The investment management industry is today falling short of its duty to create long-term, sustainable wealth and must now put active stewardship at the centre of its activities, operations and purpose. This is the conclusion of a new paper from Hermes Investment Management. The paper, Stewardship: The 2020 Vision, calls for an end to the short-term focus on delivering higher returns relative to a benchmark and to fulfil its role of active stewardship.
Research supports the positive impact of stewardship on investment performance, with evidence showing that engagement pays off financially and non-financially. Successful engagement can translate into significant outperformance; studies have shown that engagement can generate higher annualised returns of up to 7.1% per annum1 while also leading to lower downside risk2.
Hermes outlines the following critical success factors to realising its stewardship vision over the next decade:
- Strong stewardship will be at the heart of the way investment managers fulfil their business purpose: sustainable wealth creation for all investors who entrust us with their capital.
- Stewardship will be a driving force in investment decision-making and fully integrated into every area of investment management, from product development to client relationship management to reporting.
- Whilst boards will continue to be held accountable by investment managers, stewardship will evolve to provide collaborative support and empower companies to deliver sustainable returns to their investors.
- Stewardship will be highly objective-focused, and its effectiveness measured by robust systems and processes.
- Investment managers will need to substantially increase, broaden and integrate different skillsets in their investment teams to deliver effective stewardship and collaborate with others.
- Where it becomes necessary to protect long-term, sustainable wealth creation, investment managers both individually and collectively will use all the influence and powers of ownership at their disposal to any extent necessary to shape a better outcome.
Saker Nusseibeh, Chief Executive of Hermes Investment Management, said:
“With the overhaul of the UK Stewardship Code complete, we have a prime opportunity to begin the transformation of our industry. We call for a seismic change in the way the investment management industry operates: from one that has for too long focused on short-term returns, at the expense of sustainable wealth creation. Our aspiration that market forces will drive behavioural change remains a hope rather than a reality, which is why the revised Code, and implementation of directives like SRDII, must deliver substantive changes.
“Hermes has been an industry leader in promoting strong and effective stewardship for over 30 years and consistently advocated for change, while helping to shape capital markets through public policy and market best practice engagement. Active stewardship is our industry’s social licence to operate and it is paramount that over the next ten years, it becomes a determining factor in all aspects of investment management.”
Leon Kamhi, Head of Responsibility, Hermes Investment Management, added:
“As we celebrate the 15th anniversary of Hermes EOS, our comprehensive stewardship service for institutional investors, we reflect on the evolution of stewardship within our industry and the vital changes that still need to be made. Our vision is that by overhauling the approach to stewardship, institutional asset managers and asset owners will be much readier to intervene to ensure that sustainable value creation becomes and remains the objective of business”.