Ethical Performance
inside intelligence for responsible business


Merger of SRI institutions needs careful managing

July 2009

The UN’s takeover of the Enhanced Analytics Initiative raises many issues, says Steve Waygood

As you may have read in EP at the back end of last year, the Enhanced Analytics Initiative (EAI), which aims to improve the quality of investment research on extra-financial issues, has been submerged into the United Nations Principles for Responsible Investment (PRI).

Signatories and supporters of both ventures, who jointly manage more than $15 trillion (£9tn) worldwide, have claimed the merger will create ‘a single, powerful voice’ in favour of more responsible investment and better SRI research. I broadly welcome the merger and agree that it makes a lot of sense. However, it raises a number of issues and needs to be carefully managed.

It is critical that asset managers reward high quality environmental, social and governance (ESG) broker research and provide structured feedback on its usefulness to investment decisions. Historically, this was largely overlooked by the market and the EAI has done an excellent job in promoting best practice in this area by providing cash rewards to the best broker researchers. However, broker commission is more commonly allocated by the people involved in the investment decision. Anything else can create a market distortion, and the type of broker work that tended to get high profile within the EAI was not always what investment managers need in their day-to-day decisions. There also remain some significant market inefficiencies. For example, brokers still tend to wait until there is near certainty on regulatory changes before forecasting the impact on their earnings assumptions and financial models.

More importantly, in many markets it remains possible for companies to blacklist brokers on the strength of a critical ESG comment. This is obviously a significant impediment to the sell-side provision of ESG research. The asset owning and asset managing members of the PRI have a responsibility to step in when this happens and I look forward to seeing how the PRI helps brokers when they stick their neck out.

While this merger of two successful institutions represents a success for mainstreaming responsible investment, it would be dangerous to assume that the markets now routinely motivate more responsible corporate practices. This is because the credibility of many investors’ claims to integrate ESG investing into analysis can be seriously questioned. 

The EAI has certainly helped to deal with some of  the market inefficiencies that can arise  when analysing ESG issues. However it did not – and could not – correct market failures and help ensure that the capital markets are sustainable. That is the job of governments.

Steve Waygood is head of engagement at Aviva Investors

Steve Waygood | Global | Mergers


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