Part 2 of a in-depth look at the impact of EU’s MIFID II on responsible investment research and engagement.
I’ve been working on company-investor ‘engagement’ on sustainability from all sides (asset manager, intermediary, listed company) for nearly twenty years and, having evaluated the practice from all possible angles (supply, demand, objectives, outcomes etc), the best summary I can come up with is that it’s an inefficient shambles.
This is not, of course, to say that individuals and firms (on both sides) aren’t doing great work. They are. It’s just that when looked at from a systems perspective, it could be so much more efficient…and 2018 could be the year that it improves.
The case for simplicity
At its core ‘engagement’ should be an incredibly simple activity summarised as:
The case for complexity
Although ‘engagement’ should be simple, there is considerable complexity in the way that it has been intermediated. For decades, ‘sell-side’ brokers have locked up the supply of ‘corporate access services’ (meaning arranging meetings between analysts and portfolio managers and company management) by offering it ‘for free’ to both sides (where ‘free’ really means bundled invisibly into trading fees). Because these brokers, with notable exceptions, were slow to expand their corporate access (not to mention research) services to cover sustainability and corporate governance issues, the SRI industry developed its own approach to contacting companies. While it is impressive how much has been achieved through collaboration and voluntarism between inherently competing entities, it has been and continues to be hard work and the administrative elements of it are a ludicrous waste of expensive analyst time: i.e. assemble coalition, agree objectives, achieve sign-off, identify first point-of-entry company contact, explain nature of collaboration (companies simply don’t understand collaborative engagement.), request meeting, have meeting request rejected, request again, arrange meeting, re-arrange meeting upon cancellation, conduct meeting, etc.
As a result, many asset managers love the concept of engagement but hate the practice, and asset owners understandably turn their attention to whether impact is achieved from so much input.
The case for 2018; the case for efficiency; the case for MIFID II
You see what I did there? I didn’t put MIFID II in the article’s title because I knew that would guarantee that nobody ready it. However, the legislation that is being implemented across Europe in 2018 is significant to this argument and cannot be avoided. From now (January 2018), European asset managers will not be allowed to pay for ‘corporate access’ services from brokers as a
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