Saker Nusseibeh, CBE, is the CEO, International at Federated Hermes and is responsible for leading the firm’s growth strategy and ensuring that Hermes continues to deliver excellent long-term investment performance, responsibly. He's also been named 'CEO of the year' before, so it's fair to say his leadership and extensive knowledge on responsible investing is worth listening to. Ahead of his speaking session at IM|Power next week, Saker states that it's the right time for asset managers to take control of their responsibilities with sustainable investments.
For all of us, the coronavirus has confirmed both the necessity and appetite in society for a more sustainable way of life. It has also shown how deeply interconnected and interdependent we are.
For our business, it has reinforced a belief that we have strived to fulfil since our 1983 origin: that successful investment requires acting as a responsible owner of companies and assets.
Investment is not trading, which is essentially speculating on the short-term price movements of securities. It demands long-term active ownership of companies and assets.
What do we mean by this?
To be an owner, you must seek to understand what is right for the company or asset, its long-term investors and the wider range of stakeholders – employees, customers, communities and local environments – that it influences now and will do so in the coming decades.
Achieving this mindset, and acting on it, is not only the right thing to do. It is also the most effective way of achieving what we call sustainable wealth creation: generating wealth through investments that enrich investors, society and the environment over the long term.
Investment connects us all
In the asset-management industry, there has been a long-standing and incorrect notion that investment is disconnected from our everyday world as one of three inert spheres:
- Citizenship: where we elect governments, pay taxes and have a say about what kind of country we want to live in
- Business: we live in communities that are inhabited by the companies we work for and interact with as consumers or suppliers
- Investment: all of us invest in both public and private companies through our savings and pensions
These spheres are connected. The corporate world influences the society we live in and operates within the laws set by the governments we elect. As pension investors and savers, we should not isolate the impact of our collective ownership of businesses from the effect they have on us as employees, consumers and citizens — and how they are shaping the world that future generations will inherit.
As investors who take ownership seriously, we have both the right and the duty to make sure that businesses are sustainable.
Owning your investment duty
As an asset manager, how do we apply this way of thinking in our investment approach?
When we invest, we’re not only trying to make money. We are also trying to create a sustainable economic infrastructure underpinned by actions targeting environmental, social and governance (ESG) outcomes. They include:
- Environment:
- Social:
- Governance:
- Creating a circular economy and reducing pollution and waste
- Taking action on climate change
- Championing natural-resource stewardship
- Promoting human and labour rights
- Effective human-capital management
- Supporting good conduct, culture and ethics
- Creating effective boards
- Assessing executive remuneration
- Supporting shareholder protection and rights
As active, long-term investors, this action is best exercised through stewardship: constructive long-term dialogue with boards and executives about strategic and ESG issues in order to deliver stronger, more resilient long-term returns and sustainable outcomes for society.
It is responsible ownership in practice.
Effective stewardship: capitalism done right
These conversations can range from a company’s climate-change mitigation efforts to social inclusion, employee wellbeing and readiness for regulatory change.
For us, this dialogue is purposeful, objective-driven and its success gauged against proprietary milestones that we have developed. We coined it as ‘engagement’ when bringing it to investors outside the UK in 2002 and have continued to advance best practice while accruing more than $1.1tn in assets under advice in our stewardship team, EOS at Federated Hermes (EOS).
To be an owner, you must seek to understand what is right for the company or asset, its long-term investors and the wider range of stakeholders – employees, customers, communities and local environments – that it influences now and will do so in the coming decades.
Done right, engagement enhances a company’s ability to succeed over the long term, leading to financial success and positive change in the world.
It is about doing capitalism better. It is vital to delivering sustainable wealth creation.
But you can’t flick a switch and make this happen. It takes time to build a stewardship team with the expertise to successfully engage companies, identify and manage ESG risks, share industry best practices in addressing them and, by doing this over time, gain their trust.
For instance, more than half of EOS’s live engagements are longer than nine years in duration, as EOS is often seen as a trusted partner in facing new or ongoing sustainability challenges.
Our 2020 vision for stewardship is that it will be a core element of all investment strategies. Active managers will be required to engage companies on long-term strategic and ESG issues, as will those tracking the index – simply voting proxies won’t qualify as real engagement.
Economics 101? Societal prosperity and self-preservation
To us, it is unclear how an investor can help create resilient, sustainable businesses unless they integrate the aim of sustainable wealth creation into the heart of what they do.
For our business, this translates into highly active, ESG-integrated investment, effective stewardship and an understanding that the long term matters more than the short term.
It is also driven by the knowledge that the success of each societal sphere – government, business and investment – underpins the others.
Few in our industry openly recognise that Adam Smith, regarded as the inventor of economic theory, was also a moral philosopher. On the subject of thinking as a rational person, he wrote in The Theory of Moral Sentiments:
“He is sensible too, that his own interest is connected with the prosperity of society, and that the happiness, perhaps the preservations of his existence, depends on its preservation.”
In other words, Smith understood the role of what we call sustainable wealth creation in a well-functioning economy. That, in a modern context, amassing wealth is pointless within a fractured society and over-heating planet.
As investors, we have the right, duty and incentive to exercise responsible, active ownership. This helps create businesses that are much more resilient to exogenous shocks like the current pandemic, and which create better outcomes for our investors and society.
Saker Nusseibeh will be speaking at IM|Power next week.
Disclaimer
The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications. This does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.