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Fewer-than-half of investors believe focusing on ESG produces better long-term returns

Hermes Investment Management, the £30.1 billion manager today published a paper from its annual Responsible Capitalism survey, Responsible Investing & the Persistent Myth of Investor Sacrifice. The survey of 104 leading institutional investors reveals that fewer than half (48%) believe companies that focus on ESG issues produce better long-term returns.

The figure represents a dramatic drop in confidence from 56% in the 2016 survey – and while the findings also showed 86% of investors believe fund managers should price in corporate governance risks as a core part of their investment analysis. Saker Nusseibeh, Chief Executive of Hermes Investment Management, says many investors are clinging to a persistent myth that to meet ESG criteria something must be sacrificed.

“It’s clear from this year’s Responsible Capitalism survey many institutional investors still view ESG as a tick-box exercise to keep risk managers happy rather than part and parcel of building a better future for retirees.

“The link between ESG considerations and financial value creation needs to be more clearly recognised. Companies that can adapt to social and environmental change are likely to deliver better long-term results for shareholders. For example, a company that harnesses big data to make industrial processes more efficient is in a better position than one relying on old and wasteful practices and companies that treat their staff well have a more productive workforce,” Nusseibeh said.

Fiduciary responsibility

In spite of the fiduciary duty of pension funds to maximise retirement incomes for beneficiaries, 33% of respondents do not believe significant ESG risks with financial implications justify rejecting an otherwise attractive investment.

Nusseibeh stated: “This figure is surprisingly high. There is a diminishing pool of buyers for companies with poor ESG records - 57% of pension funds believe the number of investment opportunities rejected on ESG grounds will increase. This should give those who believe that ESG criteria can stand independent from financial returns pause for thought.

“There remains some confusion over the nature of ESG. People believe it naturally excludes certain areas that have done well in recent years – tobacco stocks, for example. However, this is to misunderstand ESG, which is about understanding the long-term sustainability of a company and having strong governance. It is about being aware of the risks.”

Longer-term vision required

When asked whether pension funds should focus on maximising retirement incomes, or on whether their investments would improve or detract from the overall quality of life experienced by beneficiaries when they retire, only 49% of respondents said they should focus on the latter.

Nusseibeh said: “I believe investors are looking at this in reverse and need to consider their role as long-term stewards of capital and in shaping society. Investment managers play a key part in holding companies to account. It is in their gift to shape a better future for retirees, and not by beating a benchmark, but by influencing the way companies behave.”

“Patterns of demand are shifting. A new generation of literate consumers is emerging, who want their goods to be made responsibly, by a company who treats its workers properly, and with a supply chain that protects worker safety. We live in a transparent, connected world, where poor practice is readily exposed. In such an environment, who would want to invest in an unsustainable company?”

Who do we serve?

It is incumbent on investment managers to understand the ultimate beneficiary of the services they provide. There is a tendency to look at pension funds as the client, rather than the individuals who must benefit from them.

“We need to forge a better alignment with the people we serve and think about the society we are building. There is no point striving for a wealthy retirement if society has been destroyed by the ill-considered actions of companies who have been insufficiently held to account by their shareholders,” Nusseibeh concluded.

To read the paper in full, please click here

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