January 18, 2005
Enhanced Analytics Initiative Picks Sell-Side Brokerage Houses with Best Intangibles Research
by William Baue
EAI awards seven firms and three runners-up for outstanding sell-side analysis of corporate social
and environmental issues.
Yesterday, the Enhanced Analytics Initiative (EAI) announced the results of its broker evaluation,
identifying seven firms that provide outstanding sell-side analysis of corporate social and
environmental issues, otherwise known as "intangible" or "extra-financial" information. EAI was
established in October 2004 by a group of European institutional investors to incentivize
extra-financial research by allocating five percent of their 2005 brokerage fees (anticipated to
run between €4 and 5 million) to the brokerage houses producing the best such research.
A report released last week by the World Economic Forum (WEF) and AccountAbility entitled Mainstreaming Responsible
Investment concluded that providing incentives is key to achieving the titular development.
EAI answers this call.
"By allocating five percent of their broker fees to the analysts
that provide the best research on extra financial and intangible issues, members of the EAI are
sending a strong message that these issues are important to our funds and we are prepared to pay
for information on them," said David Russell, advisor for responsible investment with UK-based EAI
founding member Universities Superannuation Scheme (USS).
Of the 21 brokerage houses who applied (out of 31
contacted), EAI singled out Deutsche Bank,
Dresdner Kleinwort Wasserstein (DrKW), Goldman Sachs, HSBC, Morgan Stanley, UBS, and WestLB,
as well as three runners-up--ABN Amro, Citigroup, and CM-CIC. The
evaluation, performed by Zurich-based investment research consultancy onValues, assessed both past research and 2005 commitments in
areas such as comprehensiveness and integration of extra-financial issues into financial analysis.
A sell-side analyst with one of the EAI-endorsed firms describes factors driving the shift
toward assessing social and environmental issues in more depth.
"For the past couple of
years, we have been increasingly looking at these issues, focusing on where they have a commercial
impact," said Myles Packman of DrKW. "One of the areas we have focused on a lot is emissions
trading," he added, referring to the European Union Greenhouse Gas Emission Trading Scheme (EU ETS) going
into force this month.
"In certain cases, we were putting in 20 to 30 percent changes to
our earnings forecasts on the back of it, so there was a direct material impact," Mr. Packman
Stepping back to assess the broader perspective, he characterized the move
toward assessing extra-financial issues as an inevitable response to market forces.
simple economics of supply and demand: you've got increasing demand from the buy-side for this
service, so that is pushing it forward," Mr. Packman told SocialFunds.com. "We are seeing
increasing demand from investors for extra-financial information--at the moment, the demand is
coming from SRI specialists and extra-financial analysts."
investors do not exist in a vacuum, a reality EAI seeks to leverage.
"EAI is potentially
very significant--what it's managed to do is get a lot of the mainstream brokers interested who
previously weren't really doing anything" in regards to analyzing corporate social and
environmental performance, Mr. Packman said.
EAI also announced the addition of another
institutional investor to the initiative: SNS Reaal Group of the Netherlands. The addition of yet
another European member highlights a very visible absence.
"It's worth noting that there
are currently no US members of the initiative, either from the 'mainstream' or from the SRI
community, and EAI would welcome US members," said Raj Thamotheram, chair of the EAI and a senior
advisor at USS. "This would send a powerful signal to the global broker community--many of whom are
headquartered in the US--that local asset owners and fund managers want to see research on the
implications of extra financial issues on investee companies."
"Our experience is that
extra-financial research--covering issues like value-destroying mergers and acquisitions, CEO
remuneration packages not aligned with business strategy, human capital issues, and eco-efficiency
performance--will be of particular relevance to US asset owners and their managers who have
commitments to being active and responsible owners, who are passively invested, or who are taking
big, long-term positions using a fundamental research approach," Mr. Thamotheram told