The new European Commission MiFid II regulation is now in effect, as of January 3. Impacts on sell-side research firms’ business models, capital markets and public companies in Europe will be immediate. Repercussions will eventually affect similar institutions in the U.S., due to global competition in the capital markets. Anticipating when, how or how severe is the subject of professional debate.
MiFid II is meant to provide comprehensive reform and an integrated EU financial market. In the space of this blog, I will narrowly reflect on its mandatory unbundling of pricing and services aspects. The impacts of these will cause current Aftermarket research business and financial models to be under attack, in terms of the reason(s) for and actual purpose of sell-side analysts’ existence.
Sell-side analysts should take a good look at the rapidly growing mainstream investor interest in ESG / Sustainability, as it could provide a critical life-line to bring their syndicated research to a new level of purposeful differentiation and survival.
Are sell-side analysts letting themselves be beaten by buy-side analysts in exploring ESG / Sustainability in investment analysis and coverage theses? How much of what sell-side analysts have traditionally produced is replaceable by quantitative algorithms? Could the threat of MiFid II to Aftermarket research firm’s revenues be enough to more broadly convince the sell-side community that the time has come to re-balance research report templates and commentary to include extra-financial and non-financial ESG / Sustainability performance monitoring?
As I have pointed out in previous blogs:
Following this logic, Aftermarket research analysts (both sell-side equity and fixed income) could be uniquely positioned to become key facilitators for improved ESG / Sustainability performance analysis and communications. They already traditionally serve as a bridge between company (IR) and investors.
U.S. sell-side analysts may have got a bit of a reprieve through the S.E.C., but will it last?
What sort of stress is the buy-side also experiencing in the concurrent shift from active to passive investing that could make them even more fierce competition to sell-side analysts?
Isn’t it also about time for the aftermarket research professionals to re-visit where human analytical capital provides the critical differentiating perspective to beat the markets that computers can’t?
Could MiFid II actually turn out to be a godsend to force a critical re-think of sell-side research models?
Have some analysts already begun to shift toward ESG / Sustainability analysis in their research reports?
I used AlphaSense to run a simple “ESG” word search in its aftermarket research subscription feature, to see what I might find across all industries, filtered for just the last 12 months and just in the U.S.
Source: AlphaSense query * Search resulted in 103 companies, but ~80 net of false positives; multiple results per company
Source: AlphaSense query
If you’ve read any of my previous blog posts on AlphaSense, you appreciate how 80 companies is a small fraction of the number of companies that actively communicate about their sustainability programs and performance progress.
It is also interesting to note how limitless the possible market demand for aftermarket research coverage of ESG / Sustainability performance analysis and communications could be, as more of the nearly 8,700 publicly listed companies on U.S. stock exchanges intentionally develop sustainability programs and communications.
A few aftermarket research analysts appear to have “gotten the memo,” but is this enough to save their field from grim, MiFid II-related contraction? This is unlikely, unless more sell-side and fixed income aftermarket research analysts quickly step-up in knowledge and coverage of ESG / Sustainability across their respective coverage universe(s).
Please seize the moment to branch into ESG/Sustainability performance coverage
– The opportunity is real and the demand is obvious!
1. AlphaSense: Might Growth in Passive Sustainability Investment Strategies Be Complementary
2. European Commission: MiFid II
3. AlphaSense: Sustainability in the Mainstream
4. SGAAnalytics: Interview with Mike Tyrell
5. NIRI: SEC Grants Relief on MiFid II
6. Bloomberg: U.S. Shields Wall Street From MiFid II Threat to Research Model
7. Reuters: U.S. securities regulator grants Wall Street EU research rules reprieve
8. IR Magazine: SEC ruling on MiFid II means business as usual
9. IR Magazine: Cut in equity research will be less dramatic under MiFid II, research finds
10. IR Magazine: Fidelity International to pass on research costs to investors
11. IR Magazine: Firms to absorb the cost of investment research under MiFid II
12. FTfm: ESG Investing
13. Google: quick search
Pamela Styles is principal of Next Level Investor Relations LLC, an Investor Relations consultancy with dual IR and ESG / Sustainability specialties.