Two third of investors show dissatisfaction over disclosures

MANAMA: Around 66% or two third of investors are worried about sustainability disclosures, says a BofAML report.

In April 2016, the SEC issued a “Concept Release” to solicit feedback from investors on modernizing the financial disclosure requirements in Regulation S-K. According to SASB, the SEC had received 227 original letters as of July 25, 66% of which pertained to sustainability disclosures, while only 11 of 341 pages of the Concept Release discussed the subject. 85% of sustainability-related letters called for improved disclosure of sustainability issues in SEC filings. A 2016 PwC report also highlighted the gap between corporate and investor perceptions on ESG: 100% of corporates polled felt confident in the quality of ESG information they were reporting, while just 29% of investors polled were confident in the quality of ESG information they were receiving. Similarly, 60% of corporates but just 8% of investors polled thought that existing ESG disclosures allow for comparison across companies/peers.

While investor relations representatives at BofAML’s 2017 Investor Relations conference that responded to BofAML’s survey noted that at least some of their shareholders are ESG-focused, just a small proportion (<15%) of the representatives included in the survey noted that the holdings of those investors made up more than 5% of their companies' market cap. On a weighted basis, companies responding to our survey are assuming that less than 5% of their shares outstanding are managed by ESG-aware investors, a gross underestimation relative to what was suggested in our 2017 institutional client survey. Close to half (42%) of the companies at BofAML's investor relationships conference that responded to our survey indicated they had no dedicated employees for the ESG initiatives, and only 17% of the survey respondents noted they had seven or more employees dedicated to their ESG initiatives. And a mere 4% of the IR professionals that responded to our survey currently incorporate ESG efforts at the leadership level of the firm.

Launched in 2009, the UN's Sustainable Stock Exchanges (SSE) Initiative works with stock exchanges globally to promote improved ESG reporting instruments. The SSE has expanded its footprint exponentially over the past few years, and as of August 2016, has partnered with 58 out of the 83 stock exchanges worldwide, where 41 of those partnerships were established within the last two years. Among those stock exchanges, 15 provide formal guidance to corporates and 12 require corporates to make ESG related disclosures in order to be listed on the exchanges. But developed markets trail the emerging markets, as just four out of the 12 exchanges that require companies to make ESG disclosures are based in developed markets, namely Canada, Germany, Hong Kong and Singapore. The United States is notably absent.

Institutional investors use ESG much more than companies think they do – Each year, BofAML surveys institutional investors to monitor which factors, characteristics, attributes and models they use in their stock selection processes. BofAML's 2017 survey indicated that while use of ESG was still lower on the popularity spectrum relative to many more traditional factors we asked about, nearly 20% of respondents to their survey use ESG – making it more popular than a number of other factors included on our survey such as analyst price targets or tools such as web-scraping and machine-learning.

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