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.
