GLOBAL – The solution to short-termism in business and finance lies mainly in the principal’s greater control of their agents, such as fund managers, investment banks or corporate boards, according to Colin Melvin, chief executive at Hermes Equity Ownership Services (Hermes EOS).
He told the audience in the Tomorrow’s Finance lecture series in London: “From the pension fund perspective, this can be achieved through well-designed investment mandates that better align the interests of agents with principals, as proposed by the International Corporate Governance Network, among others.
“We also need better stewardship of owned assets through full ownership and collaborative engagement by asset owners, such as pension funds.”
Melvin said that, despite the advances in environmental, social and governance (ESG) and the increase in the number of the signatories to the UN-backed Principles of Responsible Investment (PRI), short-termism in business and financial markets was still a problem.
Short-termism destroys value and may include disincentives to recruit, invest, undertake research and develop new products for the long term, he said.
The basic problem of the capitalist system is control and capture by agents rather than principals, he added.
“The major problem with executive pay and the reason for this current dysfunctionality is that the policing has largely been undertaken by the agents, by fund managers as agents for the underlying owners of the companies such as pension funds, and many of those fund managers are not interested in [the long term],” Melvin said.
“Many favour performance measures that make sense in the context of their own performance targets. And this has resulted in structures wholly unsuitable for many of the companies concerned.”
Melvin said he had witnessed an increase in corporate pension funds adopting the sustainability practices of their sponsoring companies into their own responsible investment policies over the last 18 months, including the pension funds of Unilever, RBS, Shell, M&S, ING and BT.
In other news, AXA Investment Managers (AXA IM) is divesting from soft commodities.
Matt Christensen, global head of responsible investment at AXA IM, told IPE: “All of the AXA-owned and managed investment portfolios are in the process of divesting from food commodities.
“And there will be no new soft commodity purchases in the future.
“We could not find a good reason to keep soft commodities in our portfolios when it remains unclear whether soft commodities add to the food speculation pricing.
“Although AXA IM does not have an opinion either way, we were unwilling to add to that controversy – in other words, it was based on defensive reasoning.”
AXA IM already excludes cluster bombs and anti-personnel landmines from its investments and blacklists a handful of countries.
The London Principles, a set of guidelines intended to assist governments considering impact investing as a tool to address social objectives, were launched at the third annual conference of the Impact Investing Policy Collaborative (IIPC) in London.
They do not dictate what a government should do but rather offer guideposts that ideally point to better strategy and policy development.
The principles are drawn from a multitude of political, economic and cultural contexts, and have been developed to address different places across varying stages of impact-investing ecosystem development.
The five London Principles are clarity of purpose, stakeholder engagement, market stewardship, institutional capacity and universal transparency.
They were developed by the IIPC together with policymakers, researchers and other stakeholders and are now open to consultation.
Meanwhile, the UK Sustainable Investment and Finance Association (UKSIF) has co-signed a letter to the Treasury Select Committee calling for an inquiry into why senior Treasury economists apparently blocked a major government review into resource depletion, climate change and UK growth prospects.
Simon Howard, UKSIF chief executive, said: “Both investors and businesses take these risks seriously, so, if a government review was indeed halted, we deserve a clear explanation as to why.”
Other key signatories include Aviva Investors, Climate Change Capital, the Co-operative Asset Management, First State Investments, Impax Asset Management Group, Triodos Bank, WHEB Group, the Aldersgate Group and Friends of the Earth.
And almost three-quarters see SRI/ESG issues as material to stock prices, according to the 2013 Thomson Reuters Extel/UKSIF SRI & Sustainability Survey.
More than 80% of the buy-side sees thematic research as vital in SRI/ESG analysis, while oil companies are seen as the laggards in meeting the needs of SRI investors.
The 2013 Survey represents the views of more than 500 investment professionals from 29 countries.
It reflects a contribution from 215 buy-side firms and 26 brokerage firms/research houses.
Lastly, ratings agency Vigeo has warned its investor clients of the reputational and legal risks of companies accused of violating customers’ privacy, after companies such as Apple, AOL, Dropbox, Facebook, Google, Microsoft, PalTalk, Skype (Microsoft), Twitter, Yahoo! and YouTube (Google) were accused of allowing intelligence services to access their servers to retrieve data about users through a monitoring programme endorsed by the administration of US president Barack Obama.
Telecom company Verizon was also accused of revealing customers’ records to the National Security Agency (NSA) under a top-secret court order.
Fouad Benseddik, director of methods and institutional relations of Vigeo, said: “This serious case shows that the corporate responsibility of preventing the violation of human rights and the privacy rights of companies’ customers does not arise only in authoritarian regimes, but also in democratic countries.
“Companies must respect the right-to-know of their customers and at least inform them in a clear and intelligible way that their communications can be observed and monitored by public authorities.”
Given the importance of the accusations of privacy breaches, the recurrence of such events for the companies concerned and the apparently insufficient due diligence measures implemented to prevent violations of the right to privacy, Vigeo has downgraded all the companies’ scores in its human rights sustainability driver category.