ESG 'make-or-break' factor for leading investors: PwC

Dive Brief:

Almost half (49%) of asset managers and other top investors worldwide are willing to divest of companies that fail to sufficiently follow environmental, social and governance (ESG) best practices, according to a survey by PwC. “ESG has now become a make-or-break consideration for leading investors globally,” PwC said.
Fifty-nine percent of the survey respondents said they would likely vote against a pay agreement for an executive who fails to address ESG issues, and 79% said the way a company handles ESG risks and opportunities is an important factor in their decision-making. PwC surveyed 325 asset managers and analysts at investment firms or brokerages and conducted interviews with investors and analysts managing more than $11.6 trillion in assets.
“It is clear that investors expect ESG to be an integral part of corporate strategy,” according to James Chalmers, global assurance leader at PwC U.K. “That includes making expenditures to address ESG issues, while clearly communicating the rationale and benefits to the business strategy.”

Dive Insight:

Corporate boards are sharpening their focus on ESG best practices as investors intensify scrutiny on sustainability policies and the Securities and Exchange Commission prepares proposals for mandatory disclosures on climate risk and workforce, according to surveys by BDO and PwC.

The proportion of directors who say their companies have linked ESG to business strategy surged to 64% this year from 49% in 2020, PwC said in an earlier report last month, citing a survey of 851 directors. Seventy-three percent of directors are focused on keeping up with regulatory guidance on ESG, according to BDO, which surveyed 230 directors. Both surveys ranged across industries.

CFOs aiming to step up their commitment to ESG principles must pick from a muddle of more than 15 inconsistent ESG reporting frameworks that vary in detail and scope.

“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,” according to Nadja Picard, global reporting leader for PwC Germany.

Only one-third of investors believe the quality of ESG reporting is good, and 74% said they would make more informed decisions if companies used a single set of ESG reporting standards, PwC said, adding that 73% of respondents underscored the importance of being able to compare companies’ ESG performance.

“Our survey reinforces the need for a single set of globally aligned sustainability reporting standards,” Picard said.

“Without global standards, investors are severely challenged in evaluating ESG performance,” Picard said. “It is also much more difficult for companies to report on ESG performance without common benchmarks or frameworks to follow.”

The International Financial Reporting Standards Foundation is creating a panel to draw up global sustainability disclosure guidelines. It plans to describe progress in forming the so-called International Sustainability Standards Board at COP26, a U.N.-sponsored climate change conference in Glasgow ending on Nov. 12.

Eighty-two percent of investors say corporate leadership needs to weave ESG into business strategy, and two-out-of-three respondents said they are most confident a company is acting according to sustainability principles if a C-suite executive is held accountable, PwC said.

“Tone from the top helps to cascade the importance of ESG throughout the business,” according to Emma Cox, global climate leader at PwC U.K.

“Demonstrating ESG commitment and performance also requires a holistic approach to reporting, with sustainability, risk and financial reporting teams working together,” Cox said. “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.”

While calling for ESG best practices, 81% of investors said they would accept no more than a one percentage point reduction in investment returns from the pursuit of sustainability goals, PwC said.

“Investors are simultaneously focused on short-term results as well as the longer-term societal issues that can create both risks and opportunities for their investments,” Chalmers said.