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sell-side analysts will get money to consider SRI

December 2004

Four mainstream European institutional investors are to offer a financial incentive to encourage brokers and investment banks to do more research on the social and environmental performance of companies.

The four – BNP Paribas Asset Management (France), PGGM (Netherlands), RCM and the Universities Superannuation Scheme (both UK) – have allocated a proportion of their budget for broker research to SRI in an attempt to persuade sell-side analysts to include more information on intangible issues in their assessments of companies.

Each will set aside five per cent of the money they currently pay to brokers – some €5million ($6.5m, £3.5m) a year in all – specifically for SRI information.

They have asked the brokers for plans on how they intend to take more account of non-financial issues, and the brokers with the best plans will be allocated a share of the money budgeted. onValues, a Zurich-based investment consulting and research company, will assess the plans by the end of this month, and the past performance of brokers on SRI issues will also be reviewed.

Ivo Knoepfel, head of onValues, said that while the new regime, which will begin at the end of January 2005, will not lead to any brokers being dropped, the fees of weak performers in this area of research will be lower and those of the best performers proportionately higher. ‘If you’re a poor performing broker that receives 20 per cent of BNP’s brokerage business, for instance, it could be that the 20 per cent is reduced to 17 or 18 per cent.’

Ellen Habermehl, senior communications adviser at PGGM, told EP the initiative was partly conceived out of frustration. ‘We’ve tried asking politely in the past but it didn’t have the effect we were hoping for. Instead of asking and hoping that better non-financial analysis will come through, this is a more concrete way of producing change.’

The four are now actively recruiting other investors to the programme, dubbed the Enhanced Analytics Initiative. They outlined their plans last month at a London meeting with more than 30 senior representatives of global and regional brokers and investment banks, including Bank of New York, Bear Stearns International, Cazenove, Goldman Sachs, Lehman Brothers, Morgan Stanley and Oddo Securities.

Raj Thamotheram, senior adviser on responsible investment at USS, conceded that brokers ‘have lots of internal questions about how they gear up for this’, but said the response at the meeting had been positive, with some analysts travelling from the US specifically to attend. ‘For various reasons this has come at a time of great flux for brokers, who are re-examining how they service their various clients,’ he said. ‘The idea of this group is to send a signal that it’s not just SRI types who want this, but mainstream funds too.’

Neil Dwane, chief investment officer for Europe at RCM, part of Allianz Dresdner Asset Management, said: ‘We will be happy in the medium term with between five and ten brokers doing this more systematically than is currently the case.’



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