Investors say ESG backlash no excuse for lack of corporate disclosure

The politicisation of ESG is no excuse for corporates to roll back on disclosure, according to investors responding to the latest annual benchmark policy survey by proxy adviser Institutional Shareholder Services (ISS).  

Eighty-five percent of investor respondents to the survey, the results of which were released on Tuesday, said they “would not be tolerant of reductions in transparency”. 

By contrast, 51 percent of “non-investors”, predominantly companies, said they would be “tolerant with lack of transparency on sensitive topics”. 

In April, Responsible Investor reported that ISS had shifted position on a reproductive rights proposal, citing risks posed to Coca-Cola by being too explicit on the topic in the US. 

“On balance, the risks stemming from issuing the requested report appear to be greater than the risks to the company associated with its current disclosure and practices,” it wrote. 

ISS received 455 responses to this year’s survey, with 239 coming from institutional investors, 24 percent of which were asset owners. 

The survey is part of the Maryland-based firm’s annual policy development process. Later this month, ISS will release and consult on draft policy updates.  

Materiality assessments

The survey also revealed that just 6 percent of investors agreed with the assertion that materiality assessments should be “limited to factors that can be expected to have a direct financial impact on the company in question and its shareholders”.

Those supporting this response also agreed that they did not generally expect environmental and social factors to have an impact on financial performance.

Last month, the chair of ISSB Emmanuel Faber questioned what he called the “simplistic” double materiality approach being pursued in Europe, which factors companies’ external impacts into disclosure requirements.

ISSB, which is seeking to create a global baseline for corporate sustainability standards, focuses solely on financial materiality.  

Yet 75 percent of investors responding to ISS’s survey said that materiality assessments should include companies’ expected impacts on society and the environment. Thirty-one percent said that even impacts “not expected to financially impact the company” should be included.  

Meanwhile 44 percent said that impacts should be limited to externalities expected to impact firms’ financial position “in the medium to long term”. 

There was a clear region dimension to the topic, ISS revealed. Close to 90 percent of investors located outside the US said materiality assessments should include the company’s environmental and social impacts to some extent. For US-based investors, the figure was 58 percent.  

Only one respondent outside the US said they did not believe environmental and social issues would financially impact the company, compared to 13 percent of US-based ones. 

Despite growing pessimism on the probability of limiting global warming to 1.5C, 61 percent of investors still believe it is the “acceptable” scenario for corporate target setting, the survey found.

Around half of investors also said they believed ISS’s benchmark policy should be applied consistently at companies irrespective of where they operate when it comes to climate (54 percent), biodiversity (51 percent) and human rights (56 percent).