Saker Nusseibeh, CEO of Federated Hermes International, and Lars Dijkstra, CIO of Kempen Capital Management, have responded to BlackRock CEO Larry Fink’s recent annual letter to corporates on behalf of the 300 Club, a group of investment professionals seeking to challenge thinking and behaviours in the investment industry.
In their response, published on the 300 Club’s website, Nusseibeh and Dijkstra extend a “warm welcome” to BlackRock as a new member of “the movement that has been working for several years to fundamentally change the investment value chain from salesmanship, which is the principal driver for many asset managers, to stewardship”.
At the same time, they set out several steps that BlackRock – and others – could take to join the ranks of those implementing what Nusseibeh and Dijkstra referred to as “The New Active” philosophy of sustainable wealth creation.
These range from aligning the interests of portfolio managers with those of asset owners and companies, for example by personally co-investing with clients, to making sustainable wealth creation and stewardship the objective rather than “minor outperformance of an index of offering the cheapest index fund”.
“The financial world is on the eve of a profound reorientation,” write Nusseibeh and Dijkstra. “But let’s not waste this revelation by talking, instead let’s act. Some of us have already started.”
“Let’s not waste this revelation by talking, instead let’s act.”
Saker Nusseibeh (left), CEO, Federated Hermes International, and Lars Dijkstra, CIO of Kempen Capital Management on behalf of the 300 Club
Published last month, Fink’s letter to CEOs informed them that BlackRock was placing sustainability at the centre of its investment approach, and that Fink believed “we are on the edge of a fundamental reshaping of finance” as investors gained a better understanding of the implications of climate risk.
It came shortly after BlackRock joined Climate Action 100+, the collaborative engagement initiative launched in 2017 that now counts more than 370 investors as members, having previously stuck to direct engagements with companies on its own.
300 Club addresses Larry Fink
Letter to Larry Fink - Welcome BlackRock
In your annual letter to corporates you argue that the financial world is on the eve of a profound reorientation. We can’t tell you how pleased we are that BlackRock, with its leading market position and its undoubted clout, is now joining the movement that has been working for several years to fundamentally change the investment value chain from Salesmanship, which is the principal driver for many asset managers, to Stewardship. The presence of BlackRock in our ranks signifies a tipping point in asset management and we extend to you a warm welcome to the movement!
As you wrote, ‘we will now assess environmental, social and governance (ESG) metrics with the same rigour as traditional measures such as liquidity and credit risk’. Some of us have been advocating this shift to a more long-term approach to investment for decades but we have seen over the past five years many asset managers move forwards, fully integrating ESG-metrics into their daily investment processes in one form or another. It has been very clear for us and them that the future risk and return of companies are critically dependent on good governance, ambitious environmental policies and social considerations.
Our philosophy can be summarized as: only when sustainable wealth creation - what we call ‘The New Active’ – becomes the new normal, will we be able to reduce the risks of value destruction to create truly excellent long-term returns for investors and value for all stakeholders (clients, employees, suppliers, communities and society).
How can BlackRock and others join The New Active?
- First and foremost: align the interests of portfolio managers with those of asset owners and wealth creators (the companies). For example, by personally co-investing with clients and by making sure the incentive structures of companies are aligned with long-term value creation, not short-term share price movement or fund flows;
- Ensuring that the incentive structures of asset managers are based on long-term active stewardship and sustainable capitalism instead of short-term salesmanship;
- Work with high conviction. To be able to really create value for all stakeholders, active portfolio managers need to focus on a limited number of companies. Being an active owner with a deep dialogue with company executives requires bandwidth. Creating positive change for all stakeholders means commitment and dedication to dialogue between the core-decision makers on both sides;
- Focus! Make the objective sustainable wealth creation and Stewardship instead of minor outperformance of an index or offering the cheapest index fund. Do that well and long-term alpha will inevitably follow.
- Practice inclusion with Stewardship and engagement. Consider exclusion as a last resort. Creating tailor-made exclusions based on external ESG-ratings without a proven track record is the easy way out. By engaging and really trying to change a company you’ll have much more impact.
- Have long-term commitment and be an active owner. Engage deeply with companies about their corporate strategy, capital allocation and sustainability risks and opportunities. In our experience, the quality of our arguments are more important than the size of our position. Bigger is not better - better is better.
The financial world is on the eve of a profound reorientation. But let’s not waste this revelation by talking, instead let’s act. Some of us have already started. We’re committed to creating investment alpha and sustainable absolute returns for our clients in a fully aligned way. Our industry needs to transition to The New Active: to long-term stewardship by helping both our clients and the companies we invest in focus on sustainable wealth creation.
Saker Nusseibeh, CEO, Federated Hermes International, and Lars Dijkstra, CIO of Kempen Capital Management. Both authors are members of the 300 Club.