The Investment Analyst’s Dilemma

Which way does responsible investment go next?

The Investment Analyst’s Dilemma in the New Stakeholder Economy – by Lucy Dunnett, Investment Advisor, Berenberg Bank

“We are seeing increasing interest in new models for measuring companies. To date, when we try to predict the performance of a company, we mostly use past accounting data to work out things like price to book, earnings per share, return on equity, price to earnings, dividend yield etc.

Of course, we also look at a number of other factors, including the competitive landscape and market trends, such as the effects of new technologies or the potential for increasing regulation. But it still proves very difficult to predict performance.

On the flip side, many of us are worried about the environment – pollution, climate change etc. The effects that a company can have on society and the environment, if they go un-checked and are left to focus only on making the highest possible return for their shareholders, are evident.

“Impact measurement” is becoming a more widely used term. There are now many companies all over the world trying to create the most effective impact measurement framework. But until now, nobody has worked out how to connect impact measurement to long term financial performance.

Some investment managers are concerned that if they start presenting impact measurement data, it may conflict with financial performance. For example, a tobacco company may find it harder to make money for their shareholders as the world turns against tobacco or it finds itself picking up the costs of long-term care for those suffering the effects of smoking.

So analysts have a dilemma

Should we do the right thing, by presenting impact measurement data to both companies and investors? At least this would allow and enable employees and consumers to make more conscious decisions. But it might also risk angering or alienating some of our clients; we may risk losing them. Or should we continue to keep the impact measurement data separate from our research reports: thereby encouraging corporates to behave in the same way and investors to invest “un-ethically” while perpetuating the problem? Perhaps the only way forward is to rethink the problem and the solution?

Or do we?

The Maturity Institute is the first organisation I have come across that has managed to show a correlation between impact measurement and long term financial performance. They believe that, when we choose to invest and buy shares in a company, we need to think, not just about the shareholder value the company will create for ourselves, but the Total Stakeholder Value (TSV) the company will create for everyone e.g. the employees, the customers, the supply chains, the local community, AND the shareholders. TSV also factors in sustainability. The best scoring companies are predicted to outperform in financial, human, and environmental terms and the growing evidence from OMINDEX analysis underpins this premise.”

The Maturity Institute’s new programme Total Stakeholder Value, Responsible Investing and Measuring Impact using OMINDEX is available on an open and in-house basis.

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