Institutions challenge banks and brokers


Leading European institutional investors are challenging the investment banking and broking industries to provide research on socially responsible investment (SRI) issues. They have told their banks and brokers they will allocate up to 5 per cent of their commission budget to the issue.

The group, which consists of Universities Superannuation Scheme (USS); PGGM, the Dutch pension fund; BNP Paribas Asset Management; RCM, part of Allianz Dresdner Asset Management; and the boutique Generation Investment Management, has dubbed its project the Enhanced Analytics Initiative. They have called a meeting with the brokers and bankers for November 2.

The group feels that "non-traditional" issues of corporate performance on issues such as overall strategy, corporate governance, human capital management and environmental management have rarely been integrated into mainstream analysis.

"We feel research on extra-financial areas such as governance and labour relations is one of the keys to understanding the performance of a business in the long term," says Philippe Lespinard at BNP Paribas Asset Management. "If we look five years ahead we think these issues will eventually be part of mainstream financial research."

Roderick Munsters at PGGM, argues that "intangible issues should get more attention than they receive nowadays because they play a crucial role in long-term performance – and we are long-term investors."

One reason research in this area has been limited is that many SRI issues have a fairly long-term impact on corporate performance whereas analysts tend to focus on quarterly earnings. This stems in part from the traditional use of analysis as a way to stimulate trading decisions and boost commissions. "SRI issues don’t really matter to brokers," says Neil Dwane at RCM (Europe). "What they want is for you to buy or sell."

USS says some brokers have done good work in this area, notably Antony Ling, of Goldman Sachs, who published a note on the environmental and social issues facing energy companies. "Those who do it do a good job," says Mr Lespinard. "It’s just a very tiny research area."

A further issue is that the formula by which institutional investors allocate commission income has not really allowed for coverage of these issues. Brokers realise there is no money in it.

That is why the group, which manages €330bn ($412bn) of assets, has set aside part of its budget for SRI. But they hope to recruit more members. "If the initiative stays at the current scale, it will fail," says Mr Lespinard.

Mr Munsters says: "If we can show brokers they can make a difference in performance and we can show them they can make money by providing research, they will listen."

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