Wednesday, July 25, 2012

Investors and analysts use extra-financial information in decision-making, suggests new research

Investors and analysts use extra-financial information reported by companies to help analyze the performance of those companies and ultimately inform investment decisions, according to new research published today (Wednesday 25 July 2012).

Research partners the Global Reporting Initiative (GRI) and The Prince of Wales’s Accounting for Sustainability Project (A4S), in collaboration with Radley Yeldar, say the research provides new insight into how financial markets source, use and are influenced by extra-financial information. 

The value of extra-financial disclosure

According to the report What Investors and Analysts Said, extra-financial information – such as disclosures on governance and environmental issues – has become an important and influential consideration for investors and analysts.

Sarah Nolleth, A4S Project Director, said, “We are delighted to see that the investor community is increasingly seeking extra-financial information as part of their decision-making processes. The increased credibility of, and demand for, these sources of information will help sustainability considerations become embedded into investors’ assessments of a company’s long-term value. The report highlights the importance of integrated reporting, but it is important to remember that companies also need integrated thinking i.e. embedding sustainability into their decision-making and strategy, as the precursor to successful integrated reporting.”

According to the survey results, governance information is the most relevant type of extra-financial information for investors and analysts, with 70 percent of respondents rating it very relevant, while 64 percent of respondents said information on natural resources is very relevant to their analyses of companies. Social and community information ranks lower, although 52 percent of respondents say such information is very relevant.

The relatively low relevance of social and community information could, the researchers say, be due to the difficulty in comparing company performance on these issues. 61 percent of investors and analysts surveyed said they find social information difficult to compare; whereas only 41 percent said the same for environmental information. In contrast, only three percent of respondents said they find it difficult to compare financial information.

Nelmara Arbex, Deputy Chief Executive of the Global Reporting Initiative (GRI), said: “This research is one more piece of evidence showing how organizational disclosure on sustainability impacts is popular among investors. GRI expects the demand for sustainability performance related information to increase and sustainability reporting to become standard practice. GRI’s guidance will continue to offer companies globally- recognized support to improve their sustainability reporting practice, and prepare more focused reports. This is the performance data we are all looking for.”

Preferred sources and formats for extra-financial information

The research also investigated preferred communication channels and formats for receiving extra-financial information. 

A key finding was that investors and analysts use a wide range of sources to gather financial and extra-financial information. However, some channels – notably PDF format publications – were more popular than others for certain types of financial and extra-financial information. 

Ben Richards, Head of Sustainability at communication specialist Radley Yeldar comments: 

“This research demonstrates that investors and analysts rely on tried and tested channels of communication – namely reporting and dialogue with companies – though this tends to be part of a blended approach to information gathering. If they need specific details, they’ll use specialist sources. This means reporters need to clearly guide these audiences through their disclosure, which often appears in a number of places on their corporate websites.” 

Richards goes on to say: 

“The research also highlights the need for reporters to reconsider interactive online reports such as dedicated microsites, which appear to be less valued by investor and analyst audiences than a PDF report. We believe there’s still a role for online channels to deliver relevant information, but reporters need to better understand their audience’s needs, and the role of the various pieces of disclosure they issue, to communicate their story as clearly as possible.” 

Other key findings from the research include: 

• Over 80% of investors and analysts believe that integrated reporting will deliver benefits to their analysis or company assessments

• Nearly half of investors and analysts (46%) state that direct engagement with the CEO or CFO on extra-financial issues is very likely to influence their investment decisions or company analysis, slightly more so than other corporate reporting channels such as the sustainability report, annual report or integrated report

• Voluntary frameworks for reporting extra-financial information play an important role in decision-making and company analysis, especially the GRI Sustainability Reporting Framework and the Carbon Disclosure Project

The research was commissioned by The Prince’s Accounting for Sustainability Project (A4S) and the Global Reporting Initiative (GRI), and undertaken by Radley Yeldar. 

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