Ethical Performance
inside intelligence for responsible business


analysts perform better with social data to hand

December 2003

Analysts with access to data on a company’s social and environmental performance make more confident judgments about its economic prospects than those who don’t, an experiment has indicated.

PricewaterhouseCoopers invited two groups of 12 and 13 analysts respectively from the fund management company Schroders to make a recommendation on the stock of the Danish healthcare company Coloplast. Both groups received financial data, but the second was also given information on Coloplast’s social and environmental performance. The company’s identity was not revealed to either group.

While three-quarters of the first group recommended selling the stock, two-thirds of the second group recommended buying it. The analysts who considered the company’s social and environmental performance also showed a much greater consensus in their financial forecasts. Their estimates of future earnings fell within a tighter range and their analyses expressed greater certainty.

PwC believes the ‘quite startling’ findings show this group was more confident in its forecasts, resulting in a higher valuation of the company, and so recommended the stock be bought. By contrast, the other group, with only financial information, questioned the value of the business because ‘uncertainty in the economic projections for the company increased’. The result, says PwC, was ‘a cacophony of sell recommendations’.

Alison Thomas, PwC’s global research director, told EP: ‘For me the study shows that analysts who are given more comprehensive information on the non-financial side have greater certainty in their financial forecasts, which leads to a far tighter range of estimates. Those with just financial data are less certain about their forecasts and therefore feel less able to put a high value on the stock, which is why they end up being sellers.’

PwC concluded that although investors’ analytical models are financially driven, ‘the factors that give them confidence in their models are typically non-financial in nature.’ It said this means that companies failing to communicate such information ‘should not be surprised if investors assume the worst when placing a value on their estimates of future financial performance.’

Schroders was less bullish in its conclusions, but was ‘very interested’ to see the difference in results. It thought that if capital was in short supply, ‘those companies which provide more corporate information alongside financial information are likely to attract that capital.’

Mike Tyrrell, a socially responsible investment analyst at HSBC, said: ‘Analysts who have information on non-financial as well as financial data are clearly more likely to make better recommendations than those who have access only to financial data, but you can’t start from the premise that analysts look just at the financial figures. They look at a whole range of issues.’

Researchers selected Coloplast’s 2002 report and accounts for analysis as these were regarded as covering financial and non-financial issues comprehensively. The full report included quantified data on social and environmental issues such as employee and customer satisfaction, community investment, and health and safety statistics. The other version omitted quantified non-financial data but retained a general narrative about social and environmental performance. The resulting financial-only document complied with accounting standards and resembled a normal report.

Analysts had two hours to develop a two-year revenue and earnings forecast and pronounce on the stock. Thomas said PwC hopes to carry out a similar exercise on a larger scale, ‘but it’s a question of finding a very big investment house willing to do it’.


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