Eurosif believes that EU policy-makers should mandate extra-financial disclosure, including some relevant key performance indicators, and incentivize best practices. Extra-financial (“ESG”) data is relevant material information that investors should have and increasingly want as a means to better gauge longer term investment risks and opportunities of investee companies. It is increasingly understood that financial statements capture less than 20% of corporate risks and value creation potential.
Further, there is mounting academic evidence that there is a direct correlation between sustainable business practices and the longer-term financial success of that company. For investors, material, timely, and comparable extra-financial information across companies remains therefore crucial in order to make valid mid- and long-term investment decisions. This could lead to a virtuous circle where investors would reward stock prices where sustainability is integrated, and companies would respond by further improving their sustainability performance.
The key elements that ESG reporting should address are how company strategies are designed to address non-financial risks and how financial results are affected by those risks – a forward looking approach that allows interested stakeholders and especially investors to improve company valuation models.