How Asia-Pacific companies can bridge the ESG trust gap with investors

The Asia-Pacific findings in the latest EY Global Corporate Reporting and Institutional Investor Survey show a significant gap between what companies are reporting in their ESG disclosures and what investors expect. The research draws on two surveys – one of CFOs and finance leaders, and one of institutional investors. It shows that investors feel strongly that they are not getting the data-driven insights they require to evaluate a company’s growth and risk profile. It’s an information gap that threatens to stifle access to capital for many organisations and, ultimately, could hinder progress on decarbonisation.

Investors are critical of the way Asia-Pacific businesses are disclosing information about their sustainability activities – cherry picking what they choose to make public. Reflecting on the information they see companies in the region provide, three quarters (75%) of investors believe that Asia-Pacific organisations are “highly selective” about the information they provide.

A massive 91% of investors believe that, unless there is a regulatory requirement to do so, most companies will provide only limited decision-useful ESG disclosures. In particular, where businesses do make long-term investments in sustainability, 80% of investors say that they often fail to explain their rationale, making such investments hard to evaluate and raising concerns about greenwashing.

Instead, what investors want and need to see is how ESG strategies are actually bringing about positive change in the world .

Increasing scrutiny from investors who want to see more ESG action

The 53% of local executives who think investors are putting even more scrutiny on their performance against ESG goals are absolutely right. Asked about their level of scrutiny, 73% of investors said they are evaluating nonfinancial disclosures in a “structured and methodical” manner. Only 2% said they conduct little or no review.

When it comes to ESG, investors believe organisations should be playing the long game. According to the survey, almost three-quarters of the region’s investors (74%) say companies should invest in improvements relating to ESG matters – even if it dents their short-term profits. But only 58% of Asia-Pacific business leaders hold the same view.

The survey does highlight some common ground between businesses and their investors. Both sides agree on the weaknesses of current reporting standards, noting that issues include the:

?·??????Lack of requirements for supporting evidence

·??????Separation of ESG reporting from mainstream financial reporting

·??????Lack of forward-looking disclosure

Companies need to take immediate action to close the trust gap

To better meet investors’ expectations, our research shows that Asia-Pacific companies need to improve three aspects of their ESG reporting:

1.??????Focus – Investors are working to align their portfolios to net zero. Companies should respond with robust insights into the important opportunities and risks, including transition risk, physical climate risk and climate scenario analysis.

2.??????Accountability – Companies should meet investor requirements for robust governance and board oversight around sustainability. That might mean moving from ESG pledges to progress and results. Or it might mean a clearer focus on ESG stewardship. Investors also expect continual engagement with company leaders around the organisation’s material progress against sustainability goals.

3.??????Transparency – Companies should also respond to investors’ calls for more consistent, comparable and reliable ESG disclosures. This means getting ahead of emerging global reporting standards, improving ESG data quality and using assurance to build trust. In Asia-Pacific, 92% of investors believe it’s important that ESG reporting and data receives independent review and assurance.

A company’s sustainability disclosures provide vital insights to help the region’s investors understand the impact of sustainability issues on a business’s performance, risks and long-term growth prospects.

Asia-Pacific organisations that are serious about securing trust and a reputation for long-term ESG focus must ensure sustainability is built into their reporting processes – systemically, strategically and rigorously. Only then will we see investor skepticism in the region subsiding and businesses being recognised for their efforts to become more sustainable.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.