The Covid crisis will have an impact on the way asset managers and investors approach stewardship issues.
Talking at Corporate Adviser’s online Sustainable Pensions conference, Leon Kamhi, the head of responsibility at Federated Hermes International said there was important lessons to be learned from the way companies and government had reacted to this health crisis.
He says: “What has been interesting is how companies – and governments – have been able to change behaviours at short notice, even if it has been economically detrimental to do so.
“When navigating our way through this crisis we must not forget climate change could have a much more negative impact on our economy and quality of life – and indeed on the sanctity of life itself.”
However he says the crisis teaches us that business and behaviours can change, and change rapidly. It is imperative for those in the investment chain as well as governments to bear this in mind going forward.
Kamhi gave an overview of the history of stewardship and how this now incorporates a more recent focus on making ESG factors (environmental, social and governance) an integral part of investment decisions.
Kamhi says he personally was not a fan of the way that ESG factors tended to be lumped together. He says: “Governance obviously relates to whether the way a company operates and whether it this is aligned with investors’ long-term interests. It also applies to the governance of investment houses like ourselves.
“Environmental and social are relevant factors for the strategy of a company in terms of what the businesses does, what products or services it is delivering for customers, and what its responsibility is towards employees and society. Whether there is more of a focus on environment or social can depend on the industry.”
Kamhi pointed out that in the recent market downturn companies with more positive ESG ratings appeared to fare better, but he said he had not seen any data on how these companies had fared during the subsequent bounce back. Stewardship and sustainability should be more focused on longer-term trends rather than shorter-term market movements over a couple of months he adds. Though he did question the sustainability of the recent bounce back, given the likely number of future insolvencies.
Hermes has been involved in stewardship over decades and is not one of the fund managers that has more recently jumped on the bandwagon. Kamhi though welcomed the fact this this is now a more mainstream concern within the asset management industry. Although it may be seen as overly-simplistic he says the industry can be broadly split into two areas.
The first he describes as “investing for good” – in other words investing in companies have have strong green credentials, or avoiding investments in companies that are not attractive from a social or ethical point of view. Kamhi describes these as ‘feel good investments’.
The second approach he characterises as “investing for change”. Here he says assets managers will invest in a whole continuum of equities or stocks with different ESG performance, but the asset manager is engaging with individual companies to improve that performance, for example encouraging more renewables from oil and gas companies.
He says regulation is also driving change across the asset management industry. “There is new rules coming from the EU which may push the focus towards investing in what is already good, rather than encouraging change, but this regulation is not yet finalised and is still underway.”