Colin Melvin, the founder and former chief executive of engagement house Hermes Equity Ownership Services, has launched a new consulting firm aimed at helping investment managers, pension funds and family offices take a longer-term view on their investments.
Jennifer Walmsley, former director of investor engagement at the UK watchdog Financial Reporting Council (FRC) has also joined the firm, which is called Arkadiko Partners – after the world’s oldest standing bridge. Melvin has worked with Walmsley previously at Hermes where she was a director of engagement. Nina Cieslinska has also joined the firm from Hermes.
Melvin, one of the architects of the Principles for Responsible Investment (PRI), believes the fund management industry is at a critical juncture – and a radical, new approach is needed to investments.
“The fundamental ways in which we measure business success and investment performance are flawed and support a ‘transactional’ world view which is undermining the health and wealth of the world’s economies and societies,” Melvin told RI.
Melvin highlighted climate change and tobacco-related illnesses as particularly stark examples of the consequences of companies externalising their costs onto society and the environment and internalising their profits for shareholders.
“To continue in business, oil companies need to find more oil and limit regulation and tobacco companies need to get newer, younger people smoking in emerging markets, because they believe their shareholders require this. But the same shareholders invest in other companies, which bear the cost of these externalities. The economic, social and environmental costs of this approach to business and investment are enormous,” he said.
Melvin believes the “truer” way of measuring corporate profitability would be to take a “relational” perspective and gauge the “net financial contribution” the company makes in the longer term and if that view were taken by fund managers, the success of a company would be viewed differently.
“What is the purpose of investing in a business? No fund manager asks this because the unspoken assumption is that all investment is about making money in the short-term. But companies are successful in the longer-term as a consequence of doing something useful and providing the goods and services that we need.“So we should be assessing and reporting on the impacts of the company that we are investing in. We should also consider our purpose and impact as investors, because this will contribute to our success.” he said.
Using this approach, Arkadiko is hoping to work with investment firms to “to realise this change and help them find a way to do this”.
Melvin said there is a crisis in fund management where clients have lost trust in investment managers and are reluctant to pay high and opaque fees.
“The move to passive is actually a breakdown in trust of the active management industry, and it’s a reluctance to believe in its ability to add value. Clients are starting to believe that if you invest through active managers for say 30 years, moving from one to another, then you’ve have indexed performance minus the fees. We have the opportunity to shift from this transactional approach to a relational one, with asset owners and investment managers working in partnership to mutual benefit.” he said.
He added: “What we are trying to do is move from the current view of scarcity to abundance. Where we see value arising through the quality of our investment relationships and those of the companies we invest in. It’s the great irony of this industry – for all the wealth in the City and Wall Street, the model is a scarcity model – we are currently all fighting for the same slice of pie.”
But there are signs of change – Melvin believes the global rise of populism and the increasing move toward adopting the PRI in many countries, demonstrate dissatisfaction with the consequences of the current financial system and that there is an increasing trend towards investors recognising that sustainability and long-term investment success go hand-in-hand.
Hermes’ Equity Ownership Service, which Melvin helped launch and an early adopter in advising clients on ESG, saw its assets under stewardship rise to £261.3 billion in 2016 from £154.7 billion in the previous year.
Melvin said early discussions with fund managers and pension funds had been encouraging and he expected to sign on new clients over the next couple of months.
Melvin left Hermes in November 2016 after 14 years at the firm. He also chairs the Future-Fit Foundation, but recently stepped down as chair of the Social Stock Exchange.