November 28, 2005

PriceWaterhouseCoopers looks at CSR information and analyst estimates

PriceWaterhouseCoopers is putting some resources into looking at CSR reporting, here’s an article sent to a few of us at Domini Social Investments by the author, Ms. Alison Thomas. PwC’s ValueReporting team studied two groups of equity analysts – one with only "traditional" financial information, and another that also had CSR information. Although this study’s sample size was limited, the results are thought provoking, if not stunning. When provided with CSR information, analysts have more consistency in their estimates (the good news), however, their earnings and revenue forecasts are lower (bad news? maybe not, maybe more realistic?). The funny thing is that the group with CSR information, despite having lower forecasts, still issued more buy recommendations, perhaps suggesting more confidence in their analysis (more good news). This poses some important questions about how CSR information impacts traditional equity analysis. I have been a skeptic that it would be through altering the models used by analysts; e.g., the discounted cash flow methodology. Rather, my hunch is that it would be useful in providing analysts with more confidence in management’s growth strategy, for example. This study’s author put it best, "the fact that such sources of competitive advantage cannot be ‘valued’ does not mean that they cannot be ‘evaluated’."

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