Asset AllocationOctober 26, 2015

Passive Strategies Seen as a License for Passive Shareholding

Investing via indexes pushes shareholders and companies further apart, according to a report by Hermes Investment Management.

Reported by Featured Author

Investors felt that passive investment strategies distance them from companies and diminish their influence as shareholders, according to a survey by Hermes Investment Management.

Some 60% of respondents said they expect a rise in allocations to index-linked products would have a negative impact on shareholder influence.

But the fund manager countered that notion, pointing out that power is still in the hands of the shareholder. “If anything, passive investors should engage more, not less,” said Leon Kamhi, Hermes Investment Management’s head of responsibility. “Engagement is the only tool passive investors have to improve the value of the companies they invest in.”

“If anything, passive investors should engage more, not less,”—Leon Kamhi, Hermes Investment ManagementEngagement and stewardship are global issues now, a Hermes report on featuring the survey said. “We live in a global economy and beneficiaries, via their pension funds, are increasingly invested all over the world, not just in the one country which a company or pension fund happens to be domiciled.”

The report outlined the strain investors’ resources were being put under, which meant shareholder responsibility was often overlooked.

“Hermes’ stewardship resource (Hermes EOS) is one of the largest of its kind in the world and is only 26 strong,” the report stated. “There is therefore a significant opportunity for asset owners to effectively collaborate and increase their investment in responsible ownership, thereby contributing to ensuring the alignment of companies and public policy makers to the generation of long-term wealth for beneficiaries to enjoy in a sustainable economy.”

Hermes also asked these 109 investors about their view on how they should influence companies’ environmental, social, and governance (ESG) policies. Again, Kamhi said he was troubled by the result.

One in five investors (21%) said he or she believed that challenging companies on ESG was not an important issue. This position is borne out by the low numbers of large investors that have signed the United Nations’ Principles for Responsible Investment, highlighted in CIO’s latest edition.

“Whenever there are poor ESG practices that lead to the destruction of value, investors have a fiduciary duty to speak up,” said Kahmi.

However, the survey showed that less than half of investors (46%) believed companies focusing on ESG issues produce better long-term returns for investors.