Greenwashing and inaccurate ESG reporting top list of investor concerns

Institutional investors believe greenwashing risks have grown over the past five years, and remain dissatisfied with the quality and comparability of ESG reporting by issuers.

These concerns appear to contribute to a gap between investors’ stated appetite for sustainable assets and their hesitancy to actually invest in them, according to the latest EY institutional investor survey.

A wide majority (85%) of respondents to the survey indicate that greenwashing is a greater problem now than five years ago, and are concerned about companies making selective or unbacked environmental claims.

This is compounded by a general dissatisfaction in non-financial reporting by issuing companies: 80% or more investors believe that the materiality and comparability of ESG reports is in substantial or acute need of improvement, while 62% say the same of accuracy.

Recent standards – be they voluntary like the International Sustainability Standards Board’s IFRS S1 and S2, or mandatory like the EU’s Corporate Sustainability Reporting Directive (CSRD) – are meant to improve these quality markers. But investors seem to have mixed views on their usefulness: less than one-third (29%) of them think the CSRD reporting standards are sufficiently detailed to support investment decision-making, while 22% say the same of the ISSB standards.

Long-term benefits vs short-termism

Investors recognise that these sustainability reporting standards are useful to understand long-term investment decisions, but not suited to support short-term decision-making. This divide between the long-term benefits of sustainable investments and the need for short-term return is another reason for what EY calls the “say-do gap” among investors.

In fact, 92% of survey respondents agree that “the risk to near-term performance outweighs the longer-term benefit of many ESG-related investments and initiatives”, and 66% believe  that their institution is likely to decrease its consideration of ESG factors in investment decision-making.

“There’s a pervasive view that immediate gains matter more than the valuable slow-burn rewards from ESG investments; and despite the latest UN assessment highlighting the lack of action on climate change, and that global warming could pass three degrees Celsius by 2100, with devastating impacts, investors seem to be focused on shorter term economic cycles and geo-politics,” notes Matthew Bell, EY Global Climate Change and Sustainability Services Leader, calling out the “worrying levels of apathy” observed in the investor community.