Demand grows for SRI sell-side research
As socially responsible investment (SRI) moves into the investor spotlight, sell-side research focusing on it is gaining in importance
According to the latest Thomson Reuters Extel and UKSIF Socially Responsible Investing and Sustainability Survey, more than 60% of buy-side respondents expect that commissions directly related to SRI/sustainable research services will increase in the next 12 months, with four out of five fund managers looking for SRI research to be integrated into mainstream analysis.
The survey reflects the views of 202 buy-side firms and 23 brokerage firms/research houses between 31 March and 4 June 2008.
Around 55% of buy-side respondents now attribute 2% or more of total commission spend to SRI, compared with less than 10% in 2005.
"The main finding of the survey is that SRI continues to become more of a mainstream investment activity," says Steve Kelly, global head of Extel surveys at Thomson Reuters. "For the sixth consecutive year since our first study in 2003, we have had more participation from both fund managers and brokers. The brokers received more nominations than ever before, which shows the buy-side appetite for research. On top of that, more companies were nominated with regard to their SRI approach, illustrating that the investment community increasingly expects companies to have a coherent SRI policy."
Back in 2003, SRI was driven by the fund management community, which wanted to see more brokers providing research on SRI, according to Kelly. "But in the past five years we have seen the brokers come much more up-to-speed," he says.
"Other factors have also played a role in the increased spending and commission on SRI," Kelly adds. "The role of the enhanced analytics initiative [EAI], where up to 5% of commission is effectively ring-fenced for SRI research, is one. Another is that brokers now provide a substantial amount of SRI-related services compared to a few years ago, so it is easier now for buy-side firms to access them than it was in the past. But essentially, it all goes back to the growing importance and mainstreaming of SRI. The way the world is changing means that SRI issues have an increasing impact on the value of stocks."
The number of brokerage houses providing SRI research has been gradually increasing, agrees Sarj Nahal, co-head of SRI at Société Générale (SocGen).
"It is now hard to find brokers among the major global or even specialist local players that are not active on SRI in one way or another," he explains.
"There is still a debate within brokerage houses as to whether SRI is a distinct area for which you need separate SRI teams to provide the research or whether all of the brokerage's stock research should have an SRI component," says Kelly. "At the moment it is more the former than the latter. However, that is changing."
Big themes that have been attracting attention include carbon disclosure and trading, and climate change.
Kelly believes these will grow even further, particularly in view of a likely new US approach towards SRI under a Barack Obama administration.
"However, the area of human capital is under-researched," says Kelly. "But that is likely to change, as I already see an appetite for this from the fund management community. The problem is how to measure it. Although measurement has always been an issue for SRI it is more of a problem with human capital than with traditional environmental areas."
According to Nahal, it is buy-side interest that tends to drive the research topics. "Demand for sell-side SRI research has exploded since our research team was founded three years ago," he says. "We respond to that need but also generate ideas ourselves. Interaction with the client base leads to around 50% of the research topics."
Areas that SocGen's research team recently covered include opportunities in Africa, carbon capture and storage, CEO value, and UK fuel poverty.
"Across the board, emerging markets form a much smaller share of the research than developed markets," says Nahal. "But in certain sectors emerging markets will become the leading growth drivers amid the recessionary environment in Europe, developed Asia and the developed Americas. And as these regions have become more important to European, North American and Asian companies, demand for SRI research in emerging markets has picked up too.
"If anything, the credit crisis has opened investors' minds to extra-financial issues. A lot of them were quite set in their ways for a long time and it is only now that they are starting to sit up and take notice."