Published on: January 27, 2023
Authors: Megan Wolf
Topics: ESG and Diversity & Inclusion
Following more traditional items such as innovation and financial performance, ESG topics such as data security, corporate governance, and reducing greenhouse gas emissions round out the top five priorities for investors, according to PwC’s 2022 Global Investor Survey. However, investors have pointed to “effectiveness and reporting gaps” in these key ESG priorities which raise concerns for their ability to assess business risks and opportunities and ultimately allocate capital.
The study surveyed 227 global investment professionals and conducted extensive interviews with investors and analysts across five countries to gather insights into the macro issues that will impact company performance and gain clarity on what measures organizations should take to help investors.
ESG ratings and scores, sustainability disclosures and alternative data rank in the bottom three valuable sources used by investors to assess company performance. Investors say there is an underlying mistrust of these reports, with 87% saying there is at least “some greenwashing” and 46% indicating greenwashing occurs to a “large or very large extent.” About 7 out of 10 investors are looking for more comprehensive reporting, which would include information on:
- The financial cost to meet the sustainability goals the company established;
- The effects of sustainability risks and opportunities on the financial statement assumptions;
- The relevance of sustainability initiatives to the overall business model; and
- An understanding of the governance and oversight over sustainability risks and opportunities.
The importance of including environmental costs was found to be critical. Of investors who were asked their willingness to accept a lower rate of return on investment for a company that undertakes activities that have a beneficial impact on society or the environment, only 27% said yes, with 46% saying no and 28% “neutral.” The results of a similar question asking if a lower rate of return is acceptable if the company undertakes issues relevant to its business’ performance and prospects barely garnished more support, with 29% saying yes, 40% no, and a surprising 31% “neutral.”
Beyond the financial impact of investing in environmental goals, investors are overwhelmingly looking for assurance that ESG reporting measures up to a company’s audited financial statements and confirms the company “has actually done what it says it has done.” In addition, investors are looking for independent reasonable assurance opinions and subject matter experts that can provide external certifications to help ascertain the maturity of the company’s overall processes and provide professional skepticism.
Director, Practice, HR Policy Association and Center On Executive Compensation