Brokers make ground on extra-financial research

Sell-side and independent research providers are broadening their coverage of extra-financial issues and becoming more sophisticated in their integration into financial models, but have work to do before they progress ‘beyond the low-hanging fruit’ according to the latest review by the Enhanced Analytics Initiative (EAI). The EAI is a group of investors representing €2.1 trillion ($3.1 trillion) in assets, including some of the world’s biggest pension funds and asset managers. It incentivises more detailed analysis of extra financial issues within mainstream financial research by allocating a minimum 5% of brokerage commissions or research budgets to extra financial issues (EFI).
The group announced that from a list of 26 research houses it had selected seven to receive its research commissions over the coming six months: CA Cheuvreux, Citigroup, Credit Suisse, Deutsche Bank, JP Morgan, Oddo Securities and UBS. The group said it also recognised the EFI performance of Goldman Sachs and Société Générale.
The EAI review – its seventh since it was launched in 2004 – said emerging trends amongst research houses included a move into previously under-researched sectors from an extra-financial perspective, such asemerging markets and the physical impacts of climate change on a range of industry sectors. It said analysts were also looking over longer-term horizons in their research. However, the EAI said better integration of extra financial analysis in forecasting financial performance and in calculating the fair value of companies “still remains a challenge.”
It said that other areas also remained under-researched, such as analysis into human capital management, workplace and stakeholder issues and the effects of merger and acquisition activity.
Peter Scales, chairman of EAI, said: “The breadth of corporate governance research is improving in response to a request made by EAI during the last evaluation an indicates the important role that the initiative continues to play in affecting a permanent change in the scope and integration of EFIs into investment research. I would hope to see a similar response on the issues over human capital management in the next evaluation. The financial integration hurdle remains and essential element of the evaluation criteria if we are to achieve greater use of EFI analysis in mainstream investment decision making.” The EAI review was carried out by onValues, the Swiss sustainable investment consultant.