Investors “Failing to do Their Sustainability Homework”
Short-termist approach revealed in EY survey risks institutional investors missing out on opportunities presented by climate action.
By prioritising short-term performance of investee firms, institutional investors are undermining their long-term sustainability goals and ambitions, according to a survey of 350 asset managers, wealth managers, insurers and pension funds.
EY’s annual Institutional Investor Survey found the majority of investors believe ESG-related investments and initiatives are harmful to short-term corporate performance. As such, they are less likely to consider ESG factors as significant to their decision-making in the nearer term.
“Despite the significant growth in corporate reporting, our findings indicate a worrying discrepancy between the wealth of ESG information that investors have available to them and the actions they are actually taking,” Ben Taylor, Global Climate Change and Sustainability Services Partner at EY, told ESG Investor.
“We need to remember that [themes like] climate action can open the door to strong growth – but these opportunities are being easily missed by investors who aren’t doing their homework.”
Eighty-eight percent of investors said they have increased their use of ESG information over the past year, yet 92% said that other risks to near-term performance outweighs long-term ESG-focused benefits.
Unsustainable strategies
EY has branded this discrepancy the ‘say-do’ gap.
“A major reason why investors may not push for change is that they believe they are sufficiently diversified at a portfolio level in terms of their sustainability-related risks,” the report suggested.
Investors that are less concerned about risk diversification at an individual company level are more likely to encourage companies in unsustainable sectors to maximise value for as long as they can, rather than transition to more sustainable practices.
This short-term perspective exposes investors and their investee companies to serious transition risks, the report said.
“By closing the ‘say-do’ gap that we have seen emerge amongst the investor community, we will potentially see more capital flow into projects that can ensure long-term, positive outcomes for the planet,” said Taylor.
“Our hope is that investors take action – so that they can be part of the solution and rightfully place themselves at the centre of the drive for sustainability.”
Greater uptake
Other research suggests that institutional investors are increasing their ESG integration in the near term.
An investor survey conducted by the Morgan Stanley Institute for Sustainable Investing found that 78% of asset managers and 80% of asset owners expect their sustainable assets to increase over the next two years.
The firm polled more than 900 institutional investors across North America, Europe and Asia Pacific, noting that more than three quarters of asset owners either strongly or somewhat agree that sustainable investment offerings influence mandate decisions, with 80% requiring their asset managers to have a sustainable investing policy or strategy in place.
Active investment manager Capital Group published its fourth annual ESG Global Study in October, revealing that ESG adoption amongst surveyed institutional investors and global intermediaries is at an all-time high, with 94% of EMEA-based respondents having integrated ESG into their investment strategies – a one percentage point increase on the previous year.
Fifty percent said they expect to increase allocations to multi-thematic ESG strategies over the next two to three years.
Closing the gap
The EY report attributed the ‘say-do’ gap to short-term economic volatility and ongoing challenges procuring robust ESG-related data from portfolio companies.
Nearly two thirds (63%) of investors surveyed said shifts in the business cycle – such as periods of recession or slower economic growth – are more likely to acutely or substantially affect their institution’s investment strategy over the next two years.
“Many of the world’s biggest economies are only expanding at an anaemic rate while their governments wrestle with budget deficits and spiralling debt burdens – a scenario that is already leading some to levy higher taxes on businesses,” EY said.
Sixty-two percent of investors said they are more likely to monitor trade restrictions and tariffs, 53% cost of capital, and 50% labour cost and availability. However, investors’ monitoring of trade restrictions and tariffs – such as the EU’s Carbon Border Adjustment Mechanism – may also reflect their interest and management of climate risks, the report noted.
Investors responding to the survey also highlighted concerns about the materiality, comparability and accuracy of sustainability reporting, with 36% dissatisfied at the progress made by companies in delivering new non-financial performance reporting.
“Public reputation is a factor too, with the issue of greenwashing undermining the trust and credibility of sustainability targets,” said Taylor.
Mindset shift
Almost nine in ten (85%) investors told EY greenwashing is a bigger problem than it was five years ago.
“To improve this, companies should engage with investors to understand what evidence and information is material to them, as well as how they use the information in their frameworks,” said Taylor.
“This knowledge will help companies accurately align their reporting with investor expectations.”
It is imperative that the ‘say-do’ gap is closed to ensure the realisation of their long-term sustainability goals, he added.
“We need to ensure higher standards of materiality, comparability and accuracy of companies’ ESG data, as well as independent auditing of sustainability reports,” Taylor noted.
“However, both of these elements are redundant without a mindset shift from short-term earnings to long-term climate commitment. Tides are turning, and investors who fail to transition and integrate sustainability more broadly into their portfolios, including short-term investments, will fall behind others who have the foresight to move more quickly.”
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