Mainstreaming Responsible Investment - AccountAbility

Responsible Investment
and Sell-side Analysis
ABN AMRO’s Climate Change
ABN AMRO published “Climate Change and Analysis” in November
2003, a 32-page outline of an analytical framework. The report was
initiated by a head of research who identified a cross-sectoral theme
and saw an opportunity to involve a number of sectors across his
research team. The aims of the note were twofold: “As well as
hopefully providing useful information to our investor clients, the
purpose of this note is partly to encourage our company analysts to
include these issues in their thinking.” In order to enhance the external
profile of the note, its publication was timed to coincide with the
Institutional Investor Group on Climate Change (IIGCC) a couple of
weeks later.
It was comprehensive, in that it included most of the industries likely
to be affected by climate change issues (such as metals and mining,
utilities, automotive, aviation, insurance).
It helped to create a contextual background against which ABN
AMRO’s clients could judge the need to adjust to climate change
pressures for individual sectors and companies.
Negatives
Sales teams could not identify the key selling points of the research.
It lacked specific equity recommendations and was therefore of itself
not “actionable” and not “commercial”.
The lead author was helped by a number of factors that few individual
sell-side equity analysts are able to draw upon. Having previously
been an equity strategist he already had experience in writing across a
broad canvas. As Head of Global Research he was able to call for
collaboration by research teams across a range of sectors. His
managerial position also provided the authority to justify an exercise
that, in time alone, represented an investment.
The report received various reactions. Among the external audience, it
was welcomed by fund management companies with a longer-term
viewpoint and achieved its goal of wide circulation around the IIGCC
conference. However there is little evidence that it attracted much
attention from investment managers outside of this group. Internally, it
succeeded in focusing analysts on the issue with follow-up in a small
number of sectors, but failed to gain significant traction as a
“marketable” product among the equity sales force.
It failed to adequately quantify any of the issues.
It was perceived to have been a burden in terms of drawing senior
analysts away from their immediate profit and loss responsibilities.
The note demonstrated to ABN AMRO’s analysts that it is possible to
write a broad, cross-sectoral piece of research, outlining a global
environmental issue and creating a context in which to make
decisions regarding investment at both a sector and company level.
Where it succeeded was in condensing a very broad issue and
highlighting the key questions for shareholders. The feedback
suggests that where it fell short was in failing to, first, provide answers
in a way that was relevant to the majority of clients (and the sales
people who talk to them) and, second, to deliver investment
recommendations.
The range of critical comment could be categorised as follows:
Positives
It dealt with a topical and material issue and supported ABN AMRO’s
involvement in the IIGCC conference in November 2003.
It was a good effort in a cross-sectoral approach to a major
global issue.
What is apparent from the reaction to the note is that innovative
research such as this requires both a very strong grasp of the issues
(allowing a very structured argument of the likely outcomes) and the
ability to focus on the most likely scenario. It needs to be founded on
sufficient information or estimation to identify causes, their most likely
effects and (critically) the probable impact on sectors and on
individual equities.
Mining analysts who have achieved sporadic success in identifying and quantifying emerging risks have been reacting to specific
events. An example would be the original leaking of South Africa’s draft mining charter, which was a distinct catalyst for
movement in share prices. With knowledge of mining company exposure and informed guesswork on the likely impact of black
economic empowerment legislation, sell-side equity analysts were able to write research quantifying the likely effects and
indicating appropriate share price levels.
Few, however, have been successful in to trying to outline the mining industries’ longer-term trends or the appropriateness of
company business models. As yet no-one appears to have interpreted recent events as an indicator of future returns.
Yet it would be unfair to pick on mining analysts, when in truth the broad philosophy of responsible investment has made little
headway among most mainstream equity analysts. This reluctance to move the research time horizon beyond the foreseeable
36