The Center for Corporate Citizenship's Institute for Responsible Investment has published Knowing the price, but also the value? Financial analysts on social, ethical and environmental information in partnership with PriceWaterhouseCoopers and Nyenrode Business University (Netherlands). This study examined how, and to what extent, mainstream analysts consider social, environmental and ethical information important to their work.

Financial analysts collect a vast amount of information for their company research. Obviously, most of this information is financial. Research has shown that mainstream financial analysts also value information on issues like quality of management, the strategy of a company, a company’s potential to innovate, or the retention of qualified personnel, although these issues are not immediately quantifiable in financial terms.

Looking at their research reports, however, indicates that analysts do not – or only to a very limited extent – pay attention to the social, ethical, governance and environmental performance of corporations.

Or perhaps analysts do focus on social, ethical, governance or environmental dimensions of corporate performance, but subsume their findings under other, broader headings.

This study was undertaken to examine how, and to what extent, analysts consider social, environmental and ethical (SEE) information in their work. It was based on interviews with European and North American financial analysts from houses such as Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Deutsche Bank, BNP Paribas, and UBS, among others.

The study found that financial analysts’ company reports rarely include a company’s social, ethical, and environmental performance, and when they do it is usually no more than a cursory mention. It also concluded, however, that analysts are aware of these issues, and that they do pay at least some attention to them.

For many analysts, however, SEE information is not material, or at least not fundamental to a company’s value. Respondents drew a distinction between “hard” data on corporate value and “soft” or “mushy” data more or less irrelevant to total value.

For others, the available SEE information is not of the required quality (or more particularly, quantity) to justify its inclusion in their valuation models. In particular, analysts find that SEE information is anecdotal, and often unsubstantiated. Potential risks prove difficult to calculate. On the other hand, company’s positive reports of their SEE performance prove difficult to trust.

But SEE information is not necessarily immaterial, the study concludes. For instance, no analyst suggested that environmental liabilities were not potential reasons to discount corporate value. Rather, they seemed to object to the idea that there is some category of SEE information that stands apart from traditional analysis. Interestingly enough, analysts’ claims that this type of information is not “solid” enough to be incorporated into valuation do not always correspond to their own practice in other areas. Quality of management, corporate reputation, potential liability, and other factors equally difficult to quantify can all and very often do play a role in corporate valuation. Indeed, analysts frequently express skepticism even about “hard” data such as corporate assets or cash flows.

Interestingly, the study did not find major differences in the way European and American analysts approach social, ethical, governance or environmental issues, with a possible exception for ethics. American analysts tend to take breaches of ethics more seriously in terms of materiality than European analysts.

Due to the fact that analysts tend to be skeptical about qualitative information that companies provide, businesses are well advised to provide as much ‘hard and material data’ as possible when trying to substantiate their added social, ethical or environmental value.

To view Knowing the price, but also the value? Financial analysts on social, ethical and environmental information (pdf), click here.