To hear our CEO, Saker Nusseibeh – CBE, talk about his vision for responsible investing in the post-coronavirus era, listen to the audio recording below or read on to find out some highlights from the speech.
Citizens, businesses and investors share a common duty
In the investment industry, we have an odd notion that investment is disconnected from our everyday world and future. In theory, three different spheres exist (see figure 1).
Figure 1. Three spheres – or all in together?
Source: Federated Hermes, as at June 2020.
Yet in reality, these spheres are all connected. We are invested in these firms through our pensions and savings, and also act as stakeholders who buy from these companies and work for them.
The corporate world has changed the universe that we live in, and we should not isolate the impact of owning these companies as shareholders from the effect that these firms have on us as employees and citizens. The coronavirus pandemic has made it clear that the ESG emperor is wearing clothes, and that building back better is now the best way forward.
As long-term investors, the odds are in our favour
As an investment manager, we have concluded that successfully making money over the long term is much more sustainable than doing so over the short term.
Research shows that 36% of managers beat the benchmark. Some say this is a reason to invest in passive funds, but beta, by nature, follows the direction of the market: if the market goes down, you’re going to lose. This is not a sustainable way to create wealth.
We have demonstrated through the 30-year history of our firm that responsible investment and stewardship leads to better financial results, and evidence shows that successful engagement can lead to significant outperformance. There is no conflict between doing good and good investment management – they are one and the same thing.
Figure 2. Driving sustainable wealth creation
Source: Federated Hermes, as at June 2020.
Active investment demands active ownership
At the international business of Federated Hermes, we place both stewardship and high-active-share investing at the heart of what we do. This ensures that we invest and engage with conviction: we build investment portfolios that are meaningfully different from the market and which we believe will outperform in the long term. Rather than betting on whether the market goes up or down, this combination of high-active-share investing and stewardship means that we focus on sustainable wealth creation.
Responsible, active ownership helps create businesses that are much more resilient to exogenous shocks. These firms are more likely to survive over the long term, and by doing so create better outcomes for our investors and society.
Sustainable businesses that look after their workforces are also more efficient. Encouraging firms to support the wellbeing of their people results in improved productivity – we have witnessed this through many engagements, such as our work with Hon Hai. The same principle extends to stakeholders. If the product or service that a business is supplying is of high quality and priced fairly – and is what the client actually needs, not just now, but over the long term – it has a sustainable and repeatable business model.
And if the way this business operates is acceptable to society as a whole, it is likely to be supported by new regulations focused on better societal or environmental outcomes. The auto industry offers examples. Volkswagen, whose emissions-test cheating shattered the company’s reputation (and share price), exemplifies the risk of disregarding social and environmental standards (read more about this in our case study on p.12 of our Q2 2019 Public Engagement Report). And those manufacturers who invested early in developing electric vehicles are in the fast-growth lane of the industry.
We are all stewards now
The coronavirus pandemic has spurred a new social phenomenon: citizens, particularly in Europe but also elsewhere, are very clearly putting pressure on governments to rethink priorities. Perhaps ever-rising GDP numbers are not all-important: by agreeing to self-isolation, people are acknowledging the value of each other’s lives.
Adam Smith, regarded as the inventor of economic theory, was also a moral philosopher. Talking about a rational person, he wrote that:
In other words, Smith understood that there is a connection between what we call holistic returns and the real purpose of the economy. This reflects an understanding that amassing wealth is pointless within a completely fractured society and over-heating planet. And it is demonstrated in the decisions of citizens worldwide to forgo growth in order to preserve life.
It is unclear how you can be a long-term investor that helps to create resilient, sustainable businesses unless you integrate this idea of holistic returns into the heart of what you do. In turn, this translates into active stewardship, the integration of ESG factors and an understanding that the long term matters more than the short term, and that the success of each societal sphere underpins the others.