A growing body of research confirms that investors around the world are incorporating environmental, social and governance (ESG) issues into their investment decision-making.1 Adding to the evidence, a recent study of institutional investors in Canada found that investors do consider ESG issues when making investment decisions. And that’s not surprising considering the growing evidence that sustainability is linked to corporate performance.2
But investors have made it clear they’re not getting the information they need from companies’ securities filings or from their CSR reports. What they want is a clear link between ESG issues and a company’s strategy, risk management and operations.
This doesn’t mean Canadian companies aren’t already considering ESG issues in their corporate strategy, risk management and operational context, and even in their executive compensation programs. What it tells us is that it isn’t coming through in their reporting.
We surveyed a group of 24 institutional investors representing over $1.7 trillion in assets under management, including some of Canada’s largest pension funds, mutual and pooled funds and other investment managers. The survey was completed by members of the investment team (40%), senior management (30%), the governance team (20%), and one board director. Key takeaways are:
- 65% of investors often or always consider environmental and social issues, and 95% consider governance issues for all investments.
- Investors want to see a clear link between ESG issues and corporate strategy, risk management and operational context.
- 75% said they prefer to get ESG information from third parties, but that they’re not getting what they need to understand materiality.
- Only 30% of investors find the ESG information companies provide good enough to help them assess materiality to the company’s business.
- 85% agree or strongly agree that the quality of ESG disclosure has an impact on their perception of management and/or the board.
What This Tells Us
The study made it clear to us that there’s a gap between the ESG information companies are providing, and what Canadian investors need to know to make informed investment decisions. So what’s the solution?
There are different ways to approach it. One is to include material ESG metrics in the 10-K or MD&A. The Sustainability Accounting Standards Board (SASB) has already issued provisional sustainability accounting standards for 90 industries in 11 sectors, and a guide for companies to implement them in their 10-K reports.3 The Global Reporting Initiative (GRI) is also providing guidance on materiality.4 Another is to publish an integrated report following the principles of the International Integrated Reporting Council (IIRC). But to date, very few North American companies have taken the leap.
While the concept release issued by the U.S. Securities and Exchange Commission in April 2016 is encouraging,5 it’s likely going to be a while before there’s any change in regulations in the U.S. or in Canada.
So we think investors should be letting companies know what will help them the most. We also think that companies can and should be taking a critical look at their own reporting – MD&A or 10-K, proxy and CSR reports – to make it consistent and useful to the people who rely on it.
Click here to read the full report.
The 2016 Canadian investor survey was developed by representatives of the following organizations:
• SimpleLogic Inc.
• RR Donnelley
• Canadian Coalition for Good Governance
• Clarkson Centre for Business Ethics and Board Effectiveness, Rotman School of Management
• CPA Canada
Catherine Gordon is President and Founder of SimpleLogic Inc., a communications firm that has been bringing clarity to business communication since 1997.
1 Unruh, D. Kiron, N. Kruschwitz, M. Reeves, H. Rubel, and A.M. zum Felde, “Investing for a Sustainable Future,” MIT Sloan Management Review, May 2016. 2) 2015 study of Environmental, Social and Governance (ESG) Survey. June 2015. 3) https://www.cfainstitute.org/ethics/Documents/issues_esg_investing.pdf. 4) Principles for Responsible Investment member statistics: https://www.unpri.org/about.
2 Corporate Sustainability: First Evidence on Materiality. March 9, 2015. Khan, Mozaffar and Serafeim, George and Yoon, Aaron. hbswk.hbs.edu/item/corporate-sustainability-first-evidence-on-materiality. From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance. March 5, 2015. Clark, Gordon L. and Feiner, Andreas and Viehs, Michael. http://ssrn.com/abstract=2508281
5 SEC Concept Release on Business and Financial Disclosure Required by Regulation S-K – SASB commentary http://www.sasb.org/wp-content/uploads/2016/05/Reg-SK-Key-Messages-FINAL.pdf