The Top Three NON-Financial Reasons Why Investors Say No to Deals

by Marta Maretich, Chief Editor @maximpactdotcom

Non-financial disclosure, including information about environmental, social and governance behavior (ESG), is becoming more important to large investors, new research shows, and this is affecting the way they choose investments.

Impact investors and other players in the social investing arena are already committed to non-financial reporting, but research from Ernst and Young (EY) suggests that today more big institutional investors are considering non-financial alongside financial information when they make decisions about where to place capital.

The EY survey canvassed the opinions of 163 institutional investors including portfolio managers, equity analysts, chief investment officers and managing directors, half of them from organizations with assets under management of over $10 billion. When asked which non-financial factors would cause them to “rule out or reconsider investments”, their answers are revealing:

1. The company lacks a clear strategy to create value in the short, medium and long term.
93.8% of those surveyed ranked this as their top reason for rejecting or reconsidering a deal. Most company reports concentrate on past performance and ignore the vital area of future performance. While past performance helps potential investors judge risk, it says nothing about the company’s plans for future value creation. Leaving this non-financial information out of reports is a fatal mistake for companies seeking investment.

2. The company has a history of poor governance.
96.3% of respondents cited this as a reason for saying no to an investment or thinking twice before committing to it. Inadequate governance is an important source of risk, so investors scrutinize the governance structures and processes of potential investees as well as their arrangements for executive pay. If they don’t see evidence that a company maintains healthy governance practices, they’re likely to walk away.

3. Risk or history of poor environmental performance.
86.4% of those surveyed said a poor record in this area would influence their view of the company negatively. Responses varied across industries, however: those closest to consumers, such as financial services and consumer products, said a poor environmental performance would make them “rule out an investment immediately”. Others, such as manufacturing and energy, said it would make them “reconsider”.

So what lessons do these findings hold for the social finance and impact investing sectors?

The EY report focuses on the attitudes of some of the largest institutional investors, but its conclusions indicate a changing culture for investors and companies everywhere.

In the future, non-financial performance and non-financial reporting will be more important than ever in most industries and in most parts of the world. More comprehensive reporting that includes both financial and non-financial disclosure looks set to become the norm—the IIRC’s Integrating Reporting approach is one example of the trend.

This means that companies that develop their skill in non-financial areas such as value creation, governance and environmental stewardship — and those who learn to demonstrate that performance though comprehensive reporting — will be more attractive to investors of all kinds.  This is something both investors and business leaders should be thinking about as the social investing movement continues its progress toward the mainstream and we shift into the next phase of building our financial future.

More findings from the EY report.
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[Credit Images: 123RF]

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