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28 November 2017

Investor Trust in a Post MiFID II World

Written by: Brett Jacobs, Director at Edelman

Financial

Publicly-listed company communications are heading for disruption. Imminent regulatory changes and widespread evidence of an investment community that has lost trust in some sources of market information make it imperative for businesses to take more ownership of their own messaging.

This imperative is likely to be brought into sharper focus from January 2018, once the second incarnation of the European Union’s Marketing in Financial Instruments Directive (MiFID II) takes effect. Designed in part to improve transparency in the pricing of financial services by requiring banks, brokers and fund managers to split out the cost of research and other services from trade execution, MiFID II is certain to create meaningful change in the investor relations process.

Some sell-side research will become uneconomic, while the analysis that remains is more likely to be held privately, making it harder to form a meaningful consensus from information in the public domain. Increasingly, companies will have to pick up the slack in forming and maintaining direct investor and analyst relationships. More importantly, companies may need to clarify what they mean when referring to “consensus” or “market expectations” – or be more specific with reference to their own “management expectations” – as the market and financial media will no longer have ready access to research notes or a meaningful “snapshot” of publicly available consensus forecasts.

Alongside the regulatory challenges, other issues are becoming increasingly evident. The maintenance of investor trust is one.

It is received wisdom now that financial risks and returns aren’t the only metrics by which institutional investors judge public companies. While shareholder returns will always play a large part, the 2017 Edelman Trust Barometer Special Report: Institutional Investors suggests that the investment industry may now be focusing on broader considerations in determining valuations and executing investments.

ESG investing, for example, is rising in prominence with a number of major asset managers offering specific funds in this arena. Our most recent analysis shows that although only 28 percent of the investment professionals we surveyed currently agree that ESG risk management is an important factor when considering investing, one in three are now more attentive to ESG risks, and this can influence their voting and engagement policy.

Another interesting finding from the study was institutional investors’ lack of trust in rating agencies, with only 28 percent of those surveyed seeing such agencies as credible sources of information about a company. Surprisingly, this was considerably higher in the pecking order than government officials and financial or business journalists: only 19 percent and 17 percent of investors, respectively, regard them as credible sources of information about a company.

Our research found that investors’ own sense of trust is paramount, with 82 percent citing this as the most important driver of investment decisions, ahead of companies’ ethical standards (76 percent), current valuation over peers (75 percent), product/R&D innovation (74 percent), and historical performance (70 percent).

Trust – and its absence – affects more than just investment decisions: it also can have an impact on investor behaviour. For companies they trust, 77 percent invested in or increased their position in a stock and 53 percent persuaded others to invest. More than a third of those surveyed said that the absence of trust in a company had caused them to persuade others to sell their stock in that business.

Trust is not a nebulous concept; there are concrete actions companies can take to foster it. A high board turnover, for example, can undermine trust, with 62 percent of respondents citing this as having an impact. Customer service satisfaction and prioritising employee commitment to the company are also high on the list, with 87 percent and 69 percent of investors highlighting these issues as having an impact on trust. A clear strategy and willingness to combat disruptive competition with innovation are also highly valued and serve to reinforce trust.

Uniting all these statistics is one very clear message: 93 percent of investors say keeping investors well-informed impacts trust. This might sound like an obvious priority, but a genuine effort to furnish the providers of capital with the information they need to make informed decisions – on a regular basis – does not happen by accident.

Especially in the post-MiFID II world, and against a background of declining trust in some providers of information, companies will need to take more responsibility for telling their own story, from establishing investor and analyst relationships to communicating their own investment case. Companies can no longer rely on the sell-side to mediate. Sound investor communications require appropriate investment and resourcing, strategic thinking and buy-in at board level, as well as co-ordination with other communications functions in the business.

Today’s investor relations challenges are increasingly complex, with many headwinds and potential pitfalls, but for companies that can anchor their stories in trusted communications, the new world under MiFID II may not feel quite so disruptive after all.

A version of this post first appeared on Edelman.com

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