disclosure regulation spurs on researchersOctober 1999
UK organizations researching companies' ethical performance are developing new products and services in the expectation that the pension disclosure regulation will increase demand for their services from financial institutions
Gauging the real level of interest among investing institutions in the ethical, social and environmental performance of companies is tricky – partly because many of the largest institutions remain unclear about the importance of these issues when they are considering whether to invest in a company.
However, institutional investors make use of specialist research services offered by external providers. The activity of these niche providers can be a useful indicator of where the ethical investment market might be heading.
There are between 40 and 50 fulltime ethical investment researchers working in the UK, according to Mark Mansley, head of the London-based Claros Consulting and author of a forthcoming report on ethical investment strategies for institutional pension funds. ‘On that rough estimate, the current market must be worth in the order of £3 million’, he says, including dedicated inhouse researchers in financial institutions, which also buy in data from the niche providers.
Demand for the services of UK corporate responsibility research organizations has grown rapidly, boosted partly by the growth in value of ethical funds under management (from £0.9 billion to £2.2 billion in the four years to September 1999), and partly by the expectation of growth arising from the pension disclosure regulation.
All the research providers have launched, or will shortly launch products and services aimed at pension fund managers, trustees and their advisers, although their success, as Mansley points out, depends on how the trustees actually respond to the regulation, which is ‘a bit of an unknown’. One of the longer established ethical funds is rumoured to be closing next year due to indifferent performance, but the provider is said to be working on a new ethical investment vehicle for the pension fund market.
In April, Pensions and Investment Research Consultants (PIRC) launched its corporate responsibility briefing service aimed at institutional investors. From early next year, it will begin offering investors company profiles, starting with the larger UK listed companies. ‘It’s aimed not at portfolio screening, but at institutions already investing in companies and wishing to engage with them,’ said Stuart Bell, PIRC’s research director.
The company profiles will cover five main stakeholder issues: employee relations, environment, community, human rights and corporate governance. PIRC has built its reputation as an independent corporate governance consultancy, so this represents a significant shift of emphasis for the organization.
‘We’re confident that the market for both advisory and research services is going to grow. It was growing before the new regulation on SIPs [Statement of Investment Principles] and that can only give it a boost’, said Bell.
The Ethical Investment Research Service (EIRIS), whose commercial arm turned over £750,000 last year, is spending ‘a six figure sum’ on new software it says will make it much easier for fund managers to research the ethical performance of companies. Ethical Portfolio Manager, due for launch this year, will allow fund managers to download information on the non-financial performance of companies onto their desktops.
‘The new software analyses companies across a wide range of criteria’, said EIRIS head of client services Karen Eldridge. ‘For example, it will say whether companies have a weak, moderate or good performance on the environment.’ EIRIS, which has 10 researchers and was set up in 1983, recently launched its pension fund manager briefing service for pension fund advisers.
Ethical and Environmental Screening Services is a new entrant to the market, but the Cheltenham-based screening company set up in October 1998, already has a number of well known City institutions as clients, according to director Lee Coates. ‘Most of our business at present is coming from the private client side’, said Coates, ‘but the SIPs regulation will drive this market forward’.
Delphi International has six researchers working for three principal funds run by two Swiss fund managers, VTZ and Pictet. Delphi is now looking at opportunities in the UK pension fund market. ‘The UK is miles ahead of Europe on this – they don’t have anything like the pension fund regulation,’ said Sibylle Hyde, Delphi’s head of equity research. ‘We are developing a database looking at the top 300 European companies as an initial product to offer to UK pension funds’. The database is likely to be in use early next year.
Mansley comments, ‘In terms of the new SIPs regulation, future growth in the market will depend on a number of factors – how the fund sponsors react, how funds react and how unions react. If there is a general consensus, things will move on. The government is fairly keen to see it succeed.‘
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