Aviva Investors, which conducted the survey of 342 sell-side analysts, believes that as a result of this flawed approach price targets and ratings are too positive.
The firm is concerned that short-termism also means that positive environmental social and governance factors can be neglected or ignored.
42% of analysts believe that sell-side research has a detrimental short-term focus.
Only 35% think that sell-side research tackles controversial topics and offers negative assessments of companies when appropriate.
Significantly, 90% said they would take “some additional caution” when writing on topics that were commercially sensitive to their own bank.
The fund manager argues that many sell-side analysts do not apply enough scrutiny to businesses, management projections and risks and as a result, price targets and ratings often present an overly positive view of a company’s long-term prospects thus impairing the efficient functioning of the capital markets.
It says that all parties in the investment chain should work together to address these issues.
Fixing the flawed sell-side
Aviva suggests a range of actions. It says the Financial Conduct Authority (FCA) and other national regulators could stipulate that research reports include an outlook of more than year and a specific section on environmental, social, governance (ESG), which requires analysts to demonstrate how material ESG considerations are integrated into their overall conclusions and ratings.
It suggests that asset managers could make a huge difference if they directed research payments to brokers focused on long-term analysis that integrates sustainability matters.
Asset owners, meanwhile, could seek transparency from their managers about the type of research they are buying.
Finally, companies should become better at articulating their integrated long-term strategy for value creation, including the risks and opportunities presented by broader, non-financial issues, while boards should be open to alternative points of view as well, including negative perspectives by analysts.
Steve Waygood, chief responsible investment officer at Aviva Investors, said: “We commissioned the study to contribute to the debate about how to embed ESG and other long-term themes into sell-side research.
“It is particularly interesting that sell-side analysts privately acknowledge many of the failings we anticipated ahead of the poll.
“While sustainability pays, the short- term nature of sell-side research undermines positive long-term policies and practices at companies that are assessed.
“More needs to be done to correct these failings, but they can be fixed if all participants in the investment chain work together.”
