Traditional researchers join in
Not too long ago, the parlance of socially responsible investing was known only to a select few in the traditional investment research world. Today, environmental, social and governance, better known as ESG criteria, is increasingly being incorporated into broker reports to better assess the risks and returns of companies.
In the past, brokerage houses would mainly garner their SRI insights from independent third party providers such as Innovest Strategic Value Advisers and Ethical Investment Research Service. While they still play a key role, the sellside has become more proactive, thanks to regulations, climate change, carbon emissions and supply chain issues. Moreover, their clients in the fund management community have also woken up to the fact that ESG issues such as cleaning an oil spill can have ramifications on a company's bottom line.
Ten years ago, many institutions viewed corporate governance more as a gimmick or fashion statement, but it is taken much more seriously today. Xavier Desmadryl, head of SRI research at HSBC, says: "Corporate governance has become increasingly important in the fund management community, especially after Enron and Parmalat . We're also seeing other SRI themes -- such as environmental and social issues - taken into account more.
"We expect to see, at some stage, a convergence between SRI and mainstream investment approaches . In the near future, we believe that, in many sectors, greater emphasis will be placed on SRI issues in a financial context."
As Michael Jantzi, who in 1990 started Jantzi Research, a Canadian-based independent firm that evaluates and monitors the social and environmental performance of securities, puts it, "The fact that mainstream sell side firms are exploring using ESG criteria in their research is one of the most significant trends that we are seeing in the industry. They are looking at companies through a different lens and are beginning to realise the long term impacts and costs of companies not complying with certain environmental standards such as carbon emissions."
As a result, there are more member signing up to organisations such as UK Social Investment Forum's register, which annually conducts a SRI survey in conjunction with Thomson Extel, part of the Thomson Financial group.
Penny Shepherd, chief executive of UK SIF notes: "We have seen two trends over the past couple of years. The first is the emergence of the dedicated sellside SRI research team. Firms such as Citigroup, Goldman and Société Générale placed in the top five rankings on our latest survey, joining UBS and Dresdner Kleinwort, who were previous winners on our survey last year.
"The second phenomenon is that SRI and mainstream analysts are working more closely together in sellside firms to assess the risks of companies and I expect that this trend will continue. For example, now when traditional analysts look at the supermarket industry, they will also be factoring in the impact and costs that dealing with obesity will have on these companies' financial future."
Although the SRI world may herald the new status of ESG criteria, there are pitfalls and life may just become tougher for the existing independent veterans. After years of toiling away in a specialist field, they are now facing competition from a band of heavyweight firms who have the clout, contacts and deep pockets to effectively vie for institutional business.
Consolidation has already taken hold with Vigeo, the French social and environmental rating agency, buying its Belgian counterpart Ethibel last year to create a SRI rating powerhouse. Meanwhile, Innovest purchased CoreRatings, the UK based environmental and sustainable ratings agency from ratings agency Det Norske Veritas.
The rivalry will not only be for a slice of the pie but for research talent. SRI analysts with a strong grounding in business and finance are and will be most in demand. Andy White, managing director of Innovest, which came number one in the Thomson Extel poll for independent firms says: "Ten years ago, SRI research teams were drawn from different educational disciplines but today new recruits need to have more of a financial qualification. In general, the main challenge is to stay ahead of the curves and respond to the market trends."
Innovest is not alone. All independents seem to be eyeing the burgeoning mainstream market, whether it be pension and hedge funds or sellside research houses. They are sharpening their analysis, increasing their coverage, tailoring their products and distributing it in any format the client wants. They are also offering more consultative services to help investment firms integrate the research into their investment making decision process.
It is no wonder than that in today's SRI world, buzzwords such as bespoke, quantifiable and comparable are circling overhead. As one industry participant put it, "I am not sure that the old or new research houses are doing anything amazingly different but they are trying to make their own brand and put their own spin on it."
Swiss based Asset 4, a provider that came onto the scene about three years ago, is one firm hoping to make its mark. The company is aiming to expand its coverage from 650 companies to 3,000 in the next two years, to provide coverage of 70% of the worldwide market in traded equities.
It is also hoping to strike similar deals to the strategic alliance it forged with Goldman Sachs this past June. The US based investment bank not only agreed to incorporate Asset 4's ESG data and framework into its investment research, benchmarking, portfolio monitoring and risk management processes, but it also took a minority stake.
Henrik Steffensen, vice president marketing and business development at Asset 4, says: "Today, companies want data to be made available in the same way as financial data is. They want to be able to quantify and compare it in a systematic way. We do not interpret data but provide companies with a framework that they can integrate into their investment-making decisions. We analyse information according to 250 criteria but what we are finding is that clients increasingly want us to customise the information according to their requirements."
Bespoke does not only apply to the research but to the distribution process. Asset 4 provides web based as well as hard copy solutions while Innovest, which aims to increase its equity universe to 2,300 by year end, has started web based presentations.
White says: "The delivery side of things has become increasingly important. You have to make sure that the report is live and dynamic and keep up with changes in the industry. We now have analysts who provide online analysis and interact with clients online."