Companies Ignore ESG Risks at Their Peril

Publicly traded companies that aren’t reporting on how they’re addressing environmental, social and corporate governance (ESG) risks could end up losing access to capital, according to recent surveys of institutional and retail investors.

Overwhelming Majority of Institutional Investors Favour Good ESG Disclosure

A November report from EY that surveyed institutional investors around the world found the overwhelming majority (86%) said companies with a strong ESG program and performance “would have a significant and direct impact” on their investment decisions.

As a result, the quality of ESG disclosure is more important than ever. EY found that 78% of institutional investors are now conducting a “structured, methodical evaluation of nonfinancial disclosures,” compared to only 32% in 2018. This means companies cannot be lax in their ESG reporting. Disclosure should provide meaningful, material information on the risks and opportunities a company faces.

Environmental risks continue to attract significant attention from the investment community, with climate change topping the list, as 90% of investors said they favour companies with specific decarbonization plans and approaches, and 86% are looking to invest in companies with aggressive strategies to reduce their carbon footprint.

In terms of the timeframe that sustainability disclosure typically covers, the survey found 51% of institutional investors were dissatisfied because companies often fail to explain how they are delivering long-term value, and instead focus too heavily on short-term profits. Half of the investors surveyed said ESG disclosure lacked details on material issues that really matter.

Companies’ commitment to ESG is increasingly under the microscope, and specifically in terms of organizational structure, EY reported, with 53% of investors saying they evaluate whether a company’s key ESG team members report directly to the CEO. Just over half (52%) of investors said they want to see a company’s culture aligned with its ESG goals.

Retail Investors Continue to Show a Preference for Responsible Investments

The interest in ESG isn’t limited to institutional investors. A December survey from the Responsible Investment Association (RIA) found that retail investors in Canada are also demanding greater accountability from corporations, particularly on environmental issues.

Eight-five per cent of retail investors surveyed by the RIA agreed that corporations should set goals to achieve net-zero emissions by the year 2050, and 80% said they wanted investment fund managers to engage with companies to reduce their carbon emissions.

A strong majority (78%) of investors said they wanted at least some of their portfolio allocated to companies that are providing solutions to reduce carbon emissions, and 77% said they wanted their investment advisers to recommend products that are aligned with their values. Overall, 73% of people surveyed by the RIA said they were interested in responsible investment options.

Canadian retail investors also expressed significant interest in corporations working with Indigenous communities to achieve environmental goals, with 70% saying companies should engage with Indigenous Peoples on decisions involving future energy transitions.

What Does This Mean for Publicly Traded Companies?

For public issuers, the need to provide detailed, meaningful ESG disclosure has never been more urgent. With institutional and retail investors demanding better disclosure, your ability to access capital and attract investment will depend on the strength of your ESG strategy.

The lawyers in the MLT Aikins ESG practice group have significant experience advising clients in a broad range of sectors, including carbon-intensive industries such as energy and mining, on developing ESG strategies and identifying ESG risks and opportunities. Learn more about our ESG service offering.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.