Anthony Hilton: Wake-up call our fund managers must heed

Responsible capitalism is high on the political agenda

20 September 2016

The Lib-Dems had their annual conference in Brighton at the weekend so, as is traditional at these times, we learned a little of what Prime Minister Theresa May and Chancellor Philip Hammond might be expected to say in their speeches at the Tory conference in a few weeks.

Such leaks are, of course, deliberately timed by the party’s public relations machine to upstage the Lib-Dems and divert attention away from them as they begin to rebuild their base.

Interestingly, both May and Hammond plan to return to the topic of responsible business.

The Prime Minister will talk again about the need to moderate executive pay and to broaden out the governance of companies to create a better-defined role, whether on the board or elsewhere, for employees and other stakeholders.

In his search for a popular theme, Hammond in his turn plans another dig at Sir Philip Green, the sale of BHS and the cutting- loose of its pension fund.

The Government intends to issue proposals in the next few weeks that will outline its next steps on the governance agenda and the standards to which companies should aspire.

We are also waiting for the report of a committee chaired by Legal & General chief executive Nigel Wilson on what needs to be done to foster more mission-led businesses — companies defined by the social impact of what they do.

These are more than just a nod in the direction of what is become a common political backdrop round the world — the desire for a more responsible capitalism.

The ease with which Jeremy Corbyn is about to re-secure the leadership of the Labour Party; the narrowing of the gap between Donald Trump and Hillary Clinton in the US Presidential election and, of course, the Brexit vote all demonstrate not simply that people are disenchanted with the way the current economic system is working, but also that they are prepared to vote to have it changed even when they don’t know what change means.

This movement has the potential fundamentally to affect the asset-management industry — where the savings of the public interface with the economic and financial system. In theory at least, asset managers are the conduit through which savers can influence the boards of companies in which they invest.

But the asset management industry seems not to get it. By and large, it refuses to see a role for itself beyond that of delivering to its clients a narrowly defined financial performance.

However, the pressure is beginning to mount. A couple of weeks ago, the Conservative MP for Croydon South, Chris Philp —who in a previous life was a successful entrepreneur — launched a paper entitled Restoring Responsible Ownership.

It argued that asset managers had to do much more to engage with companies, in particular to exert some degree of control over executive pay.

Yesterday came an even more broad- based challenge from one of the asset-management groups generally regarded as a leader in progressive thought.

Under the direction of Saker Nusseibeh, pension investor Hermes pushes the argument that it is not enough to provide good pensions for people in 30 years if in the meantime the world is barely worth living in because it has become so polluted.

Managing a pension fund is not simply about making money, it is also about making the world a better place for those pensioners to live in.

The environmental and social aspects of investment have to be considered alongside the monetary profit the pension investor hopes to make.

The asset manager must give weight to the broader picture in deciding where to invest, even if it means the immediate financial returns are lower.

But Hermes is having a struggle gaining general acceptance for its ideas.

People may have woken up to the idea that a true measure of risk-adjusted returns requires risk to be defined as more than just money, but the asset management industry still has to be convinced.

Hermes yesterday published the first paper from its annual Responsible Capitalism survey with the depressing conclusion that many things are going backwards as the industry struggles to come to terms with ultra-low interest rates.

The survey, which polls the views of 102 leading UK and European institutional investors, found that 7% fewer believed that it would be right to reject an otherwise attractive investment because of its significant environmental social and governance risks. That was coupled with a growing resistance to pricing in corporate governance risks alongside financial metrics. Yet the illogicality of this retreat is underlined by 10% more managers saying that they believed companies that focused on environmental, social and governance issues deliver better long-term returns.

The broader idea that the state of the world should matter to fund managers still had some way to go. Almost 45% said it was not their concern whether their investments would improve or detract from the quality of life in years to come, against 41% who believed otherwise. This prompts Nusseibeh to observe: “Global capital is still not managed in a way that takes responsibility for shaping society seriously.”

It is tempting to say that the managers’ only awareness of the world outside comes through as a growing unease about investing in companies which have been in the news for tax avoidance. In fairness, however, the asset-management industry is guilty less of a wholesale sliding backwards and much more of a dearth of good intentions and social awareness being turned into actions.

Asset managers do see that the way companies interact with their stakeholders will become ever more important as time passes. But, as Nusseibeh says: “We are still waiting to see the gradual shift in mindsets reflected in portfolios.” That however does raise the question of how long those in asset management expect people to wait. Given the shift in public and political mood, they would be unwise to think time is on their side.

MORE ABOUT

Hermes

Capitalism

Anthony Hilton: Wake-up call our fund managers must heed

Read More