A significant percentage of investors around the world are paying more attention to companies’ environmental, social and governance (ESG) performance when making investment decisions and may divest from firms with poor environmental track records, says a survey.
According to the 2021 EY Global Institutional Investor Survey, 74 per cent of institutional investors now more likely to “divest” based on poor ESG performance, than before the COVID-19 pandemic.
The report, now in its sixth year, canvasses the views of 320 institutional investors across 19 countries, including 15 respondents from India.
According to the report, 92 per cent of investors said they have made decisions over the past 12 months based on the potential benefits of a “green recovery”.
“It’s clear that the COVID-19 pandemic has spurred investors to place more emphasis on ESG performance. There are positive signs that this is starting to translate into action, although both companies and investors need to take bolder steps to put ESG performance right at the center of their decision-making,” said Marie-Laure Delarue, EY Global Vice-Chair Assurance.
There are also clear intentions among the majority of investors, to look more closely at ESG risks across their portfolios and investment targets in the future.
More than three-quarters (77 per cent) of those surveyed say that, over the next two years, they plan to step-up their analysis of “physical” risks the impact of climate change on a business’ ability to provide its products and services.
This is an increase from 73 per cent in 2020.
Similarly, 80 per cent will be doing more to evaluate “transition” risks which are the market impacts that might result from the move to a low carbon economy up from 71 per cent in 2020.
“ESG performance is gaining pace in India with Business Responsibility and Sustainability Reporting (BRSR) mandatory for listed companies starting FY23.”
“It is therefore key for investors and businesses to keep ESG and sustainability at the centerstage of their overall organizational agenda, helping them analyze and enhance the non-financial performance of their businesses,” Chaitanya Kalia, EY India Climate Change and Sustainability Services Leader said.
The report, however, noted that despite the sharpened focus on ESG performance and ambitions to do more, institutional investors have been relatively slow to make concrete changes to the way they operate.
Just 49 per cent have taken action to update their investment approaches and only 44 per cent have revamped their risk management strategies.
Only 44 per cent believe that they have a “highly mature” approach in relation to climate risk, it said.
Moreover, many investors are concerned about the quality and transparency of ESG reporting on the part of the companies that they consider.
Half of those surveyed (50 per cent) say they don’t believe companies are reporting adequately on financial material issues, a marked increase from 37 per cent in 2020.
However, there is a clear hope that the introduction of global standards will help on this front and 89 per cent of the investors surveyed said they want these standards to become mandatory.