Hermes Investment Management, the £29.8 billion manager focused on delivering superior, sustainable, risk adjusted returns to its clients – responsibly, has today published the fourth and final paper of its annual Responsible Capitalism survey.
The paper, which focused on Stewardship, found 60% of the 109 UK and European institutional investors surveyed expect the advent of passive investment vehicles to have a negative impact on the vital issue of shareholder engagement.
Author of the paper, Hermes Investment Management’s Head of Responsibility, Leon Kamhi, said:
“Sixty percent of the investors we surveyed believe the growth of low-cost passive management will cause large shareholders to become distanced from many of the companies they invest in.
“However, if anything, passive investors should engage more, not less. Engagement is the only tool passive investors have to improve the value of the companies they invest in.”
Investors have a fiduciary duty to speak up
Meanwhile, 21% of respondents still believe that challenging companies on ESG issues is not important, a number Kamhi found troubling.
“While 71% of respondents believe that institutional shareholders have an ethical and fiduciary responsibility to challenge companies in relation to poor ESG practices, it is worrying that many still do not see it as an issue. Whenever there are poor ESG practices that lead to the destruction of value, investors have a fiduciary duty to speak up,” Kamhi explained.
Asset managers and owners need to engage
Kamhi believes if investors are to be responsible owners they need to engage – and not just with company management, but also with public policy makers as well. If investors can influence policies at a national or sector level, Kamhi feels it could result in risk reduction and a lowering of the cost of capital.
“If we can achieve something at a public policy level, it has a ripple effect on the whole industry. Pension funds are universal investors invested in thousands of companies across all sectors of the economy, so they are less interested in how, say, AstraZeneca is doing compared with GlaxoSmithKline, and more concerned with the health of the entire pharmaceutical sector,” Kamhi said. He added, “This is particularly relevant for passive investors who are exposed to an entire index and not only the best performers.”
It is also no surprise that there is increasing academic evidence that good stewardship adds value to companies, Kamhi explains. For example, research from Hermes Global Equities found that well-governed companies tended to outperform poorly governed companies by an average of over 30 basis points per month over a five year period, while a study by the Smith School of Enterprise and the Environment at Oxford University and Arabesque Partners shows that there is “remarkable correlation between diligent sustainability business practices and economic performance”.
Despite this, the survey showed that just 46% of investors believe companies focusing on ESG issues produce better long-term returns for investors.
Effective stewardship vital to responsible capitalism
Kamhi believes stewardship, ultimately, means working to ensure that everyone in the investment chain is aligned and addresses the interests of pension fund beneficiaries. As such, it is vitally important to responsible capitalism.“Investors have a significant opportunity to effectively collaborate, increase their investment in responsible ownership activities and thereby better align companies and public policy makers to the creation of long term wealth for beneficiaries to enjoy in a sustainable economy,” he concludes.
Read the paper: Responsible Capitalism and Stewardship
 ESG Investing: Does it make you feel good, or is it actually good for your portfolio? January 2014
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