Hermes Investment Management has called on the industry to radically reform by carrying out active stewardship to deal with issues such as climate change.
The company’s chief executive Saker Nusseibeh said: “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.”
He was commenting on a recent Hermes report, Stewardship: The 2020 Vision, which was published shortly after the Financial Reporting Council (FRC), the UK’s regulator for the accountants, auditors and actuaries, issued an update to the UK Stewardship Code.
Active stewardship is core
The Hermes report argues that the lack of progress on environmental, social and governance (ESG) issues can be linked to a short-term focus by the industry and that long-term focused, active stewardship is needed to address this shortcoming.
Currently, active stewardship “only commands a small proportion of the resources available within investment management firms,” it notes.
Its 2020 vision seeks to elevate active stewardship to place it “at the heart of the activity and purpose of investment management firms”.
Leon Kamhi, head of responsibility at Hermes, explained: “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”.
Nusseibeh added that, as market forces have so far not been a driver of improvement, the revised UK Stewardship Code and the EU Shareholder Rights Directive II “must deliver substantive changes”.
Vision backed by UK Stewardship Code
The Code, which will take effect on 1 January 2020, seeks to protect the interests of UK savers and pensioners by ensuring responsible management of their money to create long-term value.
The changes follow a consultation from a wide range of stakeholders including asset managers and asset owners.
It comprises a set of ‘apply and explain’ principles for them, and a separate set of principles for service providers.
Ingrid Holmes, head of policy and advocacy at Hermes Investment Management, told Expert Investor that the update is “ground breaking”.
In Holmes view, the Code’s annual reporting requirements, which include disclosure of voting records, will have the most significant impact on its signatories.
“It will no longer be enough to draft a policy and engage in a minimal fashion without a stated intent with regards to impact,” she explained.
Approved reports by the FRC must be made publicly available on the signatory’s website or, if they do not have a website, in another accessible form, the Code says.
“Living up to the Code will require significant work for many of the current signatories, in terms of developing a strategy and programme of engagement, and may well also require an increase in staff and resources to deliver,” Holmes said.
No more tick-box engagement
Daniel Wiseman, lawyer for non-governmental organisation ClientEarth, commented that the Code is a “significant update” and shows that tick-box engagement on ESG issues is no longer good enough.
“If implemented properly, it has the potential to raise standards and transparency across the industry – especially when it comes to stewardship around market-wide and systemic risks like climate change,” Wiseman told Expert Investor.
“Whether it’s the growing climate emergency, slave and child labour in the textiles supply chain or growing inequality, it is clear investors need to use their ownership rights and speak out to deliver better outcomes for investors and the society and environment in which they live,” Holmes said.
Key points of Hermes’ 2020 vision
- While 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 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.
- 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.
- Investment managers will need to substantially increase, broaden and integrate different skillsets in their investment teams to deliver effective stewardship and collaborate with others.
- Stewardship will be highly objective-focused, and its effectiveness measured by robust systems and processes.