How can growth in passive and sustainability investment strategies affect a company’s relationship efforts and effectiveness with investors and buy-side and sell-side analysts? Should we also think about this in context with the concurrent trend of shifting sell-side research business models both in the U.S. and Europe? Might ESG / sustainability be a saving grace?
These, and other related questions warrant strategic consideration by company IROs, C-suite leadership and Boards of Directors.
After taking a look at AlphaSense and other current research, my takeaway is that proactive attention to a growing, mainstream sustainability investor base can effectively provide a positive bridge and lifeline in the inevitable transformation of both the investor relations and investment research fields.
Nearly 40% of U.S. equity assets under management (AUM) are now held in passive (rules-based) vehicles. Juxtapose this with over 20% of U.S. equity AUM ($8.72 trillion) that is now using sustainability strategies in investment decisions. One can see the growing chance of cross-over between these investment strategies that has piqued my attention – and others’ too.
Passive investing includes quantitatively driven, automated and/or high frequency electronic trading, index funds and exchange trade funds (ETFs).
Sustainability investment strategies are bifurcated by general reference as either exclusionary / values-based or inclusionary / performance-based. The latter is further defined by social motivation or positive ESG performance, index tracker or theme specific.
In a May 2017 paper published by Nasdaq ($NDAQ) on passive investing, the author made several key points in talking about this paradigm shift and convergence:
The author also correlates the battle for control and the driving force of socially responsible investing (SRI) / ESG:
More recently, Morningstar’s ($MORN) head of sustainability research publicly shared:
Meanwhile, the traditional sell-side research business model has undergone and continues to undergo significant change driven by, not the least of which, the Wall Street firms’ settlement with the New York Attorney General that affected the role of the sell-side analyst within investment banks in the U.S. and now the new European Securities and Markets Authority MiFID II regulation.
Once the 2018 implementation deadline goes into effect, MiFID II is expected to not only impact financial institutions and sell-side research pricing, justification and services in Europe, but also to impact research firms in the U.S. who they compete against.
As Mike Tyrrell, editor of the specialist SRI investment research and communications network, SRI-CONNECT, points out:
Technology has changed fundamentally the nature of communications and the availability of data. Regulation (MIFID II) will change fundamentally the business dynamics of investment research. To survive and thrive as areas of investment focus, sustainability and corporate governance research will need to deliver insight to investors and not simply swamp them with data. To enable integration into ‘mainstream’ decision-making, our industry will need to supply depth and diversity of view.
To get an informal sense of analysts’ attention to sustainability, I checked the SRI-CONNECT 5,000+ membership listing. Of these, >1,200+ identify as ‘buy-side’ while fewer than 120 identify as sell-side analysts (the rest are IROs, institutional investors, independent research providers etc). From this, it looks like there is a disparity between buy-side and sell-side analysts’ attention to sustainability; something that sell-side analysts might do well to heed in the face of the growth of passive investment.
Taking my curiosity one step further, I used AlphaSense to find which sell-side analysts are writing about sustainability, if any. I ran a search in AlphaSense for keywords sustainability and ESG, and limited the timeframe to the last 12 months. I found ESG / sustainability references by 19 research firms, in 475 documents, on 163 companies, across 11 sectors and 49 industries.
The research notes were dominated by European firms; the clear leader being Credit Suisse ($CS), followed by Natixis ($NTXFF), Kepler Cheuvreux (privately held), Deutsche Bank ($DB), Société Générale ($GLE.PA), HSBC ($HSBC) and others. JP Morgan ($JPM) was the only top-tier U.S. research firm with a notable number of results. I also found a Deutsche Bank ESG conference primer with comments that further support the focus of my blog:
Why isn’t there more U.S. sell-side analyst commentary on sustainability performance? How soon will they adjust their research value proposition by adapting to the dynamic shift toward ESG / sustainability investing? What is tying the sell-side analysts’ hands? Could there be mutual benefit gained from IR and C-suite leaders stepping-up suitable sustainability performance disclosure and discussions, so sell-side analysts can correlate the applicable information to constructive research and analysis on more companies?
Investors are increasingly interested in expanded communications to include sustainability goals and performance discussions, a.k.a. extra financial, non-financial, intangibles or other.
A recent survey of IROs found only 14% indicated they regularly communicate with passive investors; 21% have made shifts in their IR strategy as a result of the increase in passive investing, 79% have not. The survey also identified that when passive investors contact IROs, their primary topic of inquiry is corporate governance policy (70%), followed by board structure (42%) and sustainability policy (28%). There is a lot of ESG/Sustainability here…
In my own modest survey of about 100 attendees, during a panel presentation that I recently moderated at the National Investor Relations Institute (NIRI) 2017 annual conference in June, titled, “ESG: De-Mystifying Sustainability for IR Practitioners,” I found that:
Two key roles of IR professionals have always been to:
1.) Prepare defensible messaging, supported with fluent fact-based performance conversation
2.) Conduct strategic relationship development with an eye toward expanding constructive investor interest in the company, while being ever-vigilant to possible unconstructive shareholder activism.
What aspects of the company’s sustainability story are unknown, unrecognized or misunderstood, that could contribute to value creation if told in compelling and meaningful IR messaging? Where might aspects of ESG be germane to expanded mainstream investor interest and communications? How might developing ongoing relationships with passive investors and sell-side analysts increase shareholder value, not only by increasing demand for the company’s publicly traded equity and debt, but also by decreasing the risk of rogue shareholder votes?
I believe it is important to take a positive approach to sustainability and to be curious. Look for myriad opportunities it can present to your firm or company. If for no other reason, remember that regardless of how company equity shares are purchased, most all shares have the right to vote.
Developing and maintaining ongoing relationships with both passive and sustainability investors – not only with the investing side but also with the voting side of the investment institutions – is an ongoing imperative to strategically position and protect your firm or company.
A blog must stop somewhere. Several recent related pieces I have (co)authored that may be of interest:
Pamela Styles is principal of Next Level Investor Relations LLC, an Investor Relations consultancy with dual IR and ESG / Sustainability specialties.
1. Goldman Sachs: Directors’ dilemma: responding to the rise of passive investing
2. NIRI Analytics: Proactively Attract Investors in an Increasingly Passive World
3. AlphaSense: The Expanding Significance of Sustainability in Capital Competition
4. Congressional Research Service: High Frequency Trading: Overview of Recent Developments
5. Nasdaq: There is Nothing Quiet About Being Passive
6. Sustainability Brief: Sustainability Investing Shift to Inclusive Strategies
7. Morningstar: What exactly is sustainable investing?
8. Q4: The art and science of corporate storytelling: An interview with Rob Berick, Falls Communications
9. WeConvene: Looking to the Future: MiFID II and the Impact on Investor Relations
11. SRI-CONNECT: Quick search: Asset Managers
12. SRI-CONNECT: Quick search: Sell Side – Research
13. Deutsche Bank Research Report, dated 31 October 2016, available on on AlphaSense
14. GRI: Sustainability and Reporting 2025
15. NIRI Analytics: Proactively Attract Investors in an Increasingly Passive World
16. NIRI: Archived Conference Materials