The growing awareness of environmental, social and governance (ESG) investment is “undermined by short-termism”, according to Hermes Investment Management, a leading promoter of the responsible investment sector.
Institutional investors have an “obsessive focus” on measurement that leads to short-term thinking, says Saker Nusseibeh, Hermes’ chief executive.
Hermes, which manages £29.8 billion (€40.3 billion) and is owned by the British Telecom Pension Scheme, says that while there is a growing awareness of ESG issues amongst institutional investors, this shift is not being reflected within investment decision-making.
Seventy-nine per cent of respondents consider significant ESG risks with financial implications as sufficient reasons to reject an otherwise attractive investment.
Yet the survey also found that reporting requirements such as IFRS17, the triennial valuation cycle and modern portfolio theory are driving pension schemes to think in short-term nominal returns, according to 44% of the survey respondents.
Nusseibeh says “siloisation” results, which is where investors see problems in the context of a single duty, such as making sure there is cash flow available when it needs to be paid out, and doing that in the most cost effective way.
“Today’s siloed and short-term investment approach is the antithesis of responsible capitalism. Change is necessary, if we are to ensure today’s savers and their children will be able to enjoy a fruitful world in the future,” he adds.
The survey also shows that 58% of respondents believe the number of investment opportunities rejected by pension schemes because of ESG risks will increase only slightly over the next five years.
Only 37% believe institutions should place a greater emphasis on quality-of-life factors.
Nusseibeh says that 47% of respondents continue to believe pension funds should focus exclusively on maximising retirement incomes rather than giving greater consideration to whether their current investments will improve or detract from the overall quality of life experienced by beneficiaries when they retire.
The findings are from Hermes’ second annual Responsible Capitalism survey, in which the firm surveyed over 100 institutional investors.
The results show that ESG has become mainstream, says Nusseibeh. “However, the industry’s obsessive focus on measurement leads naturally to more short-term thinking and decisions that often miss the whole point of investment. This is to the detriment of the savers the industry is supposed to be serving.”
©2015 funds europe
