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Magazine Issues » November 2014

INTERVIEW: ‘I swear to do no harm’

Saker NusseibehSaker Nusseibeh says responsible capitalism is at a tipping point. The chief executive of ethical investor Hermes Investment Management, talks to Nick Fitzpatrick.

Whether or not you are sceptical about pension funds and investment managers applying responsible investing principles, you must admit the concept of investing for good certainly has durability. Since 2000, for example, UK pension funds have been required to disclose any environmental, social and governance (ESG) policies. 

All these years later, sceptics might say a rainforest of paper has been swallowed in the ensuing box-ticking exercise, but a Darwinian view might also be to say that if the idea of responsible investment has persisted, it must have evolutionary benefits.

The benefits include an, on average, extra 30 basis points of return a month if investors avoid companies with bad governance, according to Hermes Investment Management. This is the language of the hard-nosed capitalist, which the ESG lobby has long-since learned to speak.

Saker Nusseibeh, the chief executive of Hermes, which is owned by the British Telecom Pension Scheme (BTPS), points to a case when Hermes rejected an otherwise good investment. 

It was in Afren, the UK-listed oil and gas company. 

Despite a good fundamental investment case, there was significant controversy around Afren, and Nusseibeh says relatively weak environmental and social policies represented limited awareness of related impacts and pointed to ongoing governance and litigation risks for investors. Hermes recently produced research that showed 108 institutional investors would also reject attractive investments if there were significant ESG risks. The finding led Nusseibeh to declare that responsible capitalism was currently at a “tipping point”.

Asked about this, Nusseibeh, who started his career at Mercury Asset Management, explains the point more. “There is a pendulum. After the Second World War it swung more towards inclusive capitalism. But later, with Thatcher and Reagan and the theories of Milton Friedman who said that a company’s only duty is to maximise profits for its shareholders, the pendulum swung the other way.

“Now, though, it is changing again. Cardinal Vincent Nichols, the head of the Catholic Church in England and Wales, and Dominic Barton from McKinsey speak about companies having a broader purpose than just profit, so we can see the pendulum moving towards a more responsible capitalism. 

“Friedmanesque capitalism very clearly does not work.” Nusseibeh says that companies tell Hermes they want to talk about ESG with fund managers, but they say that fund managers are not interested; meanwhile, fund managers say they want to talk about ESG, but companies are not interested. 

But he adds: “We find that companies do increasingly want to engage.”

Nusseibeh, when talking about ESG, is prepared to range into more idealistic territory beyond just that of the hard-nosed capitalist. Fund managers can and, he feels, should play a role in safeguarding the broader wellbeing of people and society.

For example, though a bank stock might increase a pension fund members’ wealth by higher profits from mobile banking, scheme members might also be adversely affected by branch closures of the same bank as it pursues those profits.

“We are not saying you exclude companies on an ESG basis, but we are saying it’s absurd to back any company debt or equity instrument without looking at ESG factors,” he says.

He acknowledges that ESG investment may be “faddish” for some, but adds: “There is a move towards ESG by pension schemes but their priority is still to get the highest nominal return at the lowest cost.”

As well as chief executive of Hermes, Nusseibeh is also known as a campaigner working to change investment management practices. He founded the 300 Club for institutional investors to ask difficult questions of their industry. But asked how this change is progressing, he refrains from using the word “change”, and talks more of a shift.

“The fund management industry is moving. There are some people who want it to become a profession and the ethical component of the industry is increasing. Some are talking about an oath.”

“What’s so hard about saying ‘I swear not to do harm’?”

One of the industry’s greatest failings in recent years was to not intervene with banks as they raced towards a debt crash. Fund managers should have been the “canaries in the mine”, he says. “It was the fund managers’ fault. Our job is to analyse markets. Fund managers should have been the canaries in the mine. Shouldn’t we have been saying ‘Stop!’ to the banks in the 2000s, telling them that their return on equity was too high to be healthy?”

Fund managers have a similarly important role now in the age of extraordinary economic stimulus, or quantitative easing in the US, UK, Japan, and similar measures in the eurozone. 

“Fund managers ought to be telling people that they should be scared of the super-easing cycle that we are in and ask what will happen when it stops.”

Back down to business now and the running of Hermes. Nusseibeh joined Hermes in 2009. He was head of investment and became chief executive in May 2012.

The BTPS has always been a good calling card for Hermes, which has £27.4 billion (€34.2 billion) of assets under management (at June) and £108 billion under advice in ESG and stewardship services. 

Hermes was the captive manager of BTPS but branched out into third-party business back in 1997.

Just over three-quarters of assets that Hermes manages are still for the pension scheme.

Thanks to its association with the telecoms fund, Hermes has a strong brand in its home institutional market, particularly for ESG investment. 

As it moves to sign up more investors, since 2009 Hermes has opened offices in the US, Australia and Singapore, and registered funds in various European countries. The fund manager has increased its international revenues from 8% to 38% since Hermes appointed Nusseibeh as chief executive and it is targeting 55%. International expansion is on the agenda, and so is diversification of its clients.

“We are primarily institutional led, but we are looking at the wholesale market as well because there is a move by those at the top end towards institutional quality.”

The pursuit of assets is less important to him and he says that as long as he is chief executive, Hermes will be foremost “an investment-led alpha house”. The point when alpha houses stop being alpha houses because assets weigh on them is £60 billion, Nusseibeh says.

Hermes is about halfway towards this, but if Hermes stands to benefit from the new era of responsible capitalism, perhaps it will be hard to put the brakes on when it gets there.

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