In this column, Erika Karp, Managing Director and Head of Global Sector Research for UBS Securities LLC, finds inspiration in the air.
By Erika Karp, UBS Investment Bank
Recently on an Airbus A330 when settling in to listen to some music or a video from the on-board entertainment system, I was disappointed to find that the armrest had an audio headset already hard-wired to it. When I asked the flight attendant where I could plug in my Bose® QuietComfort® Over-Ear QC 15 Noise Cancelling® headsets, she said I could just use these. I felt a sense of panic rising ahead of the prospect of a long flight without my precious headphones. I had become extremely attached to this possession which offered me comfort, clarity, and an enhanced ability to block out all the noise around me, and to concentrate on the beautiful clear signals of my music. In longing to be able to use my QC 15′s, I was reminded of the tag-line used by Bose® in highlighting the appeal of their products: “Better Sound Through Research.”
It occurred to me how incredibly valuable this offering from Bose® is. In fact, applied to an entirely different field, that of Wall Street investment research, this same product would be astonishingly powerful. Imagine a kind of Investment Research which could serve to block out the near-term noise and allow for a clear, crisp understanding of the long-term drivers of value creation by the world’s publicly traded companies. Research and analysis which could go beyond the worries over the stock price movement associated with a “200-minute moving average” or a quarterly earnings report which deviates from “whisper numbers” by a penny. I would argue that the analysis of Environmental, Social and Governance (ESG) performance of public companies is a kind of “Noise Cancelling Investment Research” which could be the holy grail of long-term investors.
Turning back to the travel dilemma of having to potentially settle for the standard headsets I had been offered on the Airbus A330, I decided not to give up.
Although the cabin was dark, I took out my iPhone, switched on my flashlight app, and starting searching for a jack for my QC 15′s. Thankfully, with some special effort, I found it behind the armrest. I put on my own headsets, began to relax, and reflected on a business conference I had just attended. It was a conference held by the Organization of Economic Cooperation and Development (OECD). I couldn’t help but notice the vision, mission and values statement of the OECD. It is entirely consistent with the principles of “Better Sound Through Research.” The OECD, arguably the world’s most respected source of comparable statistical, economic, and social data, strives to “measure, analyze and compare for better polices and better lives”. In other words, “better lives through research.” Why should we not make the same special effort towards better investment research which plays such a critical role in the functioning of the world’s capital markets? We should.
Financial analysts should find ways to sift through the massive amounts of “noise” which tend to drown out the essential “signals” that can be derived through better research. ESG analysis offers a framework to analyze the critical elements of corporate performance that lead to financial and stock market results. By pursuing new and differentiated avenues of inquiry, investors can find leading indicators of performance: signals. Signals which offer truly predictive insights. “Noise Cancelling Investment Research” implies asking questions about such things as a company’s progress towards the efficient utilization of scarce resources, its effectiveness at employee engagement and retention, its track record for safety and risk management, its ability to ensure an ethical and sustainable supply chain, and its strong Board composition and diversity of perspectives. ESG analysis is the “Noise Cancelling Investment Research” that will empower “Sustainable Investing.” The capital markets can aspire to the same excellence as the OECD and Bose®….Better investing through research.