The nature of investor mandates needs to be addressed as part of a wider look at how companies incorporate social value creation, says consulting firm KPMG in a major new report.
It suggests “some form of performance metrics that focus on longer-term and broader value creation” could be included in investment mandates.
“An improved understanding of the relationship between corporate and societal value creation cannot, in itself, drive change unless the nature of investor and executive mandates and incentives is also addressed,” KPMG observes – adding mandates are “critical levers” in the system.
It quotes Jon Duncan, Head of Sustainability Research at Old Mutual, as saying: “Mandates often simply don’t contain a long-term perspective, and this is the key driver in my view.
“Portfolio managers can be interested in the long-term question, but if it’s not in the mandate, the returns expectations always come first.”
Noting how fund managers need to comply with the mandates given
by asset owners and are therefore often incentivized primarily by short-term financial results, the report says this creates a situation where short-term shareholder value creation is prioritized over “longer-term societal value creation”.It cites work being done by the Principles for Responsible Investment (PRI) and the Environment Agency Pension Fund looking at how mandates can be designed to create societal value.
But practical solutions to incentivizing fund managers, KPMG acknowledges, are challenging and need “innovative thinking around how performance fees can be extended across longer periods or replaced altogether” by alternative incentives.
“While a complete end to short-term financially-based incentives is perhaps unrealistic, a more likely scenario is for some form of performance metrics that focus on longer-term and broader value creation and sit alongside rather replace established financial KPIs. Such new metrics could be included in investment mandates.”
The publication introduces what KPMG says is a “new methodology” called ‘KPMG True Value’ to account for externalities as “economic, social and environmental megaforces” transform the business landscape.
And in the foreword, John Veihmeyer, Global Chairman of KPMG International, calls for a “standardized approach” to the measurement of social value creation by companies. “As the old adage goes, what you can’t measure, you can’t manage,” he writes.
The 116-page report is called A New Vision of Value: Connecting corporate and societal value creation.