Fiduciary investors must factor cost to society into returns

Sally Rose

By

18/05/2017

Institutional asset owners must look beyond nominal financial returns and embrace a more holistic understanding of their fiduciary duty or risk fuelling further populist backlash, argues Hermes Investment Management chief executive Saker Nusseibeh.

He believes professional investors charged with managing the retirement savings of ordinary people need to pay more consideration to the societal costs of their investment decisions, and how these will affect the lives of their stakeholders.

Traditionally, pension funds and superannuation managers have cited limits on their ability to consider environmental, social and governance (ESG) risks associated with their investments, due to their fiduciary duty to members.

But to truly honour the spirit of their fiduciary duty, investors need to care about “something more” than nominal financial returns and “go deeper”, Nusseibeh said.

“Lawyers call fiduciary duty the highest standard of care. As understood today, that drives investors to focus on their specialisation of delivering nominal returns. But the focus really should be on meeting that highest standard of care, which means going for holistic returns.”

Nusseibeh was speaking at the Investment Magazine Fiduciary Investors Symposium, held in the Blue Mountains, NSW, May 15-17, 2017.

His presentation drew on a number of ideas laid out in his recent essay, The Why Question, published in March 2017. Nusseibeh is the founder and former chair of the 300 Club, a group of leading investment professionals who seek to challenge the investment orthodoxy and improve the contribution of financial services to society.

Hermes Investment Management is a UK-based fund manager with £30.8 billion ($53.5 billion) of assets under management and £264.2 billion ($459.1 billion) in assets under advice.

Nusseibeh said professional investors tend to think about the purpose of their job as purely to generate financial returns; whereas, the actual goal of the ordinary people whose pensions they are managing is to be able to retire.

“We have to start thinking very hard about what the other costs are of the way we manage their money,” he told the audience of institutional investors.

Nusseibeh said it was a mistake to think about shareholder and stakeholder rights as separate when, at a collective level, they are often the same people.

“The citizens of the world own most of the capital in the world, as well as being the workers and paying taxes,” he said.

Therefore, he argued, it was misguided for superannuation and pension funds to think they were serving shareholders’ interests by supporting corporations that minimised their tax obligations, when this lower tax take harms the economies in which their members need to live.

The global swing in support of populist politicians is a symptom of the havoc still being wreaked by the fallout from the global financial crisis of 2008, Nusseibeh said.

“Major markets have now recovered from the GFC so, in theory, the GFC has passed,” he said. “But at home in the UK, the taxpayer is still worse off because of the cost of the government bail-out.

“If we in this room don’t understand this, ordinary people do. Why do you think people voted for Brexit and Trump? Because they are not stupid. They understand that the financial system has let them down.”

Nusseibeh said there was plenty of evidence that by shifting their focus to long-term holistic returns, institutions could also improve their nominal financial returns.

He pointed to a study of studies conducted by the Brookings Institution, a US think tank, which showed the academic literature overwhelmingly supported the hypothesis that investors that incorporate ESG factors in to their decision-making outperform – on key measures such as cost of capital and share price – in 80 per cent to 90 per cent of cases.

Nusseibeh said pockets of the funds management industry globally had been quicker to accept this evidence and that he hoped to see this way of thinking become mainstream across major asset owners, such as superannuation and pension funds.