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talk could plug data gap

June 2007

A lack of communication between research teams in different parts of the investment industry appears to be an important factor in the reluctance of many institutional investors to take adequate account of social and environmental issues affecting company valuations, according to the largest study to date into investors’ use of extra-financial information.

Sell-side analysts, who feed research on companies to pension funds and asset management firms on the buy-side, do not consider the issues particularly relevant to a company’s valuation, yet their buy-side colleagues say that they are.

The European Centre for Corporate Engagement study of 240 investors and 88 sell-side analysts found that the investors consistently rated environmental and human rights risks as more important than sell-side analysts did. The investors felt that in other areas too, such as product responsibility and community development, sell-side analysts were not supplying the range of data needed for informed investment decisions.

When the centre investigated this discrepancy it found that 22 per cent of buy-side institutions did not discuss such issues with sell-side analysts at all, and only a third raised them to a ‘moderate or great extent’.

‘Many [environmental, social and governance] issues appear more important to the buy-side than the sell-side’, the centre says. It concludes: ‘If it is investors who want more information on environmental, social and governance issues, then they should be responsible for leading the dialogue with sell-side analysts.’

Despite the poor communication, however, sell-side analysts appeared ‘fully aware’ that they were not meeting institutional investors’ needs for social and environmental data. Among possible explanations put forward are that sell-side analysts simply ignore the requests because it is ‘difficult to incorporate extra-financial information into their [financial] analyses’, and that investors are getting the information from other sources, such as SRI rating agencies, other specialist providers and companies themselves.



Further Information
http://www.corporate-engagement.com
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