Neil Stewart reports from the IR Magazine Winter Think Tank in London, where sustainability, consensus estimates and a new scenario analysis challenge were on the agenda
When we chose socially responsible investment (SRI) as one of the topics for our recent Winter Think Tank, we didn’t expect any surprises.
After all, social and environmental factors are well ensconced in the European fund management community, and European companies have well-established sustainability reporting programs.
Three eye-opening phenomena emerged, however. The first was the degree to which SRI factors have moved to the mainstream. For example, the director of the Paris sales desk for a major investment bank handles SRI clients as a core part of his mandate.
He commented that the SRI world is bigger than IROs think, and encompasses not just the equity world but also other asset classes.
Emphasizing that point, an SRI analyst from a mainstream institutional investor insisted that sustainability issues should be integrated into regular interactions with all segments of the fund management industry. ‘Don’t use the ‘S’ word,’ she warned, referring to sustainability.
‘As soon as you do, you’ll be relegated to the SRI analyst. Instead, incorporate sustainability into your core strategies and present them as part of your main investment presentation to mainstream portfolio managers.’
Sustainability practices under review
The second surprise was that IROs from blue-chip companies, which typically have long-standing CSR programs, had come to the think tank expressly because their sustainability programs and reporting practices are under review.
For example, they’re considering whether their sustainability reports should be integrated with financial reporting or kept separate. They’re also wondering about the benefits versus costs in time and resources of participating in sustainability indices like FTSE4Good and the DJSI.
‘There are a lot of indices out there and we’ve done a great deal of work understanding which ones are most important,’ one IR professional commented. ‘How integral are they to investment decision making? That’s something we’re trying to evaluate.’
Finally, Bank of America Merrill Lynch unveiled new research entitled SRI Consensus, which analyzes the top 500 global SRI funds to identify the most popular and least popular stocks in those portfolios. The bank plans to update the research every quarter.
Consensus estimates discussion
A separate discussion of consensus estimates also made a lot of the European IROs at the think tank sit up and take notice.
It has long been standard practice for IR teams to compile their own consensus estimates rather than rely on inconsistent numbers published by news providers like Bloomberg or Reuters.
What is new, however, is the degree to which companies are promulgating their consensus estimates – at least to their covering analysts, but often to the wider public, too.
Think tank participants agreed that compiling consensus numbers is useful in tracking how the market perceives a company’s communications while helping to inform senior management about the market’s expectations. Consensus numbers can also provide a useful benchmark for sell-side analysts.
Most think tank participants usually handle the time-consuming task themselves, though outsourcing it to an independent firm is an increasingly popular option, and brings the added benefit of an independent viewpoint.
Where participants differ is in distributing the numbers publicly. Some see it as necessary disclosure in support of transparency, a few publish all the numbers on their website, others distribute them to the media and participating analysts, while a handful stick to verbally informing analysts.
But some companies refrain from distributing estimates for fear that publishing a consensus number could be seen as endorsing it as a forecast.
One company explained how twice a quarter it compiles its own consensus by sending a detailed spreadsheet to covering analysts. A summary is then made available on the company website but analysts also get a detailed spreadsheet including ‘splatter’ charts so they can see how their own estimates compare to consensus on revenue and EBIT.
Scenario analysisFor the first time at an IR Magazine Think Tank, we gave participants a challenge. We instructed them to imagine they worked for ABC, a fast-moving consumer goods company listed on a major European stock market and with global operations.ABC has global revenue sources including 30 percent from Asia, and a premier fashion line, Brand X, experiencing strong growth, particularly in Asia, that accounts for more than 45 percent of ABC’s global sales. With those facts in mind, we invited our think tank participants to consider these options: 1. Dual-list ABC on an overseas market. 2. List Brand X on an overseas market while retaining a strategic stake. 3. Spin-off Brand X. Of the four groups of IROs tackling the issue, three chose option one. The last group chose an option that wasn’t even proposed: let ABC be entirely subsumed by Brand X. ‘If you’ve got the business in Asia, it’s easy to be on the road there, so that’s a proportional response to the Asian investment pool as it now stands,’ one of the IROs from this group commented. |
Sponsors
IR Magazine Think Tanks are free, invitation-only events for select groups of senior-level IR professionals. The next event is the West Coast Think Tank in Palo Alto on March 15, 2012. Find out more at www.irmagazine.com/events. The IR Magazine Winter Think Tank was sponsored by:
