Why the biggest challenge now is to get relevant extra-financial analysis direct to mainstream analysts.
For three years now, the Enhanced Analytics Initiative (EAI) – which sees buy side firms and asset owners united in explicitly rewarding sell side research organisations that produce good quality research on extra financial factors such as ESG issues – has worked to reduce the unnecessary volatility in stock market returns that comes from the presence of critical information gaps in respect of long-term corporate health and performance. EAI’s 27 institutional members together hold assets of over $3trn (€1.9trn), giving them considerable market clout. It should come as no surprise, however, that there is much yet to be done. For example, several brokers with whom EAI members have strong commercial relationships continue to produce stand-alone reports. This means that even their most important ESG conclusions are not routinely reflected in the mainstream notes that shape consensus numbers and opinion.
Why is change so difficult and yet so important?
As William Donaldson, former analyst and SEC chairman has said: “To state an obvious, but often overlooked fact – quarterly earnings do not reflect companies’ long-term viability. Identifying the factors that will drive long-term growth – such as personnel, strategy, financial strength and flexibility, internal corporate governance, innovation and customer service – may be more difficult to quantify, but they offer a more accurate and more complete portrait of a company’s future.” (1) Prior to EAI’s formation, just a handful of sell side houses allocated resources to filling this information gap in securities research. Since, the number of research houses covering extra-financial factors has increased significantly, both in quantity, quality and geography. Relevant research from analysts in Australia and Asia is now increasingly common. Most sell side staff are clear that EAI has been a critical factor – if not the defining factor – in getting the necessary management support and extra financial resources for this research. The result has been an
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