Anyone in denial about the growing importance of corporate governance, environmental and social factors in setting the direction of business needs to start talking to investors.Some 90% of institutional investors from across the UK and Europe believe fund managers should price in corporate governance risks as a core part of their investment analysis, alongside financial metrics.
Environmental, social and corporate governance factors (ESG) are becoming increasingly significant for institutional investors, with over two-thirds believing that pension schemes will reject a growing number of investment opportunities over the next five years if they involved ESG risks, according to Hermes Investment Management's first 'Responsible Capitalism' survey. It finds that 79% of respondents consider significant ESG risks with financial implications as sufficient reasons to reject an otherwise attractive investment. As many as 71% believe that company pension schemes will reject more investment opportunities over the next five years due to ESG risk.
Saker Nusseibeh, CEO of Hermes Investment Management, says: "This clearly demonstrates an awareness and appetite for ESG which is larger than many of us perhaps thought." A piece of research from the Hermes global equities team published in January this year found that "well-governed companies outperformed their poorly-governed counterparts by an average of over 30 basis points per month since the beginning of 2009." "Companies with strong ESG credentials are looking increasingly attractive to institutional investors" says Mr Nusseibeh.
The Hermes Responsible Capitalism Survey aims to identify the most prevalent corporate governance issues for investors for the next three years. On the issue of diversity, all of those surveyed highlighted diversity of experience at boardroom level as the greatest corporate governance concern. But by diversity they mean 'diversity of experience' - which can be gained by appointing entrepreneurs, for example - or 'worker's representatives' as they do in some of continental Europe - rather than simply by gender.
The survey is also a "word of warning for the fund management industry" says Mr Nusseibeh. "Our clients', he says, "are clearly telling us that we need to 'up our game' in terms of how we assess the corporate governance of our investments."
Mr Nusseibeh has stood out within the industry for quite some time. He is a Palestinian with a doctorate in medieval history from the University of London. Around this time last year his name was at the head of a letter to the editor of the Financial Times which began:
"Sir, As long-term investors, we call this week on UK publicly listed companies to embed social sustainability in their businesses by paying employees and contracted staff the living wage. We wish to be invested in companies that focus on the longevity and productivity of their business operations….."
After the financial crisis, he felt strongly enough about the need to restore trust in the industry to set up the 300 Club, a group of investment professional across the globe. “We appear to be at an inflexion point every bit as dramatic as the one that launched the basis of modern investment thinking in the early 1950s. The 300 Club believes that current financial and investment market theory and practice is very likely to fail investors at their time of greatest need" says its charter.
Mr Nusseibeh was also not shy of risking ridicule by being one of the first to call for - and take - a banking and finance oath. UK media coverage of such events tends to veer from dismissal from those who assume the financial services sector will carry on much as before, despite public outrage at the excesses of the past - to adulation from those who are then regarded as 'left leaning and bound to love anything a bit different.'
In truth, his is one of the names on the list of nominees for 'Leader of the Year' for the National Business Awards UK - which in itself, speaks volumes about the times - they are a changing.
