ESG Integration Practices of Sell Side Analysts

KKS Advisors & High Meadows Institute / February 2017
Sakis Kotsantonis, Chris Pinney, Caitlin McCorkle, Joe Lewis

The goal of the research presented in this report is to understand what incentives and information are needed to encourage sell side analysts to integrate ESG factors into their valuation and pricing models. Sell side analysts have a large influence over valuation and pricing for companies that in turn impact the willingness of those companies to take on projects that don’t meet analysts expectations. Research shows that over half of businesses would forego projects with positive net present value if they conflict with their planning around meeting analyst expectations. Our research included both quantitative and qualitative research into the behavior of sell side analysts, the incentives that drive them and their attitudes, and current practices in terms of ESG. In terms of incentives, our research shows that recognition and size of portfolio are key drivers for sell side analysts. There is no evidence that compensation is related to earnings forecast accuracy, but rather compensation programs are designed to reward actions that increase brokerage and investment banking revenues. When it comes to ESG, our desk research and a survey of 570 sell side analyst quarterly calls showed that:
• ESG integration is still in its infancy for most analysts, with less than 3.8% of analysts in our sample asking questions specifically linked to ESG factors.
• 80% of ESG-related questions asked by sell side analysts in our sample were concentrated within just five sectors. Predictably these sectors can be deemed traditionally ‘ESG heavy’. They include Services, Energy and Resources, Consumption, Health Care, and Financials.
• In terms of institutional players, sell side analysts for Barclays, Bank of America Merrill Lynch, and Morgan Stanley asked the most ESG or long-term value related questions.

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