Responsible Investor

What’s the future for ESG broker research?

SRI team cuts and the merger of EAI and PRI demand clear future research incentives.

Fears that dedicated SRI research could become a victim of the credit crisis are proving prescient as banks look to tighten belts. News last week that Deutsche Bank had discontinued its corporate governance research service for clients added to the ending of dedicated ESG research coverage at JP Morgan and Citigroup’s decision to cut back staff at its in-house SRI research team. This is not yet a deluge. Some of the previously specific SRI research will be folded into existing equity and bond research and many brokers are retaining specialist SRI teams. It is, however, a worrying development for those concerned that ESG research, still a relatively new and growing discipline, could become ‘mainstreamed’ for cost rather than content reasons. The irony is that the credit crisis and the latest Madoff Ponzi scheme allegations have underscored a need for better, more probing research on governance and the link between social and investment issues such as sub-prime mortgages/credit cards and banking remuneration. However, major questions remain over how to broaden ESG research, how to mainstream it convincingly, and, of course, how to pay for it?

At a meeting earlier this month in Paris, broker, investor and fund manager members of the Enhanced Analytics Initiative (EAI), sat down to close one chapter – the ending of the EAI – and the opening of another: the merger with the United Nations Principles for Responsible Investment (UNPRI). Prior to the recent alliance, the EAI, which numbered 30 pension funds, asset managers and brokerage arms of investment banks, carried out a bi-annual evaluation of investment research providers. This identified a recommended shortlist of those producing high-quality extra-financial research to which buy-side members could direct a portion of their research commissions. Under the merger, the PRI will effectively adopt the EAI as its platform for promoting the first of its six principles: to incorporate ESG issues into investment analysis and decisions.
In his parting comments as incumbent chairman of the EAI, Peter Scales, former chief executive of the London Pension Fund Authority, said broader coverage of extra financial issues should have alerted investors to poor governance, dislocated incentive structures and bad capital management: “That is not to say that better

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