to
HESTA’s Mary Delahunty is not sustainability. We’re a carbon-neutral your social license."
only focused on impact investing fund ourselves and take a responsible
but also leads the fund’s own investment approach across the

Investors are embracing understanding of the ESG reporting risks and opportunities from other
TCFD disclosures as part universe. In particular, they are sources, as well as the climate-related
factoring in disclosures made as impact on a company. The TCFD
of evaluations
part of the TCFD framework (see recommendations provide companies
With investors focused on companies’ figures below). with a comprehensive framework to
exposure to climate change, ethical report the impact of climate risks and
practices and the impact of operating The extensive use of TCFD opportunities, systematically making
models on communities, what recommended disclosures reflects it easier for investors to analyze a
information sources are they using the challenges that investors can company’s potential financial impact
for their evaluations? The research face in obtaining information about due to climate change.
shows that investors are building their a company’s existing climate-related

67%
More than two-thirds of investors surveyed say they
make “significant use” of ESG disclosures that are
shaped by the TCFD.

78%
More than three-quarters of those who make significant
use of that TCFD information say that it has a
significant impact on investment decision-making.

“
It’s encouraging to see more
organizations taking the first step,
which is to go from informal to more
formal processes.
Mathew Nelson
EY Global CCaSS Leader

10 How will ESG performance shape your future?

The issuer perspective
Is investor appetite for SDG information being met by companies?
This research also examined Figure 4: Use of SDGs by corporates is accelerating
whether investors are using
disclosures related to Sustainable Percentage of issuer reports that feature SDGs vs. those that do not
Development Goals (SDGs) in (GRI Sustainability Disclosure Database)*
their decision-making. We found
that 59% said they were making
significant use of that information.
Of course, while investors are 66%
embracing SDG disclosures, 83% 76%
92%
there is still a lot that needs to be
done to use the data provided by
corporates to drive sophisticated,
nuanced investment decision- 24% 34%
8% 17%
making.
2016 2017 2018 2019
To understand if organizations
are at least meeting that growing
Mentions SDGs No mention
interest, this year’s research
included a data-driven analysis of
*Note: sample of 6,743 global organizations.
the Global Reporting Initiative (GRI)
Sustainability Disclosure, looking
at whether the reports posted reporting have clear performance were government goals and plans
by companies include SDGs. The goals, showing how SDG that have now been picked up by
SDGs, set in 2015 by the General commitments will drive long-term the private sector,” they explain.
Assembly of the United Nations value, and is there an approach “However, while the information
(UN) and intended to be achieved in place to assess and measure may be very interesting to
by the year 2030, are part of UN progress against goals? Effective other stakeholders, it does not
Resolution 70/1, the 2030 Agenda. measurement will be essential necessarily give us the data and
They cover broad challenges such if leadership teams are to drive information that we can use in
as economic inclusion, diminishing meaningful action and give investors our assessment of a company. For
natural resources, geopolitical credible information and data. them to be broadly picked up by
instability, environmental the investment community, there
A senior ESG executive at a North
degradation and the impacts has to be a sort of translation,
American asset manager told us
of climate change. where what’s presented is much
that there is still a need for SDG
more of an investor-oriented set
The analysis found that the information to be more closely
of information.”
use of SDGs by corporates is tailored to the needs of the investor
accelerating. In 2016, just 8% of community. “Originally, the SDGs
reports mentioned SDGs; however,
by 2019, this had reached more
than one third (34%) of all reports About the research
posted by the target companies This research program included a data-driven approach to analyze the GRI
surveyed (see figure 4). Sustainability Disclosure Database, conducted in February 2020. This analysis
examined the database between 1999 and 2020, during which time 11,296
Of course, SDG-related disclosures organizations had contributed nonfinancial reports to the site. The research
will only be of value to investors focused exclusively on larger, listed companies, including multi-national
if they are material and of high enterprises. This left a research sample of 6,743 organizations that, between
quality. For example, does SDG them, had published 35,294 reports to the website between 1999 and 2020.

How will ESG performance shape your future? 11



Investors have a strong Access to greater insights into allows corporates to measure and
intangible assets — such as communicate intangible value so that
appetite for a formal
intellectual property, talent, brand investors can evaluate their long-
approach to assessing term value creation strategy (see
and innovation — allows investors
intangible value to look beyond book value.6 In the figure 5). Eighty-three percent say it
Too often, companies’ disclosures past, 80% of the market value of is necessary, including 40% who say
fail to establish whether intangible a company could be read off the it is “very necessary.”
assets are driving organizational balance sheet; now, on average,
One initiative that can help companies
performance. Without this insight, just 48% is on the balance sheet.
to explain how their investments
investors may be deprived of In Silicon Valley, the difference is
in talent, innovation, social goals
important information about how especially stark: companies there
and corporate governance create
businesses create, measure and only have, on average, 10% of their
long-term value is the Embankment
communicate long-term value. Take value on the balance sheet.7
Project for Inclusive Capitalism (see
culture as an example: it is a critical “A framework for reporting intangibles
The research shows that there
intangible asset that plays a central and long-term value: the Embankment
is significant investor appetite
role in reducing risk and delivering Project for Inclusive Capitalism”).
for a formal framework that
long-term, sustainable growth.

Figure 5: There is significant appetite for a formal approach to measuring

and communicating intangible value
Only 2% of
Do you see a new formal approach to measuring and communicating an entity’s
intangible value as necessary in assessing long-term value?
investors don't
see the need
83% for a formal
framework to
measure and
communicate
intangible
value.

2%

Necessary Not necessary

Note: excludes “neutral” responses.

6 “Isn’t It Time the Intangible Became Tangible When Measuring Long-Term Value? EY — Global.” Building a Better Working World — https://www.ey.com/en_gl/trust/
isn_t-it-time-the-intangible-became-tangible-when-measuring-long. Persico, Felice. 28 Mar. 2018
7 “Measuring Long-Term Value: Nothing Is More Practical than a Good Theory.”, EY, 2019.”

12 How will ESG performance shape your future?

 A framework for reporting intangibles and long-term value:
the Embankment Project for Inclusive Capitalism
The Embankment Project for that organizations can use in four initiative by the World Economic
Inclusive Capitalism (EPIC) brought categories: financial value, consumer Forum (WEF) to develop a
together the Coalition for Inclusive value, human value and social value. common, core set of metrics and
Capitalism, EY and 31 companies, recommended disclosures that
The next phase in the project is
asset managers and asset owners corporates can use to report the
to leverage the EPIC findings and
with approximately US$30 trillion shared and sustainable value
framework to identify, manage and
of assets under management, in they create. The WEF’s 2020
measure the intangible assets that
pursuit of a single goal: to identify consultation paper, Toward
are often the greatest contributors
and create new ways to measure Common Metrics and Consistent
to an organization’s success. EY
and demonstrate long-term value Reporting of Sustainable Value
teams are committed to supporting a
to financial markets. Creation, outlined consistent
comparable and scalable framework
metrics under four ESG pillars:
EPIC developed 63 indicators that will support organizations
Principles of governance, Planet,
and a framework that helps in building out the connection
People and Prosperity.8
organizations to measure between the tangible and intangible
and communicate long-term assets contributing to long-term For more information on EPIC,
value creation for a broad value creation. visit epic-value.com and
set of stakeholders, not just www.ey.com/ltv
Long-term value approaches also
shareholders. The approach
informed the EY contribution to the
provides a set of indicators

8 “Toward Common Metrics and Consistent Reporting of Sustainable Value Creation.” World Economic Forum, 2020,
http://www3.weforum.org/docs/WEF_IBC_ESG_Metrics_Discussion_Paper.pdf

How will ESG performance shape your future? 13

“
We need to acknowledge that we
cannot look to replicate an approach
to reporting and disclosure from the
traditional financial perspective onto
a sustainability perspective.
Jacob Michaelsen
Nordea

Of course, companies that want to

give investors a comprehensive view Figure 6: The top five challenges to the usefulness and effectiveness
of how they plan to create, measure of ESG reporting
and communicate long-term value Thinking generally about the ESG reporting you receive, which of the aspects
for all stakeholders, should ensure below, if any, do you believe are challenges to its usefulness and effectiveness?
a connection between financial and
nonfinancial reporting. Financial
performance comes from success 1 The disconnect between ESG

in areas such as access to, and

reporting and mainstream 46%
financial information
use of, resources: for example,
manufacturers’ use of water
resources. As a result, long-term 2 The lack of real-time

performance and value creation

information 41%
should be assessed holistically
and through the lens of longer-term
3 The lack of information about
business sustainability. However,
investors surveyed say that this
how the company creates 41%
long-term value
connection is missing: their number
one challenge to the usefulness and
4 The lack of focus on the material
effectiveness of ESG reporting is issues that really matter 37%
the disconnect between ESG and
mainstream financial information
(see figure 6).
5 The lack of forward-looking
disclosures 37%

Note: percentages of the same numeric value are ranked by decimal point difference.

14 How will ESG performance shape your future?

The effective connection of For Nordea’s Jacob Michaelsen, perspective,” he says. “That is
nonfinancial and financial disclosures a stronger connection between to say, we shouldn’t necessarily
hinges on the intangible value already financial and nonfinancial reporting steer our efforts toward an output
recognized by investors. How can does not automatically mean that looks similar to a traditional
organizations identify, manage and expecting ESG reporting to replicate financial analysis. But, it’s also
measure the strategic assets that financial reporting outputs, but important to be mindful about what
bridge the gap between the financial instead focusing on consistency people are saying about the need
and nonfinancial contribution to across ESG reporting standards and for some form of standardization.
society and the economy? EY teams how investors use the information We do need to have some form of
have developed a framework that can provided. “We need to acknowledge comparability in measurements.
address this question, which is based that we cannot look to replicate an I think we in the market need to be
on three high-level phases that guide approach to reporting and disclosure better at understanding how we can
organizations in understanding their from the traditional financial go about setting up broad lines for
long-term value: perspective onto a sustainability standardization, as soon as possible.
This would not just be around the
reporting itself, but also the usage
of those disclosures. Regulation
1 Identify intangible assets and the contributing value levers can certainly play a role here, but it
should be balanced with also letting
the markets try to work out what
2 Validate desired outcomes for each value lever and build a long
term value impact matrix works and what does not.”

3 Formulate a measurement and valuation process with metrics

and a long-term value reporting process

How will ESG performance shape your future? 15

 2 The ESG
performance
disconnect:
environmental risk
in the spotlight
16 How will ESG performance shape your future?
A growing disconnect threat different standards on what or how you need to make sure that they
to report this information. Investors understand that you’re not going
As we have seen, investors are
are consistently stating that a to use it against them. The aim is
on a journey to formalize their
common set of standards is crucial to to try to understand them better. I
approach to ESG evaluation. They
improving the quality of nonfinancial always say to these companies, ‘your
are looking for corporates to
disclosures and that it will facilitate risk is our risk.’ In order to have a
provide standardized and rigorous
better decision-making on good shareholder relationship, it is
nonfinancial data to support their
investments. The WEF International important to have dialogue about
approach, and any expectation gap
Business Council (IBC) launched a exactly these topics. Because if
between corporates and investors
project to consider how this challenge we don't have the information,
could come at a significant price.
could be overcome and whether there we have to make a judgment on
For example, companies that do
could be a set of nonfinancial metrics our own intuition.”
not align with investor expectations
that all companies report on to
could find it harder to access capital. One of the biggest areas of
enable some element of performance
They could also see a decline in their disconnect is in how companies
comparison. The WEF IBC report
stock value, with investors that are are disclosing ESG risks to
Toward Common Metrics and
concerned about lack of risk insight their current business models.
Consistent Reporting of Sustainable
responding by raising a company’s For example, as figure 7 shows,
Value Creation9, proposes a first draft
risk profile. Choosing not to engage dissatisfaction with risk disclosures
of what a common core set of metrics
on ESG, or weighting performance has risen since 2018, across the
and disclosures could be.
solely toward positive aspects may board — environmental, social and
lead to investors coming to their For NN Investment Partners’ Adrie governance and the number of
own conclusions. Heinsbroek, a good way to close any investors that are dissatisfied with
disconnect is for corporates to see environmental risk disclosures has
Obtaining ESG performance
their interactions with the investment increased 14 percentage points
information that helps investors
community as a relationship. since 2018. Moreover, 86% of those
to compare corporates can be
“Sometimes, companies are a bit investors that are dissatisfied with
challenging. There is no consistent
reluctant to share particular types of the environmental risk information
view on what ESG information is
information with us,” he says. “While they receive say it is "critical" that
material, and there are a number of
it’s sometimes understandable, disclosures in this area improve.

Figure 7: More investors dissatisfied with ESG risk disclosures

In your opinion, do companies adequately disclose the ESG risks that could affect their current business models?

Percentage of respondents who say that companies do not adequately disclose the ESG risks that could affect
their business models

41% 42%
34%

20% 21%
16%

Environmental risks Social risks Governance risks

2018 2020

9 “Toward Common Metrics and Consistent Reporting of Sustainable Value Creation.” World Economic Forum, 2020,
http://www3.weforum.org/docs/WEF_IBC_ESG_Metrics_Discussion_Paper.pdf

How will ESG performance shape your future? 17



Investors are focused For Dr. Matthew Bell, EY Asia Pacific and targets, and governance. The
on TCFD climate risk CCaSS Leader, the popularity of the disconnect between financial and
TCFD framework also points to its nonfinancial information is something
disclosures, but questioning
value beyond climate-risk reporting. the TCFD is also designed to address.
insight into processes “It’s fascinating to me that the top At a minimum, there’s an opportunity
for managing risk three results from the survey all for the market to ask what we can
It is clear from the research that allude to a desire for more value- learn from the TCFD framework,
environmental risk is a key issue connected means of reporting. why it has earned such acceptance,
for investors. Earlier in this report, Investors’ regard for the TCFD and what its relevance to other ESG
in "Investors are embracing TCFD framework might not just reflect factors might be.”
disclosures as part of evaluations", their view that it’s best-in-class in
The TCFD recommendations are
we saw that more than two-thirds the context of climate reporting, but
particularly aimed at sectors that are
of investors make significant use of that its approach could be seen as
identified as especially vulnerable
ESG disclosures that used the TCFD a framework for other ESG-related
to climate change impacts. These
framework. And, when investors topics,” he says. “For example, the
include both the financial sectors
were asked about the most valuable TCFD framework can lend itself
(e.g., banks, insurance companies,
way that companies can report ESG to COVID-19 disclosures. This is
asset owners and asset managers)
information, the TCFD framework also because it sets out ‘the now, next,
and nonfinancial sectors (e.g.,
emerged on top. The top three most and beyond’, and details this across
energy, transportation, materials
valuable ESG disclosure vehicles are: strategy, risk management, metrics
and buildings, agriculture and
food, and forest products). While

1 Climate-related disclosures in financial reports as implementation of the TCFD

recommended by the TCFD recommendations is largely
voluntary, investor appetite for this
information will likely drive further
2 Company disclosures based on what management believes is
most material to the company’s value-creation strategy uptake of the recommendations in
nonfinancial reporting.

3 Company-defined reports that integrate financial and

nonfinancial information

18 How will ESG performance shape your future?

However, despite the importance
of this information to how investors Figure 8: Risk management is the least-developed TCFD area
evaluate companies, the 2019
EY Global Climate Risk Disclosure Thinking about the four areas of the Task Force on Climate-related Disclosures,
which is least developed in terms of the information provided by companies?
Barometer — which assesses company
reporting — found that responsiveness
to the TCFD recommendations differs
of respondents say this is
significantly between countries and 1 Risk management 30% the least-developed area
sectors.10 There were question marks
around the depth of the disclosures
on climate risk exposure and 2 Governance
27%
resilience, and the 2019 EY Global
Climate Risk Disclosure Barometer
found room for improvement in 3 Metrics and targets
23%
both the coverage and quality of
disclosures by companies. There is
a pressing need to ensure that the 4 Strategy
20%
quality of TCFD disclosures reflects
how extensively they are used by
investors in evaluation.
HESTA’s Mary Delahunty believes that TCFD framework will start to set the
This latest EY research also points to improvements in TCFD disclosures standard for areas that companies
concerns regarding the information will evolve naturally as best-in-class can excel.” She also feels that
provided. The TCFD recommendations companies emerge that others will investors will increasingly expect
are structured around four thematic want to emulate, creating a natural companies to take a robust approach
areas of risk: governance, strategy, consistency. “I think with time, certain to the four areas. “Overall, we should
risk management, and metrics and TCFD terms will become accepted,” be less accepting of light-touch
targets. Investors’ greatest concern she explains. “That will then disclosures in those four areas,” she
about the TCFD framework is the risk create its own level of consistency. says. “They can be well understood
management element, which provides Standout performance using that if a company is focused to do so.”
insight into how companies actually
identify, assess and manage their key
climate risks. Investors were asked to
name the area where they received
the least-developed information from TCFD: four thematic areas of risk
companies, and risk management
came out on top (see figure 8). • Governance: the organization’s governance around climate-related
This may reflect the fact that while risks and opportunities
some companies disclose that they
have processes for identifying and • Strategy: the actual and potential impacts of climate-related risks,
managing climate risks in their overall and opportunities on the organization’s businesses, strategy and
organizational risk management financial planning
system, this is described in general
• Risk management: the processes used by the organization
terms without a clear link between
to identify, assess and manage climate-related risks
the climate-related and overall
risk management. • Metrics and targets: the metrics and targets used to assess
and manage relevant climate-related risks and opportunities

10 “How Can Climate Change Disclosures Protect Reputation and Value?”, ey.com, https://www.ey.com/
en_gl/assurance/how-can-climate-change-disclosures-protect-reputation-and-value, accessed 27 April 2020.

How will ESG performance shape your future? 19



Strategy — an area and enterprise risk management risk and strategy processes,” says
for concern system. This has resulted in very EY’s Dr. Matthew Bell. “From what
broad and high-level approaches to investors are telling us, there’s an
While strategy is the thematic area
analyze how climate-related risks opportunity for those functions to be
that received fewer negative votes,
and opportunities have affected the more embedded into core business.”
one in five investors (20%) identified
business organization, strategy, and
it as their least-developed area. Furthermore, it was found that many
financial planning.
This is something that is echoed companies do not consider their
in the 2019 EY Global Climate “The sustainability functions of current strategy’s resilience against
Risk Disclosure Barometer.11 The companies have been very good at climate-related risks and lack a
assessment of company climate risk understanding what ESG performance structured approach to identifying
disclosures finds that many companies matters could impact corporate climate-related opportunities. This
fail to align sustainability and risk value for their stakeholders over the is arguably an implication of the
management in a way that integrates long-term, but often find that these companies’ under-utilization of
climate change risk factors into the insights get ‘watered-down’ or lost climate scenario analysis, which
overarching strategy of the company altogether when embedded into wider otherwise could help companies

Driving effective climate change risk disclosures: actions

In the EY report, How climate Companies that seek to understand • How will our products and
change disclosures reveal business their climate risk exposure can ask services be affected by carbon
risks and opportunities, we themselves the following questions: policies and targets? How
examined how important it is • What are the biggest emissions can we anticipate the impacts
that organizations have a strong sources in our value chain? and adapt?
grasp of the range and magnitude • What incentives, instruments and • Are the international
of the financial impacts from indicators can help us to align climate policies and national
climate change.12 our strategy with the goals of the commitments integrated into
Paris Agreement (the Paris Climate our business strategy and our
Disclosing climate-related risks
Change Conference, which was supply chain and sourcing
likely requires changes to the
held in 2015, was the 21st meeting strategy?
governance and risk assessment
of the Conference of the Parties • What is our potential exposure
processes (in line with the TCFD
of United Nations Framework to new regulations such as
recommendations). It may take
Convention on Climate Change)? carbon taxation and carbon
several years for an organization
For example, an internal carbon pricing? What assets are at
to be in a position to generate
price on capex and opex and risk — supply chain, products
valuable information for investors
company-specific targets. or activities — and in which
and shareholders to help them
• What are our stakeholders’ geographies?
make informed decisions. The
earlier organizations embark expectations of climate footprint • Are some of our products
on this journey — and provide a and carbon performance? For or activities at risk from the
platform to help educate directors example, to lead the development 2°C roadmap (limiting global
and management about climate of sustainable products and warming to two degrees
risks — the better positioned they services or disclose information Celsius to try to avoid the
should be to engage with investors required by investors. worst consequences of climate
and shareholders on the impacts • What type of climate risks is change)? How can we turn that
and opportunities. the business exposed to in the into a competitive advantage?
long run?

11 “How Climate Change Disclosures Reveal Business Risks and Opportunities.”, ey.com, https://www.ey.com/
en_ae/assurance/climate-change-disclosures-revealing-risks-opportunities, 9 January 2019.
12 Ibid

20 How will ESG performance shape your future?

structure their climate-related but disclose very little information
risk and opportunity identification on their GHG emissions relating to
process and assess their current
strategic trajectory.
investments and lending activities
(e.g., Scope 3). This finding also
Many companies
The analysis also found that
means that the Scope of climate- fail to consider
their current
related metrics is often confined to
companies, in many instances,
Scope 1 and 2 GHG emissions. For the
do not cover some of the most
material climate-related risks that
companies that do report on Scope
3 GHG emissions, these disclosures
strategy's
they are exposed to. For example,
many financial institutions in
usually include non-material resiliency
emissions, such as business travel.
the 2019 EY Global Climate Risk
Disclosure Barometer research
Thus, to a large extent, companies against climate-
disclose greenhouse gas (GHG)
need to focus on and disclose their
most material Scope 3 emissions.
related risks.
emissions in relation to their own
operations (e.g., Scope 1 and 2),

Leading the way in ESG performance: the sector view

This survey asked investors to is paying attention to the potential
evaluate 10 sectors and say impacts on its physical networks.
whether they felt they were After all, the incentives for disclosure
leading the way in ESG reporting are as much about the upside as
compared with other industries, the downside.
meeting expectations or lagging
behind. Given the importance
of industry-relevant information Figure 9: The top three sectors for ESG reporting
to investors, the ranking of
different sectors illustrates who Considering the following industries, and thinking about the maturity of their
is potentially meeting that need. ESG reporting compared with other sectors, please say whether you feel that they
are leading the way in ESG reporting, meeting expectations, or lagging behind.
The technology and
communications industry is seen
as leading the way more than any
of investors say
other sector (see figure 9). 1 Technology and
43% that this industry
communications
This resonates with the findings of is leading the way
the 2019 EY Global Climate Risk
Disclosure Barometer, in which
the telecommunications sector
2 Retail
34%
scored highest for coverage and
second-highest for quality of TCFD
disclosures. This may be because
the industry, more than any other,
3 Power and utilities 33%
is embracing the opportunities
associated with an economy-wide
low-carbon transformation, and

How will ESG performance shape your future? 21

 3 Investors are
holding companies
accountable

22 How will ESG performance shape your future?

ESG is fundamental to
Figure 10: Nonfinancial performance is now used more frequently in
investment decision-making
decision-making
The importance of strong alignment
between corporates and investors In the past 12 months, how frequently has a company’s nonfinancial performance
played a pivotal role in your investment decision-making?
is reinforced by the central and
decisive role that ESG information
plays in investment decisions: 91%
of investors surveyed say that 2020 9% 48% 43%
nonfinancial performance has played
a pivotal role in their investment
decision-making over the past
12 months either “frequently” or
“occasionally.” Furthermore, the
2018 3% 62% 34%
proportion of investors that say this
happens frequently has jumped to
43% from 34% in 2018 (see figure 10).
Seldom Ocasionally Frequently
This increase reflects a continuing
trend that has been tracked in our Note: excludes the investors that answered “never”.
historical research. In 2016, for
example, 68% of investors surveyed
said that nonfinancial performance
had played a pivotal role in their Figure 11: Frequent use of nonfinancial performance in decision-making
investment decision-making either is on the rise
frequently or occasionally, compared
In the past 12 months, how frequently has a company’s nonfinancial performance
with today’s 91%. Additionally, played a pivotal role in your investment decision-making?
as figure 11 shows, only 27% of
investors were making “frequent”
Percentage of respondents who say that they have made frequent
use of nonfinancial performance
use of nonfinancial performance in investment decision-making
in the same year. This trend in
using nonfinancial information to
determine a businesses’ value is 43%
likely to continue in a post-pandemic
world, as investors look not only at a 34%
businesses’ resiliency, but also at the 27%
alignment of their purpose to long-
term value creation.

2016 2018 2020

Only 27% of investors were making

“frequent” use of nonfinancial
performance in 2016.

How will ESG performance shape your future? 23



A fundamental shift in investor ESG culture:

the importance of conviction and belief
The evolution of culture within But today, discussions with not only gathers wide-ranging
institutional investors is clear. industry leaders demonstrate information, but also assesses
Interviews for this research significant diligence within firms whether the fund manager’s
show a significant change in to ensure a culture of ESG is being people believe in the ESG-driven
expectation for fund managers maintained. When assessing approach. “Investment funds are
to take ESG seriously. Back in how the investment industry subjected to an intensive analysis
the first EY investor study, which approaches ESG decision- consisting of questionnaires with
was conducted in 2013, one making, ABN AMRO’s Vincent qualitative questions that we
US-based third-party investment Triesschijn believes that it is assess ourselves,” he explains.
portfolio manager characterized critical to also take into account “We also visit the fund managers’
ESG evaluation as something the convictions and beliefs offices to conduct a thorough due
of more interest to the younger of investment managers and diligence.”
generation, saying, “There are whether they truly “believe” in
people who are coming into the ESG. When assessing the external
business today who are probably investment fund managers
more focused on it than I am.”13 offered to its clients, the bank

The survey also shows that investors because of the potential for disruption • Transition risk: transitioning to
are focused on climate change risk to supply chains and damage to a decarbonized economy may
and are making extensive use of both infrastructure. entail extensive policy, legal,
positive and exclusionary screening. technology and market changes to
We saw earlier – in "Investors
These two areas are covered in more address mitigation and adaptation
are focused on TCFD climate risk
detail later in the report. requirements related to climate
disclosures, but questioning insight
change, which could pose varying
The climate imperative: into processes for managing risk" —
levels of financial and reputational
physical and transition that TCFD recommended information
risk to organizations. For example,
is seen as critical to investors in
risk are critical to asset climate-related financial risks
securing the information they need
allocation and selection on a company’s existing climate-
could affect the economy through
elevated credit spreads, greater
Investors are paying increasing related risks. The TCFD disclosures
precautionary saving and rapid
attention to climate change as they characterize risks and opportunities
pricing readjustments.
seek to understand what it means along two dimensions — physical
for companies and the potential for impacts and transition impacts:
a systemic financial shock to the • Physical risk: risk to asset
economy. In the EY Megatrends 2020 valuation and returns that may be
report14 , new technologies reveal that posed by changes in the physical
climate-driven geophysical change climate. For example, changes
is happening much faster than first in rainfall patterns could impose
thought. This is creating additional climate-related constraints on
pressure for business leaders to operating activities.
adapt more quickly to climate risk

13 Climent, Juan Costa. Tomorrow’s Investment Rules Global Survey of Institutional Investors on Non-Financial Performance.
EYGM Limited, 2014, https://www.eycom.ch/en/Publications/20140502-Tomorrows-investment-rules-a-global-survey/download.
14 “Are you reframing your future or is the future reframing you?” EYGM Limited, 2020.

24 How will ESG performance shape your future?

The EY research finds that 73% of In EY teams’ experience, corporates’ sectors have considered the physical
investors surveyed say that over assessment of the impact of physical implications of a changing climate,
the next two years they will devote climate risks falls behind that of most have not yet fully integrated
considerable time and attention transitionary impacts, particularly them into their valuation models.
to evaluating the physical risk regulation. This is a problem, as
The 2019 EY Global Climate Risk
implications when they make asset the risks are two sides of the same
Disclosure Barometer finds that
allocation and selection decisions; coin. One reason why there is a
physical risks are not only overlooked
71% say the same of transition risk. more consistent consideration of
in valuation models but often omitted
Investors that take a structured, transition risk is the more immediate
altogether from forward-looking
methodical approach to evaluating likelihood of consequences. Transition
strategic and risk management
nonfinancial disclosures pay more risks are generally associated with
disclosures. Physical risk is key to
attention to these issues than those “mitigation” — actions taken to reduce
many high-risk sectors over the long
who say they evaluate nonfinancial the likelihood and consequence
term, so this lack of understanding
disclosures informally (see figure 12). of future physical consequences.
and disclosure highlights a significant
So, although companies in some
shortfall in the quality of disclosures.

Figure 12: Physical and transition risks are critical considerations in asset
allocation and selection Investors
Thinking about climate change specifically, how much time and attention will you
devote to evaluating transition risk and physical risk in your asset allocation and
are devoting
selection decisions over the next two years? considerable
Percentage of respondents who give significant time and attention time and
to transition and physical risk
attention to
75% 76% evaluating the
63%
67% implications of
physical and
transition risks
when making
investment
decisions.
Transition risk Physical risk

Formal approach to evaluation

Informal approach to evaluation

How will ESG performance shape your future? 25



Meeting investor expectations on transition and physical risk:

where to start?
Disclosing climate-related risks several years for organizations to and management about climate
that meet the needs of investors be able to generate the information risks, the sooner they will be able
is likely to demand changes to that will help investors to make to engage with investors on the
companies’ governance and risk informed decisions. The earlier possible impacts — as well as the
assessment processes. It may take they start to educate directors opportunities for the organization.

Exclusionary and positive increase. It involves exclusionary

screening are used screening, such as excluding
extensively emissions-intensive activities from In September
a fund or portfolio, and positive
In September 2019, institutional screening, which means investing 2019,
investors responsible for more than
US$4.6 trillion in investments formed
in sectors, companies and projects
that are chosen for their positive institutional
the UN-convened Net-Zero asset
Owner Alliance. The aim was to use
ESG performance relative to industry
peers. These approaches co-exist with
investors
their financial influence to combat traditional techniques such as value responsible
climate change, with the group investing, and most investors are
committing to move their portfolios using both exclusionary and positive for more than
to net zero GHG emissions by 2050.15 screening to inform their decisions
(see figure 13). US$4.6 trillion
The research shows that this kind
of sustainable investing is on the in investments
formed the
Figure 13: A significant number of investors are making extensive use of Net-Zero Asset
exclusionary and positive screening
Owner Alliance.
To what extent does your institution use the following approaches to integrate ESG
issues into its investment decisions?

Percentage of respondents who make extensive or occasional use of screening

43%
Extensive
57%
Occasional

55%
38%

Exclusionary Positive

15 “UN-Convened Net-Zero Asset Owner Alliance — United Nations Environment — Finance Initiative.” United Nations
Environment — Finance Initiative — Partnership between United Nations Environment and the Global Financial Sector to
Promote Sustainable Finance, https://www.unepfi.org/net-zero-alliance/. Accessed 29 May 2020.

26 How will ESG performance shape your future?

 “
The extensive use of positive only tool and it is not always the most
screening reflects its growing effective tool. If you are selling off
importance in sustainable investing. your ‘dirty’ investments to investors
Investors are using positive screening
of ESG risk factors to create a modern
that do not care about this, there’s a
bit of a hazard that basically you’re
Increasingly,
best-in-class investment approach
that generates performance that is
saying, ‘Well, it’s somebody else’s
problem.’ So actually, to an extent,
investors are
in line with — and often exceeds —
market benchmarks.
we would be better off if the most
sustainable investors bought the least
moving away
For Nordea’s Jacob Michaelsen,
sustainable investments, because from a binary
those investors will be able to put
positive screening is a critical part of
impact investing and building a more
more pressure on the company analysis of invest
or divest.
to change.”
sustainable future. “Increasingly,
investors are moving away from a
binary analysis of invest or divest,” Jacob Michaelsen
he says. “Exclusion can still be Nordea
relevant as a tool for sustainable
investments. However, it is not the

How will ESG performance shape your future? 27

 4 The future of
ESG performance:
trusted and credible

28 How will ESG performance shape your future?

ESG is critical to success in For ABN AMRO’s Vincent Triesschijn, According to a senior ESG executive
the post-COVID new reality transparency is also about the at a North American asset manager,
willingness of companies to be open consistency is a major element of
The COVID-19 global health to questions and discussion. “An credibility, with the Sustainability
pandemic — rather than distracting us important element in evaluating [ESG] Accounting Standards Board (SASB)
from the need to drive a sustainable data is the extent to which companies helping to drive the consistency
future — reinforces that imperative. are responsive to questions and and materiality of disclosures. “The
The transition to a decarbonized engagement,” he explains. “However, consistency piece is very important,”
future is critical to the long-term geographical and cultural differences they say. “We are very supportive
resilience of companies, the economy can create a barrier to finding of the SASB standards, which help
and the planet as a whole. Strong ESG reliable information. Generally, we provide that consistency in terms of
strategies and frameworks will likely prefer to invest in companies that we ‘these are the material metrics and
be critical to recovery and thriving in understand well and that are open here’s how you report out on them.’
the long-term future. to discussions. The same principles You would then have to explain year
apply to external investment over year if, for some reason, you
Investors will be keeping a close eye
managers. In the end, transparent chose not to report on that metric.
on how countries and organizations
and reliable sustainability-related I think a lot of ESG reporting is still
recover from the economic impacts
information will contribute to very qualitative and narrative-driven
of the pandemic. The national
better, more informed, investment and, while you sometimes need that
economies and companies that
decisions that benefit the risk-return for context, it has to be backed up
set an agenda for climate-resilient
characteristics of both companies and with a solid data set that does not
growth will likely be seen as an
investment portfolios.” change from year to year.”
attractive prospect, both in terms of
near-term opportunities, such as job NN Investment Partners’ Adrie Next we examine investors’ appetite
creation, and their long-term ability Heinsbroek points out that for assurance across the ESG
to withstand systemic shocks. transparency is also about spectrum – from climate-related
organizations that are willing and disclosures in financial reports to
For investors to understand a
motivated to be open. “I need to green investment disclosures.
company’s resilience maturity, they
understand what a company’s
need to have insight into the ESG risks Building trust and credibility
objectives are,” he says. “Sometimes,
that companies face and how they
reading between the lines is just as in climate-related disclosures
intend to manage them. Credible and
important as having the words put on
trusted ESG disclosures are therefore As we saw earlier in this report, in
paper. I want companies to tell and
essential. The research has found "the ESG performance disconnect:
share with us what they want to share
that there is significant appetite environmental risk in the spotlight"
with us. Let them tell their story and
among investors to build trust in the environmental issues are front
allow us to ask them questions.”
credibility of ESG disclosures. This of mind for investors. However,
appetite perhaps reflects some of the As part of that open approach, environmental and climate
factors that can weigh on investors’ Adrie Heinsbroek believes that change disclosures — and insight
confidence in ESG disclosures: organizations also need to be into companies’ approaches to
• Because nonfinancial disclosures transparent about challenges and managing the related risks — are
can involve qualitative information, dilemmas, which both companies only useful to investors if they have
investors worry that it is a and investors can then learn from. confidence in what is reported.
subjective viewpoint rather than “More disclosure is not always The research uncovers significant
evidence-based fact. better,” he says. “In the early days appetite for expanding the scope of
• Investors may worry that there of sustainability reporting, the big assurance to provide that credibility
is no transparency into the leap forward was that companies and confidence: for example, as
assumptions that underpin the also started to share and disclose figure 14 shows, 75% would find
data, and ask whether those some of the dilemmas they faced. value in assurance of the robustness
assumptions are reasonable. Today, a lot of it only looks like good of an organization’s planning for
news. You also need to disclose some climate risks.
• ESG disclosures are often
supported by immature processes dilemmas or some failures. Then, the
and can involve judgment calls that companies — and we as investors —
may increase risk. can say ‘Let’s learn from that.’”

How will ESG performance shape your future? 29



Figure 14: Investors say there is significant value in independent, third-party assurance across the ESG spectrum
From your perspective, how valuable is it to have a third-party firm provide independent assurance over the
following information?

Percentage of respondents who see independent assurance as "valuable" or "very valuable"

The robustness of an organization's planning for

climate risks
75%

The robustness of a organization's processes and

controls for ESG reporting
75%

Climate-related disclosures in financial reports 72%

Nonfinancial and ESG performance measures 70%

This suggests that the investor Corporates that want to access capital
community, given its reliance on and communicate their story to
nonfinancial information, will play investors will need to respond to this
an active part in pushing corporates investor-led demand.
toward nonfinancial assurance.

The issuer perspective

Are companies responding to investor focus on trust and credibility?
Investors are clearly focused Figure 15: Despite investor demand, most reports do not
on whether ESG information receive external assurance
is credible and trusted. To
Percentage of issuer reports that have received a form of assurance vs. those
understand if corporates are
that have not
meeting this need, the data
science-based analysis of the
GRI’s Sustainability Disclosure
Database examined whether the
reports posted by companies 76%
72% 75% 78% 82%
have received a form of
external assurance.

The research shows that around

a quarter (24%) of organizations in 28% 26% 22% 19% 24%
the sample say that the report they
posted in 2019 has undergone a 2015 2016 2017 2018 2019
form of external assurance. As
figure 15 shows, a significant part Report has received assurance Report has not received assurance
of nonfinancial information does
not receive that validation. *Note: sample of 6,743 global organizations. See page 11 for sample information.

30 How will ESG performance shape your future?

Building confidence in green in the study (46%) do not feel that impact of green investments and,
investment disclosures they are given very robust and of those, 34% say it would be “very
credible information on green bonds useful.” And the respondents who
In today’s market, there is demand and the green performance and make extensive use of disclosures
for consistent and in-depth impact of investments. shaped by the UN SDG policies are
information on how corporates are particularly interested in that kind
deriving revenue and growth from It is perhaps not surprising,
of assurance: 92% of this group think
environmental solutions. But a therefore, to find that there is
it would be valuable, compared with
significant number of investors are significant appetite for assurance of
71% of the respondents who are not
concerned that the information they this information: 82% of investors
so focused on the UN SDGs (see
receive is limited. For example, close surveyed say it would be useful to
figure 16).
to half of the Europe-based investors have independent assurance of the

Figure 16: Investors would value assurance of green investment

disclosures, and there is particular interest from SDG-focused investors 82% of investors
Thinking about the reporting information that companies disclose on the impact
of green bond investments, how useful would it be to have independent, third-
surveyed say
party assurance of that reporting? it would be
Percentage of respondents who believe assurance would be "useful" useful to have
or "very useful"
independent
92% assurance of the
71%
impact of green
investments.

SDG focused Non-SDG focused

What are green bonds?

Green bonds can be used to • Waste and pollution reduction • Climate adaptation
fund or refinance past or future • Sustainable land, biodiversity infrastructure
investments in a broad range of and water management projects • Information and
categories, including: and infrastructure communication technology
• Energy efficiency upgrades • Green buildings projects that reduce travel
• Renewable energy • Low-carbon transport
infrastructure

How will ESG performance shape your future? 31



What next?
Action in three areas is suggested for involved in ESG performance and companies — particularly those in
companies to meet the expectations strategy will also be critical. high-risk sectors — of how they might
of investors and ensure their ESG be affected by climate-related risks
For this connection to be of value,
performance plays a critical role in in the short, medium, and long term,
companies should also assess whether
the long-term response to the global and how they manage those risks in
their nonfinancial information is
pandemic: the future. Robust TCFD reporting
seen to be as credible as their
will be increasingly important as
1. Connect nonfinancial financial disclosures. This requires
governments, regulators, and society
nonfinancial reporting to be based on
and financial information as a whole look to companies to
specific, investor grade metrics that
accelerate the transition to a net-zero
The research shows that investors are valued by investors and enjoy
GHG emissions economy. The clamor
are concerned about the gulf that investor confidence. EY teams are
for disclosures on how businesses
often exists between financial and currently working on an approach
are planning to respond to physical
nonfinancial performance. Resolving that is designed to allow corporates
climate risks — as well as the risks
this is complicated by a lack of to identify, manage and measure
arising from the decarbonization
regulation related to the alignment the intangible assets, that are often
transition — will likely intensify.
of financial and nonfinancial the greatest contributors to an
information. To help close this gap, organization’s success — building out Critical actions include
investors can focus on building more the connection between tangible understanding the impact of climate
credible and nuanced approaches and intangible assets, and how they change — including 1.5oC, 2oC and
to understanding what influences contribute to long-term value creation 4oC scenarios — and assessing the
long-term value for given sectors and a purpose-driven strategy. resilience of their business strategies
and companies, while corporates in these different scenarios; capturing
can focus more on their materiality — 2. Build a more robust the opportunities associated
reporting on what environmental, approach to TCFD risk with decarbonizing the economy;
social and economic factors are most disclosures as the assessing avenues for accessing
relevant to their stakeholders that world transitions to and attracting capital; and driving
could impact their ability to create a decarbonized future strategy with appropriate tools, such
value over the longer-term. Closer as shadow carbon pricing across their
collaboration and understanding The research findings show that value chains.
between the finance teams involved there is a need for increased
in financial reporting and the teams focus and understanding among

Building a disciplined and connected

approach to nonfinancial reporting
will likely be key to meeting the
expectations of investors.

32 How will ESG performance shape your future?

3. Instill discipline into extensive experience in establishing
processes, controls, and assurance
nonfinancial reporting
of financial information — can bring
processes and controls
their best practices and experience to
to build confidence and trust bear. The input of CROs and their risk
ESG performance reporting generally teams can also be valuable, as can
lacks the rigorous systems and treasury function input where green
controls that characterize financial finance is involved.
reporting. This is compounded by the
fact that ESG reporting measures do
not conform to standardized metrics.
As a result, investors and corporates
cannot guarantee the accuracy Robust TCFD reporting will
and reliability of nonfinancial
reporting. Establishing effective become increasingly important as
governance practices and assurance
of nonfinancial processes, controls the transition to a net-zero GHG
and data outputs can build trust and
transparency. This is an area where
emissions economy accelerates.
CFOs and their finance teams — with

How will ESG performance shape your future? 33

 About this research
In February 2020, the EY Global Climate Change and Sustainability
Services (CCaSS) Team commissioned Longitude to conduct its fifth survey
of institutional investors to examine their views on the use of nonfinancial
information in investment decision-making.
Longitude and the EY CCaSS Team collaborated on writing the questionnaire, incorporating some repeated questions
from prior years along with a number of thematic questions on topics of near-term interest. In total, Longitude
collected 298 responses from senior decision-makers at buy-side institutions around the world. Demographic
highlights of the research program are below:

What is your title? In which of the following sectors do you invest

most heavily?
Managing director 25%
Financial services 55%
Chief investment officer 25%
Business services 34%
Chief operating officer 15%
Real estate 26%
Director of research 13%
Energy 22%
Portfolio manager 11%
Industrial 20%
Equity analyst 8%
Consumer products 18%
Manufacturing 15%
What type of institution do you work for? Mining and metals 14%
All of the above 11%
Bank 33%
Insurance company 26%
What are your institution’s assets under management?
Third-party investment management 11%
Private pension 10%
US$50b or more 13%
Family office 7%
US$10b to US$50b 19%
Public pension 5%
US$5b to US$10b 26%
Foundation 4%
US$1b to US$5b 22%
Endowment 3%
Less than US$1b 20%
Sovereign wealth fund 1%

Where is your position located?

EMEIA 44%
Asia 31%
North America 13%
Latin America 10%

34 How will ESG performance shape your future?

EY contacts
Mathew Nelson
EY Global CCaSS Leader
[email protected]
+61 3 9288 8121

Matthew Bell
EY Asia Pacific CCaSS Leader
[email protected]
+61 2 9248 4216

Velislava Ivanova
EY Americas CCaSS Leader
[email protected]
+1 720 289 1889

Christophe Schmeitzky
EY EMEIA CCaSS Leader
[email protected]
+33 1 46 93 75 48

How will ESG performance shape your future? 35

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