Enhanced Analytics Initiative: demonstrating demand for ESG research to the sell-side
USS played a founding and significant role in the operation of the Enhanced Analytics Initiative (EAI), which ran for four years between November 2004 and December 2008.
The aim of the EAI was to stimulate sell side analysts to produce research which incorporates environmental, social and governance issues in such a way as to enable fund managers to integrate them into their investment decisions. This very successful project helped stimulate an exponential growth in this research.
EAI has now formed a more global partnership with the UN Principles for Responsible Investment to provide access to and a market for such research on a wider scale.
Enhanced Analytics Initiative: changing the way the broker community analyses extra-financial issues and intangibles
Founder members of Enhanced Analytics Initiative explain performance criteria
USS Report on Enhanced Analytics, May 2006
USS Report: Enhanced Analytics for a New Generation of Investor
Authored by James O'Loughlin (formerly Head of Investment Process at the Cooperative Insurance Society) and Raj Thamotheram (USS's Senior Advisor, Responsible Investment), "Enhanced Analytics for a New Generation of Investor: How the Investment Industry can use Extra Financial Factors in Investing" looks at the role that extra-financial factors play in the determination of stock prices. It argues that because many investors pay attention to salient and measurable information, they can easily overlook less conspicuous, and less tangible, data that provide a broader perspective on corporate and stock market performance.
Defining extra-financial factors as those which are likely to have at least a long-term effect on business results but which lie outside the customary span of variables used by some analysts and which seldom get integrated into investment decisions, this paper argues the case for the Enhanced Analytics Initiative (EAI) which addresses this oversight problem at source: by making extra-financial factors more salient to investors.
Increasing the quantity and improving the quality of investment relevant research pertaining to extra-financial factors benefits two groups. Investors develop the background knowledge about extra-financial factors, which they need to construct scenarios that are better suited to anticipating possible future states of the companies in which they invest.
They are equipped with models that demonstrate how to quantify or otherwise integrate extra-financial factors into investment decisions. And they are provided with information that allows them to think differently from the market, which enhances their prospects of out-performing it. In parallel, corporate managers gain a business case for improving their management, monitoring and reporting of material extra-financial factors.
Thus, enhanced analytics is, according to the authors, encouraging the emergence of a new generation of investor that is oriented towards the long horizon and is better informed about the role that extra-financial factors play in corporate performance and in the determination of stock prices. This new generation is also better able to integrate information from diverse sources into their decision making to take advantage of the alpha that research attests is available.
Finally, the paper makes a call CEOs, CIOs, trustees, consultants, and trade unionists to join fund managers in an informed partnership that will ensure the emergence of this new generation investor, which will set the benchmark for its peers in the investment management industry of the 21st century.