The latest battleground in the fight to reduce short-termism in the investment industry is the relationship between pension funds and their asset managers, according to Colin Melvin, Head of Stewardship at Hermes Investments, with new tactics required to improve the dialogue between them and the role of stewardship in the capital markets.
Melvin recently took on the role after heading up Hermes Equity Ownership Services (EOS), the engagement arm of the asset manager that is owned by the BT Pension Scheme.
One such tactic, Melvin has since revealed to RI, is a new smartphone app in development intended to improve the relationship between pension funds and their beneficiaries. It can be used to provide information to beneficiaries about the companies they are investing in through their pension and potentially to canvass consumer opinion about the same companies.
Melvin added: “There’s a need to popularise stewardship. People don’t generally feel that they control companies or that they have any control over the situation but they could. If they can properly understand their role, they may feel less inclined to just sit back and let these things happen. A stronger connection, and better communication between beneficiaries, is a good thing.”
Melvin has also been meeting with pension funds and asset managers in order to discuss the nature of the agreements made between the two parties, with more meetings in the diary for this Autumn and plans afoot to get a group of interested senior investor and pension representatives in the same room to examine how they could work together some time in 2017.
From there, Melvin continued, questions can be asked about the nature of that relationship – he offers some examples: “Is it too transactional in nature? Can we find ways of lengthening time frames, of aligning interests?” – but the aim is not to create a new initiative. “It’s more practical than that,” he adds.A switch in focus is necessary because the quality of fund managers’ work on behalf of pensions at the moment leaves something to be desired, especially in terms of ESG integration and being a good, long-term steward of investee companies, Melvin noted, with much done in the name of stewardship that has been ineffective.
He continued: “Even if you’re a very long term investor a narrow interpretation of fiduciary duty will lead you to do things which are inconsistent with your client’s interests.”
Melvin illustrates the problem using the example of corporate tax: companies that minimize their tax bills often see a direct bump in their valuation, despite the fact that paying less tax is damaging to the local economy, the company’s own prospects or even the prospects of other firms you could be invested in. In other words, the market rewards short-term decisions which are actually damaging in the long-term.
There is also a need to avoid drawing up barriers between long- and short-term investors, Melvin believes, and to further distance RI from the capital markets norm. He concluded: “There’s a danger that we institutionalise RI and make it into an apologist for the investment industry.”
Another problem is finding the right targets for good stewardship, particularly companies with a strong environmental or social impact to make, and for larger institutions to successfully invest in them. Often projects can be too small to back directly.
Melvin has a potential solution in mind, however, born from efforts made in his new capacity as Chairman of the Social Stock Exchange, the UK-based impact investing platform.
“One thing I’d like to do is find ways for the largest institutions to invest in companies with a strong social purpose, and to understand how that develops and sustains the economy as well,” he explained. “I think we could aggregate these smaller investments into one vehicle.”