Executive summary

‘Integrated analysis’ is an SRI strategy in which analysis of environmental, social and economic issues contributes to better financial analysis by identifying additional sources of risk and opportunity, thereby contributing to better overall investment decision-making.  Specifically, it aims to deliver a stream of ideas that are: Material, Actionable, Timely, Communicable and Outperforming (M,A,T,C&O).

It aims to improve the performance of segregated SRI funds and also to ‘mainstream’ social and environmental considerations into all investment decision-making.  As a result, it is a high-priority development area for the majority of SRI analysts in Europe.

Recently, the strategy has developed significantly and the vague concept of ‘mainstreaming’ has been replaced by practical approaches and techniques.

Two approaches

Two approaches are adopted to integrated analysis:

• Quantitative (top down) approach – which has, the past, been prioritised by SRI investors – but which does not appear to have any viable practical application and certainly does not convince ‘mainstream’ investors – most of whom are fundamental bottom-up investors
• Fundamental (bottom up) approach – which has only recently received attention but is starting to generate (M,A,T,C&O) investment ideas that integrate easily with mainstream investment practice and build the credibility of SRI analysts with mainstream clients, colleagues and companies

Demand growth

‘Integrated analysis’ appears to be approaching a tipping point in its development as:

• Explicit demand from asset owning clients for ‘integrated analysis is growing
• Demand from the SRI industry remains strong – partly to meet client demand and partly because integrated analysis supports the rationale of all other SRI strategies
• However, there is still little explicit internal support from the CIOs and Heads of Research within asset management institutions

Analytical tools

Asset managers are developing a range of new analytical tools for generating ‘integrated investment ideas’.  We outline thirteen of these including: sustainable investable themes, scenario analysis, thematic extension, reverse thematic extension, value-chain analysis, process/product crossover, overlap analysis, risk flagging, financially-weighted ‘best-in-class’, industry context research, policy or market analysis, technology analysis and targeted risk substitution.

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Stimulus research – the missing link

‘Stimulus research’ is a new form of research that is emerging to support integrated analysis.  It could quickly grow into a market worth $10m per year, of which $1m would go to independent research houses.  This would motivate the production of 500 pieces of ‘stimulus research’ per year – including 10 reports on each of 30 stock market sectors and 200 on sustainability themes.

Six conditions will be required to a market that will incentivise the publication of more ‘stimulus research’:

• ‘Over-the-counter’ payment model
• Reliable revenue stream of adequate size
• Efficient research distribution system
• Support from asset managers
• Support from SRI agencies

Reporting required

Improved reporting on ‘integrated analysis’ should increase uptake of the strategy and improve the quality of its execution.  We, therefore, outline a structure of reporting that incorporates objectives, resources, research practices etc.  This includes a methodology for grading portfolios according to the extent to which sustainability issues are incorporated into individual stock recommendations.

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Mind forg’d manacles – the myths of mainstreaming

Some significant barriers remain to progress with ‘integrated analysis’.  However, most of these exist only in the mind.  We highlight, in particular, nine ‘myths of mainstreaming’:

• The sell-side responsibility myth
• The myth of more written research
• The ‘straight-to-mainstream’ myth
• The illusory promise of quantitative purity
• The ‘market sentiment’ myth
• Emperor data’s new clothes
• The market ‘short term-ism’ matters myth
• Missing out or moving on?
• The ‘all other things being equal’ myth

Conclusion

Investment institutions that put aside the ‘myths of mainstreaming’ (in particular, the deceptive allure of top-down quantitative analysis) and focus on bottom-up fundamental integrated analysis should be able to:

• Use a variety of new research techniques and the emerging class of ‘stimulus research’ to...
• ...generate a growing stream of (M,A,T,C&O) investment ideas that can be incorporated within mainstream investment practice
• Place their investment process at the creative forefront of investment, societal and scientific thinking
• Outperform in a way that is closely attuned to emerging client demand