The Investing in Society programme, curated by Jericho on behalf of Federated Hermes, resumes in September. Find out more about the role asset management industry can play in capitalism’s re-set and how you might like to get involved.
About The Programme
Federated Hermes has, over a number of years, undertaken considerable work to better articulate the “why” of investment and developed a vision for the future of stewardship in the investment industry. Building on this, the ambition is to articulate and initiate a purposeful debate with other industry participants on what the next steps for the industry need to be, including a roadmap for getting there. This is what the Investing in Society programme, curated by Jericho Chambers on behalf of Federated Hermes, is all about.
The first step in this process (Spring 2020) was to undertake a series of internal discussions among Federated Hermes executives plus “critical friends” from the outside world. These inputs have directly shaped this article, setting out Federated Hermes’ thinking; how it can bring to life a programme to support future workstreams; and provide a clear call to action towards meaningful change.
The next step is to gain a wider range of views from a range of market participants, based on the principles of activism, participation, accountability and dissent (ie. more than just an echo chamber of usual voices). A roundtable discussion scheduled for September 17th is an important next stage in the process. From there, we hope to establish a clear call to action and an actionable plan.
The State of Responsible Capitalism: whereto from here?
The COVID crisis has thrown into sharp relief some of the failures of the current model of capitalism, including the role of the asset management industry plays within the system.
Too often firms shelter behind giving a compliant nod to ESG considerations, as though these are sufficient to deliver a prosperous economy which benefits all of society. Others argue that while this is a first step, more fundamental structural and behavioural change is needed.
Moreover, as corporate belts tighten in light of the economic downturn, will the ambition to realign the needs of society with the responsibilities of business be set aside in favour of the inevitable demand of a growth & profit rebound? We are therefore, as many recognise, at an inflection point – and the September 17th roundtable seeks to explore not just where we are now, but where we go next: threat or opportunity for genuine reform?
Even pre-COVID, the corporate world may have reached “peak purpose”. What started as a vital and noble ambition – to realign the needs of society with the responsibilities of business – has been diluted to the point where, for many, corporate purpose is now little more than skin-deep: convenient for CEO keynotes, the Davos playlist and grandiose Vision, Mission & Values statements but not delivering meaningful change and a better society.
New thinking, new practice and new leadership behaviours (were and) are urgently required – not least to counter the sceptics who still challenge the very premise of anything beyond conventional approaches to investing to maximise shareholder returns.
Federated Hermes is not alone in its thinking – the clarion call for structural change to the industry and “responsible/ stakeholder capitalism” reverberates from Prince Charles to former Bank of England Governor Mark Carney; film-maker Richard Curtis through to Marc Benioff and Larry Fink; the Financial Reporting Council and the Financial Times Editorial Board.
As above, we believe that the Asset Management industry has a crucial role to play in capitalism’s re-set. But it cannot do it alone. It would do well to think more from the outside-in, rather than taking too introspective a view, which inevitably leads to only incremental change. Addressing diversity and inclusion, executive pay and the living wage are important and necessary but not game-changing.
The global challenges of searing inequalities of wealth and distribution; resource depletion and the climate emergency; automation and the loss of meaning at work; plummeting levels of wellbeing and a parallel decline in mental health plus the emerging health and social challenges associated with coronavirus have to be part of any re-think of responsible capitalism, defining good work, good health, good environment and a good society – speaking to future generations, not current elites.
Those Gen-Zers – born between 1995 and 2000 and entering the workplace and voter booths now – must have their say. The next generation of workers, entrepreneurs, activists and politicians want to move beyond what investment is currently for. New frameworks will be required – beyond current definitions of opt-in/ voluntary stewardship and the original ESG flag-wavers like the Global Reporting Initiative – with long-termism fully assured. Greta Thunberg, not Warren Buffett, is the role model and standard-bearer for the next generation of citizen consumers.
Global Challenges: Catalysts & Coalitions for Change
Where does the Asset Management sector sit within this and how can it drive the conversation forward?
It can be a powerful catalyst for change with a clear voice; it can promote the drive towards real/ better/ authentic purpose; it can champion the rights of citizen investors – the individuals who represent the true investors in any fund; it can partner with companies who are themselves fully and properly committed to sustainable wealth creation and eschew those who are not; it can develop and deliver new stewardship and leadership models that speak to leadership for the future, not the past and finally it can advocate for effective policy change to force, through regulation the laggards (and others) in the industry towards better outcomes.
Essential to this is the radical re-appraisal of the purpose of the Asset Management industry and the axiomatic development of new reporting standards and measures as a result. This lies at the heart of any real reform. All this starts with shifts in mindsets. Current barriers to long-term stewardship and genuinely responsible capitalism are as cultural as they are operational.
There will inevitably be trade-offs. Compromise, as well as consensus, will be needed. Social Good and “Responsible” Capitalism will remain uncomfortable bedfellows. The investment industry requires transition strategies, just as the energy and fossil fuel sectors need managed transitions, too. This, in turn, demands radical honesty and transparency about what is possible as well as what is desirable and where the barriers lie. Long-term security will be quickly undermined by poor decision-making in the near-term. The investment sector must be able to articulate what it can and cannot achieve – and by when. This is fundamental to answering the challenges of why, how, who and when? The conversation cannot be limited to – or by – the current fashions surrounding ESG.
Federated Hermes is prepared and willing to step-up and once again lead the conversation within a fresh and inspiring global coalition. But no one organisation can engineer change on such a dramatic scale on its own. Federated Hermes can help better frame the critical debate – with new language as well as new measurements, not just for itself but for others, too. It can convene and build a movement that speaks not only to aspiration, but also to practical implementation.
Questions Need Answers
Key issues to be explored and addressed by this new coalition include:
- Sustainable Wealth Creation
What is required to shift the economy’s mindset to properly consider the need to deliver fair returns to all stakeholders? How should the industry ‘break the tragedy of horizons’?
- Next Generation Fiduciary Expectations
What are the economic and societal outcomes which are critical to achieve sustainable wealth creation and how can the investment management industry be accountable to them?
- Structural Change
How can client mandates, fees and governance, including pay within the industry, be better aligned towards sustainable wealth creation? What should the role of stewardship be in an investment house alongside investment activities? What regulatory changes might be needed to achieve this?
- Overcoming Systemic Barriers
Signalling versus impact – what is the role of engagement versus exclusions and divestment in the active and passive spaces?
- Collaboration in the Investment Chain
How can different industry players work together to further investors’ and society’s long-term interests? How do incentives need to change to allow this? What are the roles of the debt, equity and private markets in driving rapid and relevant change?
- Exercising Leverage
How can the power of individual savers be harnessed most effectively to effect change by and in the investment industry?
Investing in Society – Next Steps
These six questions are the initial focal points for the first Federated Hermes-led conversations with external stakeholders. They, too, will have a perspective on key challenges and areas of enquiry. This process starts in mid-September 2020.
No one organisation – business, government or NGO – has a monopoly on the answers. In this chaotic, traumatised world, the future can only be negotiated by the many, not imposed by the few.
Ingrid Holmes & Leon Kamhi
Robert Phillips & Andrew Gunn
September 4 2020