Rigorous Environmental, Social and Governance (ESG) management can deliver an extra 40 basis points per month according to Saker Nusseibeh, CEO and head of investment at Hermes Fund Managers.
“Where it [ESG] really matters for performance is in consistently avoiding bad governance. You can add 40 basis points per month… Per month!” Nusseibeh told a crowd of more than 30 trustees of Australia’s top 50 superannuation funds and asset consultants at the Conexus Financial Fiduciary Investors Symposium last week.
Nusseibeh talked about the importance of weighing up a company’s sustainability when considering whether to hold it in portfolios. Governance issues, he said, should be a mandatory part of the process, while environmental and social issues also weigh heavily despite being harder to measure.
“Think in terms of its ability to consistently offer stable returns for over 20 years, because that’s the investment time frames of your members. That’s how long they can be invested for, not one, two, or three years,” he said.
“Look at Lloyds of London. It successfully insured against world events for over 200 years… Then it went belly up, not because they couldn’t calculate risk. They were pretty good at that, but they didn’t successfully calculate the environmental risk of asbestos.”
Nusseibeh also urged trustees and managers to think more broadly about the future implications for fund members in a world devoid of ESG; one of lower standards of living punctuated by greater wealth inequality; high inflation; and transport and fuel restrictions.
“ESG is a tool for enhancing returns… But one should also do what is right for the sake of doing what is right.”
David Rae, head of asset allocation for New Zealand Superfund (NZ Super), also told the crowd about how the fund had recently brought ESG management “out of the back office to the front office.” It’s a move he says, that had some of their investment professionals “kicking and screaming” about drafting their own policies but effectively “switched on their brains” about ESG and the costs and implications of getting it wrong.
It’s an approach that’s resulted in direct changes in major listed and unlisted companies NZ Super invests in, including changing supply chain issues in 16 technology companies, a complete change of board at another, and broke up “empire building” governance in a large listed infrastructure company. Rae says their ‘active engagement’ on ESG won’t stop there, but is looking to build power in numbers through working together with other New Zealand funds on governance issues in particular.
“We recently got people in a room and said, ‘let’s raise corporate governance issues, and lets act as a group on these… we realise that tough talk in a locker room can quickly disintegrate on the field, so it’s important to have one company that’s leading that charge,” said Rae.