Hermes Funds Management, 100 per cent owned by the UK’s largest pension scheme BT pension fund, will implement “responsible asset management” across its entire product range.
The move is a direct implementation of the first principle of the United Nations Principles of Responsible Investing (UNPRI), which states “We will incorporate environmental, social and governance (ESG) issues into investment analysis and decision-making processes”.
While the UNPRI have been signed by a large number of institutional investors around the globe, including about 180 asset owners, it has been universally agreed they have been difficult to implement.
Hermes, which has about 200 clients and £27 billion under management, operates under a multi-boutique structure and has separate asset management capabilities in hedge funds and private equity among other areas.
According to Colin Melvin, chief executive of Hermes Equity Ownership Services which is also owned by BT pension fund and is the overlay service which engages with corporations, the funds manager is looking at every investment activity and questioning whether what it does makes sense from an ESG perspective.
“They are looking at how to do a better job using environmental, social and governance criteria, with an approach best described as a positive screen,” Melvin, who was the chair of the committee that drew up the original UN principles, said.
Principle two, which states “We will be active owners and incorporate ESG issues into our ownership policies and practices” is the role of Hermes Equity Ownership Services.
Melvin, whose firm acts on behalf of 11 large pension funds with combined assets of £50 billion (US$74 billion) – including its owner BT in the UK, PSP in Canada, and VicSuper in Australia – believes the most recent credit crunch has resulted from a lack of accountability and investor responsibility.
“We have to look at how we got here, why has this happened and it is a consequence, in part of ineffective ownership,” he said.
“For us to now kick up a fuss about remuneration, and other issues, is ok but the work should have been done years ago, the hard work should have been done during the bull run.
“Government intervention is unfortunate, and its a sign of failure. Surely it is better for companies and shareholders to work this out themselves.”
Hermes Equity Ownership Services has 25 staff to engage with corporations, an increase from 19 since last year. It has a total universe of about 7,500 companies and completes about 400 engagements each year.
“Negotiating and engaging is the way to bring about change,” he said.
Melvin argues there are three ways institutional investors can resist repeating the problems of the most recent crisis: engagement with companies; awarding long term mandates and collaboration to facilitate these two efforts.