What’s In A Name?

New York, NY – Last week, the team at Integrity Research Associates published an article on ResearchWatch talking about how the Cap and Trade programs proposed by Senators John McCain and Barrack Obama might have a bullish impact on ESG (or Environmental, Social, and Governance) research. 

However, we made a rather brash assumption — that all our readers knew what ESG research really was.  The following article, written jointly by Raj Thamotheram, Director, Responsible Investment, AXA Investment Managers and William Russell-Smith, Managing Director, AQ Research Ltd discusses the topic of adopting an appropriate name for this new type of research / investment style which takes into consideration a wide range of “extra financial” issues. 

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Why do progressive investment professionals make it tougher for themselves by choosing words that create difficulty when reaching out to unconvinced colleagues? While we don’t claim to have “the answer,” this is clearly a question worth examining more deeply. 

Having experienced the failure of the acronym “SEE” (social, environmental and ethical) and growing resistance to “SRI” (socially responsible investment) within the institutional investment space, most practitioners and commentators who want change in the investment system – and for shorthand we will call this constituency the “progressives” – have switched to using “ESG” (environmental, social and governance) while some have plumped for “non-financials.” 

What’s in a word or phrase, you may ask? Is this an interesting but essentially theoretical concern?  Why should “ESG” do so much better than the failed “SEE” just because it has one less “E” and one more “G”?  What is surprising is that many who seek to engender change still insist on using these ineffective phrases. One might expect those who have much invested in the success of this development to commission more detailed market research. No one has reported doing so. The obvious question is why? Three forces might be at work: 

• Maybe the producers who service – and rightly hope to profit from – this market are keen to retain the language of their specialisation. Hence the stress on the three component parts – “environmental, social and governance.” On the financial research side, we see similar specialization e.g. equity research, debt research (and the desire of some firms to produce multi-asset class research).
• Organisations who face internal debates over whether and how quickly to acknowledge this “new” agenda may feel more comfortable with a phrase which recognises the primacy of the financial and gravitate to using “non-financial” to cover the rest.
• There seems to be no significantly better alternative. One favourite – “drivers of long-term value” – fails to capture the risk dimension, which is arguably the bigger factor. “Intangibles” is a term which isn’t easy to grasp and “ethical” carries too much baggage. McKinsey & Co. has taken to using “corporate health,” the EU Commission talks of “Key Performance Indicators,” consultants choose “comprehensive business reporting” and so on. But perhaps the real paucity with which we are struggling isn’t primarily about the absence of a good enough phrase. Perhaps it is a paucity of investment beliefs and mental models. Is this frame of mind determined by other societal factors? Consider information from AQ Research’s contact management system:
   

  	All Brokers & Fund Managers	Identified “SRI” specialists
  Male	86%	73%
  Female	14%	27%
  Total number	13,550	313

Source: AQorn

Whilst the female/male ratio is well below what would be expected from the general population, “SRI” attracts a higher ratio of females. Is this cause or effect i.e. that women are more comfortable with “SRI” issues than finance, or just quicker to grasp the importance? Do women use different language or interpret language differently? 

The good news is that a growing number of practitioners are becoming what we call progressive. More asset owners are speaking of being long-term or responsible investors or both. Brokers are talking of incorporating these factors into their mainstream research as the specialists integrate among the general sell-side analyst population. However, whilst many Continental European managers are focused on “integration” and related initiatives using extra-financials, does that mean these factors are extra or add-ons? 

To investigate some of the issues raised, AQ Research, AXA Investment Managers and FTfm have jointly created a survey for investment professionals to register their views. We would encourage all industry participants to take part, with a particular invitation to the mainstream- not just specialists in this field.  The authors believe that this is the first major survey of mainstream participants. 

“If it’s so important, how come we don’t agree on what to call it?” is available at www.aqresearch.com/survey until July 14, with the results being published in FTfm shortly thereafter.