Risk performance is gaining equal footing with financial performance as investors make their decisions about companies, a new report finds.

An Ernst & Young survey of key institutional investors from around the world — including Canada– reveals that such investors are demanding companies show greater transparency on risk management.

Almost two-thirds of investors will apply a penalty on potential investment targets in the absence of good risk management, while nearly half say they have withdrawn investment for the same reason.

On the plus side, 82% of investors responding to the survey say companies effectively managing risk are worthy of a premium.

“Companies need and accept risk as a part of business — no risk, no growth,” says Ross Pearman, a partner with Ernst & Young in Toronto.

“Investors agree, according to our survey, but have also told us loud and clear they expect transparent communications when it comes to risks and how they’re managed. Without this frankness investors are likely to be wary of, or avoid investing in a firm,” he says.

While institutional investors have indicated a preference for one-on-one communications (42%), seconded only by the annual report (41%) as a means of gaining information about risk, Pearman notes that companies need to balance the want for one on one interaction by investors with the risk of selective disclosure. “There is a danger of creating a different kind of risk if the demand for face-to-face discussions results in certain groups of investors getting information not shared with others. Selective disclosure must be avoided as companies manage how they share information in the way investors are demanding,” he says.

When asked who should ultimately be responsible for risk, the top choices were the CEO (23%), the board as a whole (20%), the holder of a specific risk management function (16%), and the CFO (15%). Just under one third of those questioned believe boards should be setting strategy for risk management, and about half expect the board to set risk guidelines.

The Ernst & Young survey questioned 130 major global institutional investors in 16 countries (including Canada) representing companies that, in total, manage funds in excess of US$1 trillion. The survey is the first in a series that Ernst & Young will conduct in 2005 and 2006 in order to gain and share insights on risk.