With ESG investing, an asset manager will choose to exclude companies from their portfolios which don’t abide by certain standards. But with stewardship, a fund house buys shares in companies prior to discussing with those companies how they improve their social and environmental impact.
“A company is unlikely to listen to you if you don’t hold any of its shares,” said Hermes head of investment solutions and product strategy during an interview with International Adviser.
Stewardship, Mason said, is part and parcel of the firm’s ethos: “When you buy a Hermes fund you get stewardship as standard. One thing we’ve been innovating around is making sure stewardship is baked into all of our products.
“This is a really important idea because when you invest you’re given two things: economic exposure to the share price, and voting rights at the annual meeting.”
"This is very helpful for advisers because they are able to have much richer and deeper conversations with their clients"
Better financial outcomes
Hermes equity ownership service (EOS) – a 25-person team – regularly engages with the boards of the companies it holds shares in, working from top to bottom to ensure they have good management structures in place.
“We are engaging with the management of the companies on clients’ behalf,” said Mason. “These companies are working for us; before I got to Hermes I hadn’t appreciated how powerful that was.
“Stewardship is using finance to create social and environmental good, and ultimately we believe better governed companies lead to better financial outcomes in the long-run.”
Stewardship is a tactic which has been utilised by Hermes from day one and the fund group has even helped draft the United Nations-supported Principles for Responsible Investment (UNPRI), the UK’s stewardship code.
Educating the market
Mason said many people still are not aware of the difference between ESG and stewardship: “There’s a lot of work for us to do to educate the market, but the market is now receptive to it.
“It’s gone from being on the fringe a few years ago to being in the mainstream, and now everyone wants this as standard.
One of the benefits of implementing a stewardship code, he said, is that the adviser is now is able to have a conversation with their client that is not just about performance.
“Advisers can now also talk about how they’re able to drive material improvements into the world and how this will have a positive impact on their performance in the long run.
“I think this is very helpful for advisers because they are able to have much richer and deeper conversations with their clients instead of just looking at some numbers on a graph.”
