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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.

"The '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.

This comment 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."

In the 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.


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