Environmental, social and governance (ESG) factors increasingly drive investment strategies, and new research from PwC finds ESG has now become a make-or-break consideration for leading investors globally. Almost half of investors surveyed, 49%, express willingness to divest from companies that aren't taking sufficient action on ESG issues. Almost six out of ten (59%) also say the lack of action on ESG issues makes it likely that they would vote against an executive pay agreement, while a third say they have already taken this action. A large majority, 79%, confirm that the way a company manages ESG risks and opportunities is an important factor in their investment decision-making.
The PwC Global Investor ESG Survey 2021, captures the views of 325 investors from around the world, who are primarily active asset managers and analysts with investment firms, investment banks or brokerage firms, including some participants based in Ireland. An additional 40 in-depth interviews were conducted globally with investors and analysts having more than a combined US$11.6 trillion assets under management.
While most investors are likely to take action if companies are not doing enough to address ESG issues, most also say that they don't want a company's action on ESG to significantly, if at all, impact their investment returns. The vast majority, 81%, said they would accept no more than one percentage point less in investment returns for pursuit of ESG goals; nearly half, (49%), were unwilling to accept any reduction in returns.
Trish Johnston, Asset Management Leader at PwC Ireland said: "Our research shows that investors are simultaneously focused on short-term results as well as the long-term societal issues that can create both risks and opportunities for their investments. It is clear that investors expect ESG to be an integral part of corporate strategy. That includes making expenditures to address ESG issues, while clearly communicating the rationale and benefits to the business strategy. If investors don't see that commitment, they won't hesitate to take action and that can include divesting their position in a company and taking their clients' money elsewhere. With Ireland being a leading global asset management centre, we expect the results in the survey to resonate among Ireland's investment community also".
Investors increasingly want to hear more from companies about their ESG-related commitments – 83% surveyed said that it is important that ESG reporting provides detailed information about progress toward ESG goals. Greater engagement with investors is critical, along with transparent, trustworthy reporting. It is concerning that only one third (33%) of investors surveyed, on average, think that the quality of ESG reporting they are seeing is good. Simply put, much of today's ESG reporting lacks relevant, timely, complete and comparable information—such that stakeholders cannot easily differentiate between companies on ESG-related performance—making capital allocation decisions difficult for all in the ecosystem. Investors gain greater confidence in ESG reporting that has been assured – 79% of those surveyed said they place more trust in ESG information that has been assured, and 75% think it's important that reported ESG-related metrics are independently assured.
A consistent set of metrics for measuring ESG performance would be of significant benefit to investors, according to the survey. Nearly three quarters (74%) said their decision-making would be better informed if companies applied a single set of ESG reporting standards, and a similar number (73%) say it's important to be able to compare ESG performance across companies.
Olwyn Alexander, Global Leader for Investment Management at PwC commented: "Our survey reinforces the need for a single set of globally aligned sustainability reporting standards. Without global standards, investors are severely challenged in evaluating ESG performance. It is also much more difficult for companies to report on ESG performance without common benchmarks or frameworks to follow. As a result, companies today need to leverage the best of existing standards, focusing at least initially on the topic of climate, to respond to urgent investor demand".
Climate is the leading ESG consideration for investors surveyed, with reducing Scope 1 and 2 greenhouse gas (GHG) emissions being the most cited (by 65%) ESG issue for companies to prioritise. What's more, 82% of investors said it is important that ESG reporting explains the rationale for environmental commitments, along with detailed plans on how to reach them. Ensuring worker health and safety (44%) and improving workforce and executive diversity, equity and inclusion (37%) are other priority ESG considerations identified.
According to the investors surveyed, ESG strategy starts at the top. A high percentage of investors (82%) said ESG needs to be embedded in the corporate strategy, and by a wide margin (66%) respondents said they are most confident ESG issues are being addressed if someone in the C-suite is accountable. More than half of those respondents (53%) think it should be the CEO.
Olwyn Alexander concluded: "ESG cannot be an afterthought, it must be an integral part of corporate strategy. Tone from the top helps to cascade the importance of ESG throughout the business. Demonstrating ESG commitment and performance also requires a holistic approach to reporting, with sustainability, risk and financial reporting teams working together. Ultimately, our research shows that to meet the demands of investors, companies need to take their ESG-related performance as seriously as they do all of their business and financial metrics".
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