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Mike Tyrrell in conversation about ESG research trends | Video Interview

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Participants:

Mike Tyrrell | Founder, SRI-CONNECT

Mike Tyrrell

About Mike Tyrrell

Mike Tyrrell is the founder of SRI-CONNECT, the professional research and communications network for investors, analysts and listed companies involved in SRI and corporate governance. Mike has over 17 years’ experience in SRI on the buy-side (Jupiter Asset Management) and sell-side (HSBC Global Equities and Citi Investment Research).

Rahul Agarwal | VP, SG Analytics

Rahul Agarwal

About Rahul Agarwal

Rahul is a Vice President at SG Analytics. He has over 17 years’ experience across a wide range of research and consulting engagements. He has set up and managed large research and consulting engagements for investment banks, asset and wealth managers, and corporates globally.

Discussion:

[R] ESG Investments have grown quite substantially over the past few years. To talk about some of the key trends that we see in this space, I am joined today by Mike Tyrrell from SRI-CONNECT. Mike, thank you for joining the discussion.

[M] Thank you for having me.

ESG Investor Survey EY

[R] Mike, let’s talk a little bit about what asset managers perceive about data that is being reported by companies on the ESG side. EY recently conducted an institutional investors survey and phenomenal 60% of the respondents felt that companies aren’t actually disclosing all ESG risks that are relevant to their business. Now, given some of these gaps that we see in information availability, how do you think asset managers are going to cope up with something like this? Do you think it will encourage asset managers more towards bespoke research providers. Do you think that is a trend that will pan out?

[M] I might start by being a bit controversial and say that while asset managers do complain about the quality and quantity of sustainability information that they receive from companies, they probably complain a little too much. In fact, you will see a lot of companies also complain about the excessive information they have to provide on these subjects to asset managers and then isn’t ultimately used. The problem is that over decades both sides have flung insults at each other across barricades, or just across bureaucratic disclosure initiatives. Where I think we need to move forward is for more direct contact between companies and asset managers but also better analysis and insight between the two.

So I do think that asset managers will turn to independent research providers. Sometimes because these independent providers can get better and cheaper access to information about the companies than the asset managers can themselves, but I think more because the independent specialist can get the depth of insights, the local market knowledge, the sector issue specialism that that asset managers want. So data will prove part of the piece, but I think the local and specialist insight will be more significant.

Green bond issuance 2013-2017

[R] There has been a significant growth in green bonds issuance over the past few years. In fact, in 2016 alone green bond issuance stashed about 90 billion USD. There are significant growth projections going into 2020 for ESG bonds. How do you think green bonds will impact ESG investing in general and more specifically how do you think green bonds will influence ESG investing in the fixed income space? I would also like to hear about your thoughts on some of the fixed income indices that have been introduced in the market. How do you think those will pan out?

[M] I am not a green bond specialist, nor really a fixed income specialist, but I do think that green bonds have brought useful and interesting momentum to the sustainable investment space more broadly. I think in fixed income they have had the very interesting effect of bringing in energy and of course money into the space, and I think some of this energy and money will leach across into the wider analysis of how environmental social issues affect other fixed-income instruments. So I think, they have been very supportive of an existing trend towards the application of sustainability and corporate governance factors to fixed income.

But I think it goes more broadly than that because green bonds also encourage infrastructure investors to look at sustainable investment opportunities, and I think they also encourage banks to look at climate change and environmental exposures of their balance sheet. That this is something we are going to see much more interest in on the back of the taskforce on climate-related financial disclosures. So I think the broader understanding of lenders and bond investors in sustainability is going to grow. And then I think for equity, there is also a knock one effect, because the information that is used to clarify whether a bond is green, or climate resilient, or has sufficient mitigative capacity, and also the processes that we go through to make these definitions will be used again in equity investment as well.

[R] Let me approach the topic from a slightly different angle: With MiFID coming in now, Mike how do you think the introduction of the MiFID regulations early next year will pan out for ESG research in general? And how do you see asset managers coping up with their demands for ESG research once the MiFID regulations come into play?

MiFID II Governance Programs - interview with Mike Tyrrell

[M] If I could start with the second of those, I think MiFID is a huge challenge to asset managers, not only in Europe, where the regulation affects but also around the world. But I think it is an exciting one. I think it is probably a once in a generation opportunity for asset managers to sort out their research supply chain. We needed that opportunity to arise for SRI corporate governance investors.

[R] Why do you think it is a once in a lifetime opportunity?

[M] Once in a generation. Because when I started working on the sell side, one of the first things I was told is ’your job has a limited shelf life, commissions are going to go – sell-side research will go,’ and I had a good career on the sell side and I have moved on to sales. It still hasn’t happened, but it looks like it is going to happen next year. Asset managers are going to be required to take more responsibility and more ownership for their budgets.

[R] Do you think it could be one last opportunity – if we don’t actually make use of it at this point, then future changes could actually take a fair amount of time to be implemented going forward?

[M] Yes absolutely, I think if fundamental asset managers don’t hurry this time, then passive investment will eat the business unless they sort out their bloating research supply chain now.

[R] What is your view on sustainability and governance research around this particular aspect?

[M] I think there is a huge opportunity for sustainability and corporate governance research. Not least because it puts that type of research on the same platform, on the same bases, as mainstream investment research.

The situation with sustainability and corporate governance research at the moment is a bit of a paradox. There is massive oversupply in the market. There always has been and there always will be. But at the same time as there has been this massive oversupply in the market as a whole, there was a lot of excess demand for very targeted bespoke, insightful research that helps asset managers make investment decisions. So we have this paradox between oversupply and excess demand. How do we resolve it is, of course, the question. It has to come from the demand side. It cannot be supply forced. Ultimately, the situation will only resolve once asset managers take responsibility for the research they buy and the research they ask for.

I think, when you consider it, it is slightly implausible that they don’t. Using only one source of research, it’s like a school child writing a history essay based on only one textbook – it doesn’t count. So I think if we look ahead, maybe 3 years into MiFID, to see what asset managers will be doing, I think it is realistic to expect that all asset managers that want to be taken seriously in sustainability and corporate governance will have one or maybe two waterfront research suppliers. Alongside this, they will have a panel of approved 5 or 6 specialist research providers, perhaps in particular markets, or on particular issues, or with particular sectors. They all will, of course, have their in-house capacities to be able to understand what research is needed and to make sense of it when it comes in to apply to investment decisions. So on top of these three areas of capacity, they will also have a bespoke research budget, that they will have control of but also accountability for, to pick up on those areas that the first 3 don’t meet, to enable them to seek proprietary insight to commission specific research.

This is why I think it is an encouraging time to be in the SRI research market. Yes, there is going to be a challenge, because MiFID will undoubtedly put pressure on research budgets overall. But it will put SRI corporate governance research alongside mainstream research and it will encourage asset managers to be good and active buyers of that research. I think that is what all providers want – good and active buyers.

[R] In the past few years, impact investing has come about in a big way and it has added a very interesting dimension to ESG investing in general. At the same time, it has also challenged the traditional outlook toward investment practices but one of the concerns that investors have is that there isn’t enough information which is available in the public domain to be able to identify a lot of these impact investment opportunities. What is your take on it? Is this something which will inhibit the growth of impact investing going forward?

Mike Tyrrell explains his views on the spectrum of impact investing

Mike Tyrrell explains his views on the spectrum of impact investing

[M] I think we have to look at impact investing through two different lenses. You have impact investing itself and then you have the analysis of the impact that equity investments have. They are two different ends of the spectrum. The former, the impact investing is not an area that I am particularly strong on but I think it is undoubtedly growing. It is clearly attractive to certain investor groups.

The second, the communication of the social and environmental impact that equity investments have is generating surreal interest in the sustainable investment community and is something that I feel very positive about. I think it stands to reason that SRI investors should demonstrate to their investing clients why they are having an impact. That is the point of these funds after all. I think some intelligent work has been done to use sustainable development goals as the reference framework against which that impact can be measured. There is some great work out there starting to work out impact can be managed with reference to these goals. So I am very encouraged about that.

Of course, we do have to be careful of mission grip, because we have to ensure that we don’t consider in a mineral water supplier to restaurants in San Francisco as meeting the demands of the sustainable development goal on water and sanitation. So I think we have to be careful about that temptation.

The other thing that I think we have to be careful about is recognizing that impact investing per se whether is clear intentionality, whether the social environmental objective is part and parcel of the proposition is at the different end of the spectrum from impact through equity investment, where the impact is a positive, a by-product and a co-product but not pure intentionality. Broadly I am comfortable and confident about the growth of impact and the analysis of impact within equities but I do have those points that we need to watch.

How asset managers measure social-environmental impact

[R] GIIN recently conducted a survey and staggering 75% of respondents actually said that in order to measure investment performance they are more or less using in-house metrics or in-house frameworks. Do you think the lack of a homogeneous framework across asset managers will likely impact the growth of impact investing going forward?

[M] I think in the long run you do need recognized frameworks across any investment strategy. However, I am always nervous about imposing frameworks too early in the process. If we try to do that, we will lose some of the quality of SRI and impact investing, which is of course about innovation and experimentation. So I think at the moment, lots of different people should try lots of different measures and metrics and over time those can be consolidated. I am a terrible believer in markets and I believe in bottom-up markets and I usually get very nervous once people start trying to impose top-down frameworks too early.

[R] Do you see a greater scope for ESG investments in Europe, given that we have seen a fair amount of regulatory push in the Eurozone in general? Or do you think it’s a trend that global regulators catch up very quickly?

[M] I think the support the European regulators have shown for SRI has been valued and helpful. I think other regulators will move along these lines. We have seen some of the stock exchanges around the world increasing their disclosure requirements on companies. But I think it is important to keep regulatory actions in context because they can’t drive demand. They can only support demand or show demand that SRI is an available option. The only thing that can drive demand is the demand itself. So people actually have to want sustainable investment.

The people who can incentivize this are the asset managers. So we shouldn’t sit back as an industry and expect regulators to create a market for us. We have to get active about communicating what is interesting and exciting and engaging about sustainable investment products. That ultimately will have the bigger impact on demand than what the regulators are doing. Although, obviously, their support is fully welcomed.

[R] In your conversations with investors and asset managers, where do you think investors are when it comes to emerging and frontier markets? Compared to developed markets, have you seen a lot of interest built up, or do you think there was a bit of interest a few years back, but due to various reasons, that has started to drill down a bit? Where do you think we are in the overall global context?

Mike Tyrrell explains his feelings about emerging and frontier markets in SRI

Mike Tyrrell explains his feelings about emerging and frontier markets in SRI

[M] At the moment I am feeling positive about emerging and frontier markets in SRI because I think there is growth within the markets. We are seeing in a number of emerging markets around the world, there is a nascent level of SRI interest and that is absolutely critical. We have encouragingly moved away from a world in which European or US asset managers throw demands onto companies as to what they expect in order to earn the investment dollars the investors were never planning to deliver anyway. So I think the in-market- growth is encouraging.

The second encouraging factor is that there are some specialist emerging markets SRI funds and they have clear investment rationals and reasons why environmental factors in one market, social factors in one sector, and corporate governance factors in another region are driving investment performance. So coupled with the domestic growth, the international specialist emerging market growth is very encouraging.

What remains challenging in emerging markets is the research model and the research average. There is no way that the economic model of research supports broad and deep research across all emerging markets. What I think, where we need to move to is a much more flexible model of research whereby there is some data availability on all companies, but there is also a responsive capacity within the research market to turn around and respond to individual asset manage demands on a time-sensitive basis. So covering all of Nicaragua doesn’t work, but having a capacity to be able to dig deep into a stock or a sector when an asset manager needs will be critical if we are to get adapt the research that asset managers, of course, are going to need if they get to dig out the alpha, the local market insights, the specific issue related insights.

[R] One of the challenges that we have seen asset managers face is the integration of the ESG research process with the mainstream research process. Now, different asset managers have gone about this in their own different ways but in quite a few instances this continues to be a challenge. How do you think asset managers are going to cope with something like this going forward?

[M] My experience is as you say, that it is challenging for asset managers but they get paid to do challenging. They don’t get paid to do simple. I think what has been encouraging in recent years is that we have seen a diversification of the different approaches to integration. If you are a fundamental bottom-up asset manager you will need to be looking at social environmental factors in so far as they can contribute insights and establish mispricing opportunities of individual stocks and sectors. But then you also have approaches that quant asset manager will take, using statistical, indicator driven models from deep data sets in order to be able to deliver that investment performance. I think where our industry gets into trouble is where we try to apply the wrong integration strategies to the wrong investment strategies. E.g. applying quants’ integration to a fundamental active portfolio or a fundamental active approach into a quant’s portfolio. Just as we get into trouble when we try to apply equity-based strategies to fixed income and vice versa. 

So integration is the challenge but I think asset managers are rising to it. I think what is interesting from a research providers’ point of view is that as different integration strategies emerge, different research strategies will emerge and different research needs will emerge. Asset managers will need to go up to the research market to look for different things. To pretend that’s not the case is a little bit like me thinking that I can buy my wife’s birthday present from the same shop as I do with the weekly supermarket shop. It isn’t going to work. So I think integration is interesting and an exciting challenge for asset managers.

I think it is also a challenge for asset owners because there are credible and very viable approaches to integration and there are less plausible strategies. The asset manager owners’ job is to be able to delve into which are which and to understand which are which. Of course, it is difficult because the integration, by its very nature, is integrated. However, it is fairly clear that an asset manager that is basing their integration activities on difficult and integer research is probably in the right space and if an integration strategy is not based on research that is trying to find out things that other people don’t know it probably isn’t integration.

IRRI Survey 2016 - Asset Owners Overview

[R] Mike, you also hold an annual independent IRRI survey. Could you talk a little bit about the objective of this survey,

[M] Sure, the IRRI or Independent Research in Responsible Investment survey was something that Extel Surveys and SRI-CONNECT set up 5 or 6 years ago. The motivation behind it was to drive recognition for quality of sustainability and corporate governance research. Essentially, we modeled on the process of the Extel Survey which recognizes high-quality investment research by sell-side analysts. So we set up the survey with a view to recognizing and rewarding sustainability and corporate governance research no matter where it comes from and that is the critical thing. It can be from sell-side research, it can be from independent agencies, it can be from independent providers.

Every year we run it. We are running it this year in November. Last year, we had over 1000 participants in the survey, so the results really do give us a sense of who is hot and what’s not in SRI corporate governance research. Of course alongside, the quality of the analysts, the quality of the research firms, we also do a lot of market research around what companies think of the SRI process, what SRI analysts and investors think about companies, about how commission is paid, about what is valued and about trends in SRI corporate governance research.

I think alongside the idea of recognizing quality, what we are trying to do is just give information into the SRI research market on the basis that information always helps market become more efficient. It helps supply understand what demand wants, demand understands supply. So the more we can do to give such results back transparent to the market, we will continue to do and are hugely supportive of course of Extel’s brand in this who bring both the technology and expertise but also the understanding of how important information is for the efficient functioning of markets.

[R] So, we just heard about Mike’s views on the responsible investing space in general. Clearly, it is a space that has a lot going for it right now. With important regulations coming in early in 2018, there is a lot to look forward to. Please let us know what you thought about this video in the comments section below.

About SRI-CONNECT:

SRI-CONNECT is a professional network and information exchange for sustainable companies and responsible investors. The platform’s vision is enabling progressive investors and businesses to lead society out of the current economic situation with an advanced strategy for tackling climate change and a solid basis for the wider challenges of sustainable development.

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SRI-CONNECT…

… facilitates communication between companies, investors & their advisors on sustainability issues.
… accelerates the inclusion of sustainability factors in ‘mainstream’ analysis & investment.
… doubles the impact of users’ SRI activity while halving the time taken (a ‘Factor 4’ goal).

Srobon Banerjee
Srobon Banerjee
About the Author

Srobon heads up the ESG research support practice at SG Analytics. He has been an active member of the responsible investment industry over the past several years. His interest areas are exploring responsible and impact investing risks & opportunities in the emerging and frontier markets.