Institutional investors not necessarily ‘walking the talk’
Hermes Investment Management’s paper Many rivers to cross – Slow progress towards responsible capitalism has queried whether institutional investors are practising responsible investment or just talking about it. More investors than a year ago believe that companies should focus on environmental, social and governance (ESG) issues as this produces better long-term results, yet almost two-thirds (60 per cent) hold the view that significant ESG risks do not justify rejecting an otherwise attractive investment.
Raising further doubts as to whether institutional investors are factoring in the long-term implications of their decision-making, there was an increase in fund managers believing that they should not price in corporate governance risks as a core part of their investment analysis alongside traditional financial metrics.
The unwillingness to factor in significant ESG risks runs counter to the views held by more than half of those surveyed (55.4 per cent) that ESG monitoring and reporting of supply chain is either 'vitally' or 'very' important. And in another sign of a disconnect between expressed views on responsible investment and investment practice, almost half (47.7 per cent) were of the view that institutional investors would not continue to invest in companies that have been in public focus for the strategic avoidance of corporate tax, regardless of financial returns. This despite the majority stating that significent ESG risks do not justify rejecting an otherwise attractive investment.
The disconnect stems from the view that the fiduciary duty of pension funds is to maximise retirement incomes for beneficiaries, regardless of long-term risks to the value of the investment. The short-term focus inherent in this view was supported by the fact that 44.6 per cent of the 102 UK and European institutional investors surveyed believed pension funds should not give greater consideration to whether their current investments will improve or detract from the overall quality of life experienced by beneficiaries when they retire, and should instead focus exclusively on maximising retirement incomes.
The Hermes report argues that a key factor behind these views is the 'increasingly difficult task of finding yield in a low interest rate environment where central banks continue to manipulate markets', and that this 'desperate hunt for returns is undoubtedly shortening the horizon over which the global investment community considers its allocation decisions'.
Despite concerns about poor corporate behaviour, such as tax avoidance or environmental degradation or misconduct in supply chains, Hermes notes that ‘it is taking a long time for those companies to be excluded from portfolios' and that 'ESG considerations are still very much compartmentalised rather than being included in core economic-based decisions'.
Hermes calls for institutional investors to take ‘… a fresh approach to calculating total financial outcomes that takes environmental and societal externalities into account'.