What ‘good’ might look like for investment research providers in 2024 …

… in respect of sustainable investment & ESG

In earlier posts, I asked:

• What might ‘good’ look like for sustainable investment & ESG in general in 2024?
• What might ‘good’ look like for asset managers in particular in 2024?

In this post, I extend my analysis to what ‘good’ might look like for (sustainable) investment research providers?

What ‘good’ might look like for (sustainable) investment research providers

IMHO, it will be ‘good’ if … by the end of 2024:

1] Sustainable investment / ESG research providers make a clear distinction between DATA, RATINGS and RESEARCH

There seems little doubt that the breadth and granularity of data will extend as reporting standards increase (and data is used (often in a wholly inappropriate manner to meet these and as web-scraping tools – including natural language processing bring down the costs of gathering and processing such data.

While such data may have uses in portfolio analytics and exposure reporting, our work in 2023 for WBCSD on how investors integrate sustainability factors into intrinsic valuation (and therefore into capital allocation) highlighted how a fundamentally different class of information will be needed – namely research that aims to create a clear line-of-sight between sustainability trends, market context and company profitability.

Such contextualised information containing forward-looking analysis (or RESEARCH as it is commonly known) is already produced for sustainable investors to a degree. ?However, far less attention is paid to it than is paid to the production of DATA and RATINGS.

As a first step, the class of RESEARCH needs to be recognised as distinct from DATA and RATINGS. ?Then it needs to be applied and expanded to scale – such that it sits alongside DATA and RATINGS as a key component of sustainable investment practice.

How much progress can be made in 2024? ?Hmmm … let’s see.

2] Every firm that offers RESEARCH (or makes the claim that their DATA or RATINGS are useful for PRE-TRADE analysis) makes it a point of principle that a trained ANALYST will meet (virtually, probably) with every company on which they produce research to hear a presentation of the company’s sustainable investment case and to ask any questions about their exposure to sustainability transitions.

It may seem self-evident that anyone purporting to hold a public view on a company would already make it a priority to hear directly from the relevant people at that company and to challenge directly their strategy, ‘direction of travel’ and the evidence presented by past performance.

However, this is practice is far from widespread amongst SRI/ESG research providers and companies often struggle to identify a relevant named analyst for their company and sector.

(Often – indeed – when approaching research providers, companies are directed to ‘issuer relations teams’ whose role appears to be more about explaining the provider’s research process to the company than listening to the company and learning about its environment and response).

If sustainable investment is to compete effectively in the (ferociously competitive) market for investment ideas, we have to learn to respond to the world as it is rather than trying to fit the world into models that work for us.

So, like all investment research providers, we need direct communications channels through which we can compare what is happening in the real world with the models that we use to translate this into investment decisions. ?Having named contacts on both sides (at the research provider and at the company) is an essential first step in this regard.

3] A competitive market (driven by the market forces of supply and demand) is developing around the quality of sustainable investment research at the level of sectors, issues and stocks

If the industry’s desired goal is for asset managers to integrate sustainability factors into their intrinsic valuation (thereby creating a cost of capital gradient between unsustainable and sustainable business practice), they will need to be supported by high-quality (investment relevant) RESEARCH.

Such research will only be produced on a sustained basis if there is market demand and if that demand manifests within research purchasing budgets for asset managers. ?Once there is demand and budget, supply will enter the market and platforms will develop to match the two.

A handful of leading asset managers (most notably Stewart Investors) are transparent about their demand for such research and are prepared to incentivise it.

IMHO it would be great if a dozen major investors stepped up in 2024 and expressed demand publicly (as well as privately) thereby creating a supply stimulus for high-quality, investment-relevant sustainability research.

Progress made recently

As one of SRI-Connect’s primary objectives is to stimulate and facilitate the development of ‘investment-grade’ sustainable investment research, it won’t come as a surprise to users that we focused on this area in 2023 and:

• Articulated a framework for integrating sustainability into intrinsic valuation and identified case studies and best practices
• Gave visibility to companies on those analysts who have identified their sectors of interest (via our Directory)
• Promoted and facilitated the flow of commissioned research via our Research marketplace
• Highlighted all published research via Market Buzz?

Next up …

In upcoming posts, I will extend this discussion to:

• What ‘good’ might look like for listed companies in 2024 …

For discussion …

Discuss below or via Research: Products, practices, value chain & economics:

• Research: Should we / how can we differentiate RESEARCH from other sustainable investment services (such as data and ratings)?
• Analysts: How important is it for analysts at research providers to identify (to companies and clients) the sectors and companies that they cover?

Economics of the value chain: How good are asset managers at articulating exactly what they need from research providers and putting their money where their mouths are on this? ?What could they do better?