European investors, as the Financial Times reminds us today, are going to be required to pay for sell side research in the near future–and this will include not just equity and bond research, but areas such as economics, strategy, quant stuff and, yes, even ESG research. Granted, most sell side research houses don’t have much in the way of an ESG offering to begin with, particularly on the bond side, but it’s been a growing field, as many practitioners are aware. Before my retirement last year, I would ask PMs and analysts what their plans were for dealing with MIFID II, and reactions generally ranged from blank incomprehension to considerable concern. I imagine that the concern element has increased this year as the deadline approaches. My own employer, bless them, seemed pretty happy to have me publish on any number of ESG issues of potential interest to bondholders, but there weren’t too many houses publishing what I was publishing.
In general, this is a more complicated issue for bond investors, for two reasons. First, the sort of bespoke research that helps pay the bills over in equity research just don’t come up as frequently for credit analysts. Second, credit research departments are smaller to begin with, with correspondingly smaller budgets, and they already have a bunch of fixed research costs that equity research departments don’t have. These include both Moody’s and S&P (and Fitch if one is so inclined.) It likely also includes an independent research outfit such as CreditSights or Gimme Credit. None of these are particularly cheap. So there’s a bunch of the research budget tied up already. And now managers are being asked (or forced, much the same thing) to decide which sell side research they are willing to pay for on top of these relatively fixed costs. Will some medium size bond house give up one of the above to pay more for sell side research? To ask the question is to already know the answer.
My own view has always been that ESG research would remain in demand, so much so that it could morph into a core offering that investors, yes, would be willing to pay for. Given the improving ESG hiring trends that are manifest these days, for example here on LinkedIn, you would think this would have occurred to some bright empiric on the sell side. Maybe it will at some point. If not, ESG research will remain largely the province of the buy side, with a number of smaller NGOs picking up the slack. The research on energy issues being put out by Carbon Tracker, or the Post Carbon Institute, is exactly the sort of research that sell side houses should be producing. Some now are, but most aren’t, and MIFID II can’t help but complicate any transition to more dedicated ESG product.