IR Monitor – 29th March 2023

This week’s news

How generative AI could disrupt IR

Generative artificial intelligence (AI) – the use of algorithms, such as ChatGPT, to create new content – promises to shake up every industry. But what impact could it have on IROs? AI could take over from search engines, or be a new intermediary between companies and investors. There is huge potential for data optimisation whereby an IR application could articulate what is exactly of interest to the market about a specific company. IR teams will need to tread carefully, however: one of the biggest concerns is the future of sensitive corporate information. Another alarming thought – might people prefer to speak 24/7 to a robot that has every detail of every annual report, or what competitors have done over time? If the level of detail is indeed what’s at stake, machines will win every time. BRIGHTtalk’s webinar gave a final call to action to test the limits of generative AI: next time you’re staring at a blank piece of paper, take the time to enter the task into Chat GPT. Or once you’ve finished, ask the software what could be improved – it might have something to say about the tasks we complete without a second thought.

Digital transformation of proxy voting

In a clear eschewal of board-centric notions of governance, investors are challenging companies to innovate their communication technologies for the benefit of all stakeholders and society at large. These calls are being made in the run-up to the 2023 proxy voting season, accompanied by new standards for shareholder participation and executive decision-making. IROs hope new voting methods will begin to marry up the recent disconnect observed between boards and their shareholders, allowing both parties to face up to any matter may arise, while avoiding traditional box ticking. Last year’s report, The State of Stewardship, revealed that companies who are not making an active effort to uphold shareholder democracy are falling behind. In a similar vein, there is unanimous agreement that the proxy approach is in need of major rejuvenation if it is to continue to ensure the voices of corporate stakeholders are heard.

In pursuit of short-selling reforms

Jeremy Hunt has made moves to design a new short-selling regime as part of the so-called “Edinburgh reforms” package to boost the City of London. In a Financial Times piece, Carson Block maintains that the UK should begin by abrogating the “non sensical” EU requirement to publicly disclose short positions. Short selling sometimes attracts “ill-judged” criticism, often from companies fending off damning revelations uncovered during the process. But it also benefits markets by improving liquidity and providing a floor price, while increasing the appetite of investors to take “long” exposures. Block underscores his position by stating that that the UK’s new framework should make it clear that recalling borrowed stock for the purpose of causing a squeeze should be classified as manipulation. Food for thought for Jeremy Hunt and his team.

FCA: poor ESG disclosures by ESG benchmark administrators

As ESG-related disclosures continue to grow, so too does scrutiny from regulators. In a “Dear CEO” letter to benchmark administrators published last week, the FCA cautioned that ESG benchmarks carry the “potential for widespread failings”. The warning follows a preliminary review of ESG benchmarks (September 2022), which had concluded that the overall quality of disclosures was “poor” and outlined a number of shortcomings. A lack of detail around methodology, unclear presentation, and the use of outdated data were all identified as particularly concerning in the latest letter. Additionally, some firms had not fully implemented the disclosure requirements introduced in the Low Carbon Benchmarks Regulation. Failure to provide accurate and transparent benchmarking could dilute public trust and lead to greenwashing, the regulator stressed. Where companies fail to address feedback, the FCA stresses that it will deploy its “formal supervisory tools” and consider “enforcement action”.

The FTSE 100 needs better companies

Strategist and investment analyst Rupak Ghose offers a damning assessment of FTSE 100 performance in The Times last week. The largest companies in the FTSE 100 lag behind international peers in terms of earnings growth and strategic credibility, and there is a distinct lack of breadth of industry segments, he writes. While the French and German stock markets have increased by more than 80% in the last 10 years, their British counterpart has displayed a measly 15% growth. Except for a handful of companies, the UK’s banking, energy, healthcare and consumer good sectors all trail behind international peers. Ghose sees the tech sector as a much-needed antidote to this stock market stasis, but notes the UK lacks exposure to this industry segment. Governance is also a key piece of the puzzle. “Decisive transformations by old economy giants”, with top quality senior management and radical business model changes, are all needed to reverse the fortunes of an ailing market.

And finally … Get the crap back in the donkey, or the plan to reverse Mifid II

Reversing the impact of Mifid II might prove trickier than expected for the UK government. The so-called unbundling was promised to boost competition, innovation and transparency by disclosing how much fund managers were being charged for research. Instead, it sparked a decline in levels of investment research. Some see this downturn as responsible for leaving London’s market limping behind Wall Street. With the EU already planning to tweak Mifid II rules to increase research spending, the government has launched a review into the investment research market. Although touted as a Brexit benefit, the reality is that this review is essential if the UK is to remain competitive on a global stage. Even so, measures could come too little too late: there is unlikely to be a flood of company research if Mifid II rules are simply reversed. Rather, any changes should be part of a broader package of reforms to revitalise stock markets. Instead of relying on a return to a pre-Mifid world, research houses are expected to focus on offering greater value if the London market is to recover.

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