The event’s first speaker, Hermes CEO Saker Nusseibeh, kicked off his presentation with a point that set the tone for the conference. He argued that wanting to do good and maximising returns – have merged. He explained that when Hermes started working in the 80s there was an assumption that money and values were in opposition but that this was no longer the case.
“Investing is about more than just beating the benchmark,” he said. “The FTSE recovered quickly from the 2008 financial crash but the structure of developed economies was deeply affected for years.” High debt, low growth, and troubling unemployment in countries such as Greece and Spain are just some ongoing effects.
Nusseibeh went on to say that climate change is happening and has become a business risk for many. “Just ask companies with factories near high water levels,” he said.
Another way in which investors are affected by ESG concerns, according to Nusseibeh is evidenced by the way increasing disparities in wealth have led to a social lack of cohesion, discontent and the election of populist parties. “We need to be aware that the parties of this sort can attack the very foundation of our investments – property rights,” he said.
Nusseibeh concluded his presentation by presenting the case for the practical benefits of ESG: “Sustainable investing is worthwhile not just because it makes us feel good, but because it can help us create a society in which we can retire comfortably, and because you actually make more money that way, in the long term.”
The second presentation provided by independent strategist, Dr Gabrielle Walker, focused on climate change and was alarming and uplifting in equal measure.
Walker argued that the relationship between the financial services industry and action around climate change had completely changed. “It is no longer an issue solely for tree huggers and ethical investors,” she said.
“Mark Carney, governor of the Bank of England and chair of the FSB said climate change presents significant risks for global financial stability and that these include ‘direct physical risks, liability risks, and risks from transition costs.’”
In terms of direct physical risks, Walker explained that Peru saw the worst flooding in its history last year, Chile has experienced the worst wildfires ever this year, and a series of hurricanes and typhoons have destroyed regions across the developed and developing world in recent times. Walker said: “The effects are not subtle, it is hard to find a place in the world that isn’t at risk.”
Walker went on to explain there was considerable pressure coming from the private sector to change business models and gave one example of a transformation. The French multinational electric utility company, ENGIE, has sold off or closed down nearly $15bn of fossil fuel related assets since 2016 and reinvested in low-carbon activities, which now provide 90% of revenue. It’s new focus has seen the share price rise more than 17%. A slide following this entitled “Capitalism is saving the climate, you hippies,” struck a chord and got a laugh from delegates.
Walker concluded by returning to the theme raised by Nusseibeh in the first presentation. She said: “Some members of the financial services community are still torn between wanting to make money and wanting to do the right thing, but they need to understand that that division really isn’t there any more.”
Head of Sustainable Investing, Hermes
The third speaker of the day, Andrew Parry, Head of Sustainable Investing Hermes, set the tone of his presentation with a quote from John F. Kennedy: “If a free society cannot help the many who are poor, it cannot save the few who are rich.”
He argued that one of the things that hasn’t changed in the last 10 years is the distribution of income and wealth and that inequality had become problematic. “There is an increased understanding that in a polarised world, such as we currently have, there is a dangerous vacuum in the centre. Similarly, if all the money is at the top, who is going to buy the products?”
Parry argued that changes in climate, geopolitics, demographics and increasingly technology, are forcing companies and investors to consider how they might make their returns sustainable. Similarly, he said: “Companies are an important part of society, they have the power to change the system and are coming to understand that they need to respect ecological limits as well as human capital.”
Parry went on to explain the four-pillar approach Hermes takes when dealing with companies and the central position advocacy has within this. “First, we look for growth; second we look at risk, in terms of climate change, and changing demographics; third, we embark on advocacy work including engagement with the company and policy makers; and finally we push for improved reporting.”
Parry concluded with a twist on another famous quote, this time Shakespearean, in a bid to demonstrate the importance of advocacy on the part of investors and the financial services industry: “Ask not what sustainability can do for your portfolio but what your portfolio can do for sustainability.”
Dr. Hans-Christoph Hirt’s presentation drilled down into the theme of advocacy presented by Parry, but began by introducing the audience to its history. Hirt explained that work began as early as 1558 with Dutch entrepreneur and shareholder of the Dutch East India Company Isaac Le Maire, a pioneer of stewardship and short selling. “Shareholders have been influencing company decisions for centuries,” he said.
Hirt made the case that engagement can add and protect value, since, according to historic studies, well governed companies outperform companies with poor governance standards by an average of over 30bps per month1, and engaged companies generate 2.4% to 4.4% higher annualised returns.2
The way a company engages is important too, accord to Hirt, helped by a growing number of stewardship codes, including the Principles for Responsible Investment, the UK Stewardship Code, and the Shareholder Rights Directive.
But the engagement needs to be adequately resourced, he warns, with robust monitoring, research and selection, as well as a multi-national team of professionals, with same language skills, diverse experience and an understanding of a company’s culture. There also needs to be focus on specific actions and outcomes with reports on progress tracking.
Hirt cited successful work with Volkswagen, Hon Hai, Chevron, and Deutsche Bank in recent years but argued that unfortunately few investors are willing to commit the resources to develop impactful engagement. He concluded that regulatory requirements forcing investors to report on their engagement activity might help resolve this issue.
1 Clark, Feiner, and Viehs (2015), “From the Stockholder to the Stakeholder – How Sustainability Can Drive Financial Outperformance”; Hermes Investment Management (2014), “ESG investing – Does it just make you feel good, or is it actually good for your portfolio?
2 Hoepner, Oikonomou, Sautner, Starks, Zhou (2018): ESG shareholder engagement and downside risk (working paper).
Head, Hermes EOS