Investors wary of portfolio companies’ ESG reports

Most institutional investors say companies cherry pick data, raising greenwashing worries

Big investors and the companies in their portfolios are on different pages when it comes to sustainability, a recent report from EY found.

Expectations about sacrificing short-term performance for better long-term returns, as well as how decisions involving ESG are disclosed have led to rift in communication, according to The EY Global Corporate Reporting and Institutional Investor Survey.

Institutional investors want companies to focus on sustainability for better long-term results. But the financial leaders at those companies often say short-term performance takes priority.

“Investors are much more likely to favor decisions that lead to sustainable, long-term value creation even at the expense of short-term earnings shortfalls, but finance leaders are much less inclined to make that trade-off,” the report read. “The research specifically found that over three-quarters [78%] of investors think companies should make this trade-off, but only around half [55%] of finance leaders are prepared to take this long-term stance.”

Further, the information investors are getting from portfolio companies is not what they want, according to results of the survey. And even while that information is lacking, nearly all, 99%, of investors surveyed said they rely on companies’ ESG disclosures in their overall investment decision making, up from just 32% who said the same in 2018.

Certainly, it is now more common for companies to report ESG data – but investors say that the information is cherry picked, EY found. In that regard, 88% of investors agreed that “unless there is a regulatory requirement to do so, most companies provide us with only limited decision-useful ESG disclosures.”

Worse, 76% of investors said that “companies are highly selective in what information they provide to investors, raising concerns about greenwashing.”

Highlighting the difference in expectations is another apparent breakdown in communication. Eighty percent of investors said that many companies don’t articulate their reasons for making long-term investments in sustainability, which makes those investments difficult to evaluate, EY’s report noted. But 53% of the big companies said investors’ short-term earnings expectations make it difficult for them to consider investments to improve sustainability.

“This disconnect could potentially undermine the smooth running of capital markets, the collective battle against threats such as climate change, and the trust that is necessary between a company and its stakeholders, including customers, employees and communities,” the report noted.

To address that, the consulting firm suggested companies find ways to communicate opportunities and risks around climate change and the energy transition to investors that have net-zero goals.

The report is based on survey responses from 1,040 senior finance leaders and 320 institutional investors globally.