Client: Department of Business and Trade (DBT)
Year Completed: 2024
eftec team: Allan Provins, Russell Drummond, Boris Babic, Mark Collar, Benjamin Hentschel
Project partners: Research in Finance, Investment Association
Full report:
About non-financial reporting (NFR) and non-financial information (NFI)
There are increasing regulations and calls for companies to provide more and better non-financial information (e.g. CSRD, TNFD, ISSB). There are many drivers of this increased pressure, a main one being that non-financial information (NFI) and non-financial reporting (NFR) is assumed to improve investment decisions and assessments of risks and company performance. Indeed, there are many studies noting the increasing usage of NFI in investor decision-making, but few studies had quantified what this information is worth.
The criteria investors use for selecting their portfolios and the resources they have available to research their decisions varies, but almost all investors are using NFI to some extent. As one investor told us: “profit and loss statements and balance sheets can only tell you so much about what a company is worth”. Thus, NFR is a key resource that informs investment decisions and supports confidence in portfolio development across the investment sector.
While the information companies produce varies, there are some general themes: quality of governance, risk exposure, available opportunities, and long-term performance and impact. As with financial information, NFI flows from companies to professional investors and consultants and on to institutional and private investors, and the demand for information flows back through these same channels. This might be in relation to a company’s hard data, like patent fillings or carbon emissions, but also “softer” elements of reporting like the narrative a company tells about itself and its future.
The widespread use of this information is testament to the value of NFR to investors. However, the absence of a market (with information being freely available on company websites) it is difficult to quantify that value. This makes it difficult to assess the benefits of policy or regulation changes on the subject.
Image from the report showing the flow of users and requesters of NFI and NFR
About the Study
Working for the UK Department of Business and Trade (DBT) we explored investors’ use and demand for such information to better understand what benefits NFI provides. We had two overall objectives related to developing evidence on the benefits of non-financial reporting:
Examine and test the logic model and assumptions concerning the value of NFR to investors; and
Assess the economic value of NFR information, including the relative value of different elements of NFR.
The first of these objectives was addressed through interviews and literature review, whilst the second was the focus of consultations and surveys with both professional and private investors. In total, 40 investors were interviewed, six major asset management firms were consulted, and over 2,000 investors were surveyed.
The stated preference part of the study sought to distinguish NFI in terms of type of information (environmental, social or governance), format of the information, and levels of assurance. In the absence of a price for this information, the cost item was described as a willingness to accept format: namely, the increase in dividend yield investors would accept as compensation for reduced NFR requirements.
An example of the kinds of choices investors made in our study.
Through this work, we determined four key findings:
Investors are using NFI to understand company management, risk and risk management, future opportunities, and long-term performance potential.
Investors rely on NFI to get a wider perspective on their portfolios, and notably this information is not just limited to environmental or social impacts.
Investors value the current UK NFR requirements at £11 billion and £26 billion per year compared against no requirements.
This value is around 25% of the current FTSE100 total dividends paid.
Our choice modelling further demonstrates that good quality, comparable information has the most value, and that requirements to improve the assurance and comparability of NFI across companies could increase the value of NFR by between £6 billion and £16 billion per year (again, measured in terms of changes to dividend yield).
Asset managers in the UK are estimated to be spending around £140 to £230 million a year to use NFI, a fraction of the benefits we report above.
Quantifying this benefit provides evidence to make business case for future UK, and indeed global, requirements for NFR. The evidence can be equally useful for policy makers, regulators, investors and companies.
Full report: