What, apart from cash incentives, grabs the attention of investment analysts? Next to nothing -- which is exactly the problem, according to an association of asset managers and pension funds.
The Enhanced Analytics Initiative wants sell-side analysts to begin measuring what it calls extrafinancial issues, such as corporate governance and environmental awareness. And to make their point, its ten founding members are offering brokers -- what else? -- a monetary reward.
The EAI’s members have promised to split 5 percent of their combined brokerage commissions -- a pool that could total more than E5 million ($6.5 million) annually -- among those firms that rise to the challenge. In January the group released its first report, commending research divisions at seven trading firms: Deutsche Bank, Dresdner Kleinwort Wasserstein, Goldman Sachs, HSBC, Morgan Stanley, UBS and WestLB.
Deutsche Bank, for example, has assessed 1,200 U.S., 350 U.K. and 300 European companies, assigning them scores that allow investors to quantify their potential governance risk. “It is always nice when a client regards your research warmly. In this instance, I think there has been a meeting of minds,” says Gavin Grant, director of global corporate governance research at Deutsche Bank in London.
Members of the EAI include Deutscher Investment Trust (an investment division of Allianz); Generation Investment Management, the U.S. money manager formed by ex-Goldman partner David Blood and former U.S. vice president Al Gore; and the Universities Superannuation Scheme, the U.K.'s biggest pension fund.
The member doling out the biggest prizes is BNP Paribas Asset Management, with E170 billion in assets. Philippe Lespinard, BNP chief investment officer, says he believes brokers will in time recognize the value of tracking nonfinancial issues. Take the case of Swiss engineering firm ABB, whose share price collapsed in October 2002 after asbestos-related liabilities of a U.S. subsidiary almost bankrupted the company. Says Lespinard, “All it needed was an awareness of these issues as a potential source of risk.”
At the same time, Lespinard, a former investment officer for the World Bank, stresses that the EAI is not promoting socially responsible investment in a different guise. SRI specialists may have political agendas, he says. “We are a mainstream investor and think this sort of research should be mainstream.”
