Ethical Performance
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merger deals riskier due to lack of ethics research

April 2007

Due diligence for mergers and acquisitions is being held back by a lack of good-quality research into the social and environmental risks associated with investment, says research commissioned by a group of large investors.

An analysis of 22 investment research providers by the Enhanced Analytics Initiative (EAI) has found ‘an ongoing improvement in the quality, diversity and coverage of extra-financial research’ over the last two years.

However, it warns there is still inadequate consideration of the social and environmental risks in due diligence for M&As ‘relative to the importance of these issues to investment decision-making’. It concludes that both the quality and coverage of such research remains ‘insufficient’.

The EAI is an international collaboration between asset owners and asset managers aimed at improving the quality of investment research into extra-financial issues. Members manage assets totalling €1.8trillion ($2.3tn, £1.18tn).

Ivo Knoepfel, managing director of onValues, the Switzerland-based consultancy that conducted the study for the EAI, said the dearth of in-depth research was significant, as the number of deals was rising. The UK’s Office for National Statistics lists 1369 mergers and acquisitions involving British companies alone in 2006, with a combined value of £141billion ($272bn), up from £108bn in 2005.

‘Long-term investors want to know if a merger deal is expected to add value over the long-term ... so environmental and social issues are all-important to them,’ Knoepfel told EP. ‘For example, a legacy of environmental liabilities or poor employee relations can weigh heavily on the success of an M&A deal.’

There was a general lack of readily available extra-financial data on companies, Knoepfel added. As a result there was often little useful extra-financial information to pull ‘off the shelf’ for analysis when a merger was in prospect.

The EAI study found that the best extra-financial analysis was by Bernstein, CA Cheuvreux, Citigroup, CLSA, Deutsche Bank, Goldman Sachs, Innovest, Morgan Stanley, Oddo Securities, Societe Generale and UBS.

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