Some big investment managers are using extra-financial research to illuminate threats to performance that exist beyond the reach of traditional stock analysis. And they’ve found that risk takes many forms. SIMON MUMME reports.
The financial data of any business is just one piece of the risk puzzle. Behind these numbers, methods of managing staff, resources and strategy in a shifting regulatory landscape can affect a company’s sharemarket performance.
Frustratingly, traditional risk models can’t translate these influences into numbers. In this extra-financial risk spectrum, environmental, social and governance (ESG) factors play significant roles. Among the big funds managers in Australia that have tackled this dimension of risk in their analysis processes are Colonial First State Global Asset Management (CFS GAM), ING Investment Management and Perpetual. Some of these institutions want to know if a particular company’s intellectual property is secure, if it manages staff poorly or how it plans to operate under an impending emissions-trading system.
Others seek broad, thematic information such as sector analyses on the clean-tech or bank lending industries. “It’s all about looking for risk and risk management policies. It’s about broadening the research perspective as different risks and opportunities have emerged,” Mark Bytheway, chief executive of the Sustainable Research Institute (SIRIS), an extra-financial research provider, says.
Bill Hartnett, managing director of the Sydney office of Innovest, another extra-financial research firm, says that managers are continually looking at new types of risk models or indicators. Some have found value in extra-financial research. “The key for us is to put it in language that funds managers understand,” Hartnett says. Initially, socially responsible investment (SRI) product managers were the first managers sourcing research from SIRIS, but enquiries now come from mainstream funds managers.
Major brokerages Citi and GoldmanSachs JBWere now provide this research, too. “Investors are asking: is this a rising risk and, if so, how can I respond to it?” Bytheway says. According to Innovest, there are only 15 companies in the ASX200 that have “world-class” extra-financial ratings, Hartnett says. The remaining companies in the top 200 are poor. “Australia is a risky market. In terms of the strategic response to climate change, we’re generally behind the eight-ball…Australian companies are some of the most emissions-intensive companies going around.”
Innovest regards companies’ responses to an impending domestic emissions-trading system, to be implemented in 2010, as a matter of stakeholder capital, which encompasses the ways that companies interact with governments and regulators. “How they deal with regulation is a determinant of management quality,” Hartnett says. Compared with European companies, Australian businesses are more vulnerable to the commercial risks of operating in such an environment, because the Europeans have been operating under an emissions-trading system for the past three years.