Institutional investors see a heightened risk in companies with human rights and climate change issues

A bushfire in Lancefield near Melbourne. Scott Barbour/Getty Images

Profit and loss and a strong balance sheet are not the only measures of a company’s health.

Non financial issues, including the environment and human rights, are becoming more of a focus for institutional investors when they decide whether to back a company or not.

And many companies are failing to disclose these types of performance risks, according to an EY survey released today.

Tomorrow’s Investment Rules 2.0 is EY’s second annual survey of more than 200 global institutional investors about their decision-making.

Nearly two-thirds (63.6%) believe companies don’t adequately disclose the environmental, social and governance risks which could affect their current business models.

At 82.6%, institutional investors in Australia are the most likely to see non-financial data as relevant across all industry sectors.

The top areas causing investors to reconsider investments are a risk or history of poor environmental performance (75.6% would reconsider the investment) and not addressing risks in the supply chain (72.6% would reconsider).

But the greatest increase in focus for investors is climate change and human rights.

In Australia, Transfield’s share price has been dragged down over reported human rights violations against asylum seekers at asylum seeker detention centres run by the company on behalf of the Australian government. The shares have gone from a high of $1.80 this year to a low of 91 cents and are currently trading at $1.14.

The HESTA industry super fund sold its 3.5% stake in Transfield as a consequence.

The findings of the EY survey are a clear signal that investor expectations and attitudes to non-financial reporting have shifted, says Dr Matthew Bell, EY Oceania’s climate change and sustainability leader.

“There is an enormous opportunity for companies to capitalise on a growing thirst for integrated and value-driven reporting, that demonstrates just why their business will create value and provide returns for shareholders in the longer term,” says Bell.

“Companies that are able to provide the type of non-financial information that investors want may enjoy greater investor attention and, ultimately, be better positioned to attract and retain investors’ capital.”

The survey also revealed a sharp focus on stranded assets, unanticipated or premature write-downs. These are increasingly a risk in nearly every industry but most recently associated with the energy and resources sectors, where steep falls in commodity prices have meant big write-downs in assets.

Nearly two-thirds (62.4%) expressed concern over stranded asset risk and more than a third (35.7%) said their funds had divested holdings of a company’s shares in the past year due to the risk of stranded assets.

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