July 25, 2006
Survey Examines Nomenclature and Numbers Fueling SRI and Extra-Financial Research
by Bill Baue
The fourth annual survey from Thomson Extel and the UK Social Investment Forum looks beyond the
numbers to assess the role of language in promoting uptake of SRI research.
What's in a name? In the case of socially responsible investing (SRI), terminology has sparked
intense controversy such that the very act of debate at times overshadows the substance of the
issues at hand. This year's SRI & Extra-Financial Survey, sponsored by the UK Social
Investment Forum (UKSIF) and conducted by Thomson Extel, illustrates the phenomenon
vividly. For the past three years, it was simply called the SRI Survey.
"For the Survey this year, in consultation with UKSIF and the market, we specifically
broadened the scope beyond SRI to include 'Extra-Financial,'" states Steve Kelly, global head of
Thomson Extel Surveys, in reporting the findings. "While this has enabled a somewhat wider range
of data to be gathered, it has also brought into sharp relief the question of nomenclature."
"The lack of consensus on terminology hampers the mainstream uptake, and in some regards is, we
feel, an arid debate," the report continues.
Thomson Extel surveyed 124 asset owners and
managers (the so-called buy-side) and 16 brokerage firms (the so-called sell-side) in Europe and
the UK between March 27 and June 14, 2006, and invited commentary from the buy-side.
'industry' needs to get rid of the term 'extra-financial," because this is exactly what SRI
analysts are trying to prove: that environmental/social/ethical issues are, after all, 'financial'
as well," stated one buy-side respondent, framing the problem succinctly.
exposes the paradox of SRI: terms are needed to define the governance, social, environmental, and
ethical (GSEE) issues so poorly understood by the mainstream, but the inherent obtuseness of
reducing complex concepts into acronyms ironically limits uptake. Science often dissects elements
into their constituent components in order to better understand the whole; the survey reveals that
the buy-side firms grasp the parts well enough and are yearning for a holistic integration of
"extra-financial" issues into financial analysis.
Shifting from semantics to statistics,
the survey reveals increasing uptake of SRI (or whatever you want to call it), with 49.82 percent
of buy-side firms applying SRI on more than 10 percent of total assets (up from 46.66 percent in
2005 and 41.38 percent in 2004.) Interestingly, when asked to prioritize attributes valued in
research, buy-side firms rated "integration of SRI/extra-financial with mainstream issues" third
behind timeliness and breadth of coverage.
It seems that the Enhanced Analytics Initiative
(EAI) is doing its job, with 32.08
percent of buy-side firms devoting over five percent of brokerage commissions to SRI research--up
more than five-fold from 6.25 percent of firms making such an allocation last year. If commissions
correspond to rankings, Citigroup Global Markets seems to be the
most successful sell-side firm, as it topped multiple categories including SRI research,
long-thematic research, SRI sales, and bespoke (or "custom") work.
In one of the few
areas where the survey posed the same question to buy-side and sell-side firms--the importance of
various SRI/extra-financial data sources--both highly prize information coming directly from
companies. Results found that the buy-side values data from independent research providers
somewhat more than the sell-side, perhaps because the independent research providers could
represent competition for brokers. Interestingly, the buy-side values data from "sustainability
specific media" significantly more than the sell-side, though one wonders how terminology impacted
these results, as the sell-side was asked about "extra-financial specific media."
ranking of independent research providers, Innovest Strategic Value Advisors topped the list with
16.38 percent support, followed closely by the Ethical Investment Research Service (EIRIS) with 13.51 percent. The highest ranked
fund managers in terms of their understanding of SRI issues were Morley Fund Management (27.14 percent), F&C Asset Management (19.63 percent), and Henderson Global Investors (14.65 percent.)
Perhaps the oddest results in the whole survey came in the extractive industries sector of the
quoted companies rankings. While it is no surprise that BP (ticker: BP) placed first, it is hard to
explain how ExxonMobil (XOM), which seems to take pride in
environmental irresponsibility, placed fourth to beat out fifth-place Shell (RD), which greatly improved its
environmental and social responsibility since the 1990s.