Differences Between Corporates and Investors Are Creating Gaps Around Environmental, Social and Governance (ESG) Disclosures, According to a New PwC Report
With Environmental, Social and Governance (ESG) Reporting Becoming Increasingly Common Among Corporates, Investors Are Looking for Better Quality and Transparency
Investors are increasingly interested in a company’s non-financial disclosures – and while environmental, social and governance (ESG) reporting has become mainstream for companies, there is a disconnect between what companies are disclosing and what investors actually want to know, according to PwC’s new report.
“The percentage of S&P 500 companies issuing sustainability reports has jumped to 80 percent in 2015 compared to 20 percent in 2011,” said Sara DeSmith, US Sustainable Business Solutions Assurance Leader at PwC. “With this increased reporting comes added expectations from investors on what these findings mean for them when taking stake in a company. The stakes are high for both parties, and it’s necessary to bridge that gap to figure out the best way to work together on this initiative moving forward.”
The report, which is based on responses from both institutional investors and companies to gauge sentiment on ESG issues, uncovered key findings around the following themes:
- Investors and corporates agree that ESG considerations are important, but the level of importance differs. Sixty-five percent of corporates said ESG considerations are “very important” to the company’s core strategy, compared to 31 percent of investors who say considerations are “very important” in their equity investment decision making.
- Current ESG information disclosures are not as valuable as they could be. More than nine out of ten investors (92 percent) said that companies are not disclosing ESG information in a way that allows easy comparisons, while 60 percent of corporates say the data disclosed is helpful. Instituting a commonly recognized and widely understood standard was named a potential solution.
- Several perception gaps are getting in the way of disclosure. Limited data and the perception that investors don’t use the information provided were the two big areas getting in the way of disclosure, according to respondents. Twenty-nine percent of corporates said their companies only have limited data to share while 29 percent of investors say that companies think investors won’t act on the information given to them, so disclosure isn’t important. Additionally, there was a big difference in opinion on the quality of what is being reported. All of the corporations surveyed said they were confident in the data they were releasing, but less than 30 percent of investors felt that way.
- Standardizing and certifying ESG disclosures could help boost confidence in reporting. There is no common framework or set of standards for ESG disclosures: 80 percent of corporates currently report using GRI’s standards, while 43 percent of investors would prefer them to follow SASB’s standards, further contributing to the disconnect.
Investors also expressed an interest in improving the quality of ESG information. Having the information certified or audited by an independent third party is one way. Thirty-six percent of investors said this would increase their confidence, compared to 43 percent of corporates. Thirty-six percent of investors also noted that having information incorporated into SEC filings to signal higher quality would help the case.
“Investor engagement is a critical tool, and companies should be having discussions with shareholders about ESG issues, listening to their concerns, and acting on their feedback,” said Paula Loop, Leader of the Governance Insights Center at PwC. “Companies need to tell a compelling story about their ESG endeavors to investors who want to know how these efforts are impacting the company’s risk profile and long-term growth.”
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