Even for Institutions, Investment Decisions Go Beyond Money

Institutional investors share motivations for considering environmental, social or governance factors in investment decisions

Most institutional investors are incorporating non-financial information in their investment decisions to some degree. Most institutional investors are incorporating non-financial information in their investment decisions to some degree.

Almost 90% of institutional investors sometimes consider nonfinancial information when making investment decisions, a report released Tuesday by EY found. The survey of 163 institutional investors found 89% said nonfinancial information played a “pivotal role” in at least one decision in the past 12 months.

Among investors who don’t consider nonfinancial information like environmental, social or governance factors in their investment decisions, half said it was because they were not sure it would have a material impact.

The survey, “Tomorrow’s Investment Rules,” was conducted by Institutional Investor magazine for EY in September. Respondents were predominantly from North America and include third-party investment managers, banks, pension funds, foundations, endowments, sovereign wealth funds, insurance companies and family offices. Almost 60% of respondents were at firms with at least $10 billion in assets under management.

While two-thirds of investors who incorporate nonfinancial information in their decision-making process have some sort of technique to do so, only half of those have a structured process in place.

Investors favored annual reports, integrated reports and company websites as sources of nonfinancial information over third-party indexes, however, many shared frustrations over which issues would have the biggest impact on shareholder returns.

“What investors are telling us is that they’re using nonfinancial information to inform their decision-making – whether or not the companies are providing it themselves,” Dr. Matthew Bell, EY Australia climate change and sustainability services partner, said in a statement. “They’ve also identified weaknesses in current reporting, and so companies now need to consider a more structured approach. By using an integrated framework companies can report what is material to them, provide further information, and point to where an investor may find the raw or unabridged data that bigger investment teams will find useful.”

Despite what you might think, investors aren’t investigating nonfinancial information to ensure it’s in line with personal values; at least, not many of them. The most important nonfinancial issue was the impact regulation had on business for more than half of respondents. Just 17% of respondents said a firm’s personal values were “essential” information they needed as an investor.

Almost 36% said they wanted that data to help minimize risk. In fact, the investing stage where many investors look for nonfinancial data indicates it is part of a “general risk-weighting assessment,” according to the report. Eighty-eight percent of respondents said they take environmental, social and governance factors into account “frequently or occasionally” when examining industry dynamics and regulation. More than 86% do so when examining the risk of an investment and how long to hold it.

More than 42% of respondents said they would rule out an investment if it lacked a clear strategy to create value in the future. Thirty percent said a history of poor governance would make them unwilling to invest, and nearly 22% said the same of investments with human rights risks from operations.

Other issues might cause investors to reconsider a particular investment, but wouldn’t necessarily rule it out entirely. Almost three-quarters said unaddressed risk in the supply chain would cause them to reconsider, but only 12% said it would rule the investment out. More than half said risk from climate change was cause for concern, but just 8% said they would walk away from such an investment.

About 48% of respondents were based in the United States and Canada, but only 15% of that group said a firm’s nonfinancial information "frequently played a pivotal role" when making investment decisions. More than 30% of respondents from the rest of the world agreed.

Of respondents who do look for nonfinancial information, most came from emerging-market countries. The report found 70% of institutional investors who said they “frequently or occasionally” use that kind of data are based in emerging markets, compared with 49% of investors in developed markets.

Risk management was a big factor in analyzing nonfinancial information overall, but the report found it was especially important to investors outside of developed markets. Emerging-market investors called nonfinancial information “essential” to decision making by a wide margin: 43% compared to 29% of developed-market investors.

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