The link between ESG and investment

EY suggests a poor track record on sustainability could scare away investors as much as it does consumers.

New research from EY Canada suggests that investors are increasingly looking to environment, social and corporate governance practices to guide their investment decisions.

The survey polled senior decision makers at banks, insurance companies, pension funds and other investment companies globally. And the findings show that they are overwhelmingly looking to send investments to companies that can prove they are making progress on sustainability and social goals.

In Canada alone, 74% of institutional investors say they are more likely to divest from companies with poor ESG track records, with 86% saying new investments will be going to companies that have aggressive carbon reduction plans or a low carbon footprint already. Overall, 90% of investors feel ESG performance is a more important factor in their decisions than it was before the pandemic, with 92% saying at least one investment decision they’ve made in the last year was based on the potential of a “green recovery.”

There has been pressure on companies to improve their sustainability and social good practices, at least partially in response to consumer demand and for the sake of brand perception. Some companies have been increasingly vocal about their ESG efforts, like Telus making it a key part of its brand identity or Brown Forman creating an entirely new agency assignment to communicate their impacts. Media company Corus recently hired a new leadership position dedicated to ensuring these efforts are applied across its lines of business.

But these efforts from the marketing department might not just have an impact on consumer perception. Thibaut Millet, climate change and sustainability services leader at EY Canada, says among the pressure on companies, there is a similar pressure on investors in response to demand from their stakeholders.

However, there is concern that there are not enough quality disclosures for investors to be confident that they are meeting that demand. Half of respondents don’t believe companies are reporting adequately on financially relevant ESG issues, with 89% calling for mandatory global standards.

In the meantime, that lack of a consistent framework is leading to a delay in investors acting on their environmental intent. Only 49% say they have updated their investment policies to reflect ESG priorities, with 44% having changed their risk management strategies.

“While quality nonfinancial disclosures and a clearer regulatory landscape — coupled with more sophisticated data analytics capabilities — are important to realizing the full potential of ESG performance, companies cannot wait,” Millet says. “There needs to be bolder steps taken all on fronts to put ESG performance at the heart of decision-making.”