‘We can achieve everything that everyone’s talking about here without trying to be the Pope,’ said Christopher Donahue, CEO of Federated Hermes, during a debate on whether moral or political judgements belong in ESG investing.
‘You can do everything that you want to do substantively… on the analysis of risk and reward. Once it is put in that context, then it works fine.’
Donahue was speaking at the Citywire World of Asset Management CEO Summit, which brought together 21 leaders of asset management groups around the world, representing a combined $21tn (£15.1bn) in assets under management. It is worth listening to the rest of his discussion in the video below.
His views were echoed, sometimes quite forcefully, by several of the CEOs at the Summit, particularly when China and its human rights record were mentioned.
‘We run other people’s money, not our own money. It’s not our company’s money. It’s not for us to impose our morals with the money of other people in various societies,’ Hendrik du Toit, CEO of Ninety One, said.
Unless you had ‘trillions and trillions’, he didn’t think you could engage the Chinese government on its record.
‘You would probably get a cold cup of tea,’ he said. ‘[Just like] if you engaged the US government about the many wars they’ve fought in my lifetime.’
Hear the rest of his punchy contributions below.
On the other hand, asset management companies must choose what they stand for, du Toit said. ‘We need to make judgements as leaders on what our company values are, which is different from how we price risk for clients.’
‘If you decided as an investment manager not to invest in China, with a mandate to generate global alpha around the world, you are clearly violating your fiduciary duty,’ said David Hunt, president and CEO of $1.4tn fund business PGIM.
Daniel Simkowitz, head of asset management at Morgan Stanley, chose the scientific approach.
Echoing Donahue’s point, he said: ‘I think the focus that we’ve tried to put forward is science. On climate, we can rely on physical science but on diversity, we can rely on social science. These are things that are both good for society, but they are also good for risk-adjusted returns. You’ve got to be careful around politics and morality, but in our opinion, you do not have to be careful with science. If you’ve got the right science, you should go hard and engage.’
The basic message was to keep morality lessons and politics out of ESG. Instead, frame the issue in terms of risk and reward, data, science and long-term investment being good for all stakeholders.
ESG happened to be the right thing to do for society, but it was also good business, Fidelity International’s Anne Richards said.
Finding the right balance
What had changed was that clients and employees now expect asset management groups to speak out on societal issues such as racial injustice.
Jose Minaya, CEO of $1.1tn US fund giant Nuveen, said that as a person of colour, he had found it difficult.
‘I always felt like it wasn’t my place to do so.’
The same was true, but for different reasons, for the privately-owned and traditionally publicity-shy Capital Group, Hamish Forsyth, president for Europe and Asia, said.
The CEOs believed that asset managers could fail in their fiduciary duty if they made moral or political judgements with clients’ money without specific mandates from clients – such as impact funds, for example.
But both PGIM’s Hunt and Minaya thought that the definition of fiduciary duty would shift. Minaya said that if Nuveen did not take public moral or political positions as a business, ‘we would destroy that fiduciary duty as I can’t attract the best people because they won’t come to me’.
Hunt echoed similar sentiments but for slightly different reasons. PGIM had real estate funds that built low-cost housing but also committed to a level of employment and education in the community it was investing in. It was PGIM’s decision to offer those funds that incorporated non-financial objectives so clients could express their views.
‘I think that this is going to mean that the definition of fiduciary [duty] and how we evolve that in clients’ minds will shift… and I think that is all to the good,’ he said.
There were indications from other chief executives that the line between investing on behalf of clients and moral issues could be blurred. It is worth listening to Fidelity’s Richards talking about stakeholder –as opposed to shareholder – capitalism.
Capital Group’s Forsyth also alluded to a melding of the moral and financial dimensions. ‘There is something fundamentally moral about the way all of us see our mission, and many in the wider world scoff about the idea that people could be purpose-driven in financial services, but actually, I think probably all of us do feel purpose-driven,’ he said.
‘Some version of you is looking to improve people’s lives through successful long-term investing. I think there is a moral cue right at the heart of what we are doing, and I think successful long-term investing involves assessing and balancing a wide range of moral and financial issues if you’re going to make good investments over long periods of time.’
Yie-Hsin Hung, CEO of New York Life Investment Management, a $605bn group owned by mutual insurer New York Life, said: ‘ESG is one of those interesting arenas where it’s not just about talking the talk; you have to walk the walk as well. I think there is an expectation on the part of not only our investors but also our customers that there’s a greater alignment between our business purpose and our social purpose.’
She added later: ‘We do have a social responsibility that goes beyond delivering just profits to the bottom line.’
Frederic Janbon, CEO of BNP Paribas Asset Management, explained what he would do if asked by a client to invest in tobacco: ‘I’d say no, even though, potentially short term, this might lead to great performance,’ he said, acknowledging that it was an issue to be debated. In any event, BNP believes strongly that its approach to ESG would lead to ‘better long-term sustainable performance [for its] clients’.
Incidentally, it is worth reading the press release from BNP when it announced in 2018 that it would exclude tobacco from the active funds it had full discretion over.
‘With seven million people dying annually from tobacco-related causes, the decision takes into account concerns about public health, as well as human rights abuses and the substantial economic cost associated with tobacco, believed to be more than $1tn a year,’ the firm said.
As Janbon put it, BNP was also betting on the fact that ‘good will prevail… and ultimately, this will lead to better performance’. Hear more of his comments below.
The full films of the (sometimes vociferous) discussions around ESG at the World of Asset Management CEO Summit will be published on Citywire websites around the world later this month.