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NEST's Fawcett challenges investors to 'be brave' on ESG

Investors should be making brave decisions on environmental, social and governance (ESG) issues, according to Mark Fawcett, CIO at the UK’s National Employment Savings Trust (NEST).

He told the audience at the 30-year celebrations of ESG research organisation EIRIS: “We have to be seen to be doing the right thing and make it very clear we won’t tolerate poor governance, poor environmental standards or poor social policies because, ultimately, if those things are delivered badly, the long term looks pretty grim.

“We have to make sure companies are held accountable and that we don’t just accept their excuses.”

Fawcett said he was frustrated by fund managers and others in the corporate governance area who say they give companies the benefit of the doubt because they can do nothing about any issues that arise.

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He added: “We have to make some bold decisions because, if we don’t, we are just going to keep not learning the lessons, and, as a result of that, no one will trust us.”

Making bold decisions was one of the four steps Fawcett recommended.

He also said investors should be genuinely long-horizon investors and not worry about short-term share price movements.

Aligning incentives between asset owners and fund managers was another important step to take because too much value was extracted in the investment chain between the member and the final investment, which he said created “unfortunate” incentives.

“At NEST,” he said, “we do our absolute best to align the incentives of our fund managers with our members, but it is a real challenge.

“It is all about fair fees, fair investment horizons, not firing and hiring at will and actually having a long-term relationship with your manager.

“We don’t pay performance fees. We have yet to see a performance fee structure that properly aligns the managers with our members’ interests.”

Fawcett also recommended true collaborations among asset owners, particularly as they were not competing with each other.

He admitted asset owners felt a sense of optimism following the shareholder spring, believing that times were changing.

“But then the economy started growing, markets rebounded, and we started forgetting the lessons we should have learned over the last few years,” he said.

He pointed to the drop in support for a shareholder resolution calling for the role of chief executive and chairman to be split at JP Morgan from 40% in 2012 to 32% this year, calling it a backward step.

He also highlighted that, despite HSBC receiving a $1.9bn (€1.4bn) fine by the US authorities for activities related to money laundering, only 11% of shareholders voted against the bank’s proposal to increase the bonus cap for its finance director from twice to five times his salary.

Richard Howitt MEP and European Parliament Rapporteur on Corporate Social Responsibility, who spoke at the same event, said that, despite progress, ESG was fighting an uphill battle.

“Short-termism still blights too much of economic decision-making,” he said.

“And there is too much talk of who is to blame for that rather than talk about how we overcome it.”

He said the European project on the purpose of the corporation and how it was best defined in European company law was trying to answer similar questions as the review on the definition of fiduciary duty by UK Law Commissioner David Hertzell.

Howitt said: “We will always be concerned about the rate of returns, but we are starting to ask not just when and how a return is measured but also for whom.

“But, as much as regulation and legislation have a part to play, governments cannot and will not achieve the necessary changes alone without markets making their own contribution, and that comes down to [risk].

“I am pleased the European proposal includes the requirement to analyse risk, and I suggest this may ultimately prove to be its most important component.

“We all know the whole concept of risk is changing for business as it is for everyone on our planet.”

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