Saker Nusseibeh is CEO at Federated Hermes Limited, and the founder of the 300 Club — a think tank that challenges conventional thinking on investing. Here, he shares his insights on the role of ESG in financial services, and the opportunities for professional investors to contribute to a fairer future.
It’s my job as a fund manager to convince people that there’s no contradiction between creating a fairer, sustainable, and integrated society, and making money. I’ve got to convince whoever owns the money that this is in their interest.
People don’t appreciate how important it is to have cohesiveness for free market economics to work. If you don’t have a free society, you have revolutions, you have disruption. The market cannot solve problems if there is a lack of social cohesion. You need fairness for the system to function.
The object of capitalism is sustainable wealth creation. We forget that the object of investment is to create wealth, real wealth, for everybody.
“The market cannot solve problems if there is a lack of social cohesion.”
Right now, there’s a disconnect between owners, professional investors and the companies that they invest in.
We’ve created a system where we have professional investors focused on meeting specific targets and outperforming benchmarks, rather than trying to create wealth. In the UK, most companies are actually “owned” by pensioners — the money comes from pension funds. So are the boards of those companies working for those pensioners? Or do they work for the investment agents, who are being judged on very short-term horizons?
Lots of investors think they’re just buying a piece of paper that’s betting on the directionality of a company, they don’t really believe they own the company. If a company wants to do something that will generate wealth over 15 years, that’s not of interest; they’re only interested in companies that will help them to “beat the benchmark”. Basically, they think they’re in Las Vegas — if you want to go to Las Vegas, then go to Las Vegas, but don’t bring that mindset into investing.
“Lots of investors think they’re just buying a piece of paper that’s betting on the directionality of a company, they don’t really believe they own the company."
You can do one of two things: change the benchmarks, or change the relationship between owners and investors.
Changing that relationship means investors have to think about the people at the end of the money — like the workers that have their pension in that scheme — when making decisions. And if you do that, lo and behold, you will actually beat the benchmark, it just takes longer. Ultimately, the thing that delineates responsible investment from other types of investing is time horizons.
We should be seeking the democratisation of investment. We want people to see the link between the money they are saving and the stuff they see on the media about markets and their movements. The companies involved in these are big employers, they’re suppliers, they’re building houses — we should be careful not to just give them money whilst giving up control and our voice in how they are run.
“We want the democratisation of investment — we want everyone to see the link between their money and the markets. People are already aware as consumers, they should be as owners, too.”
To be honest, it hasn’t yet. I think that’s because people still think of ESG as a separate thing to invest in. You have to integrate ESG as a fundamental way of investing — it doesn’t make sense otherwise. We need to stop thinking of it as a “product” and bring ESG into all aspects of investing: it’s all about stewardship.
You also need to understand the purpose of this stewardship, which is not just about creating positive societal outcomes — primarily it’s a better way of creating wealth.
Another challenge is that ESG for some people has left-wing connotations, and they don’t see that it’s just common sense. Companies want to have good ESG, and consumers are choosing companies that treat people well and operate sustainably.
When we talk about the “S” factors I’m not talking about CSR, I’m talking about the way a company treats its workers, interacts with its local tax authority, the way it shares margin with its customers. These choices impact margins in the short term too. CEOs have finally worked out that ignoring, for example, ethical issues in the supply chain, is both the wrong thing to do and financially crazy.
People facing in-work poverty will spend 30–40% of their time distracted. Gender diversity increases our talent pool. Wellness is about productivity. Mental illness hurts productivity. We need to start measuring these things because there are financial implications. We just haven’t worked out how to measure it yet.
“We need to start measuring the ‘S’ factors, because they have financial implications.”
I hoped the 300 Club would help to fundamentally change the way that people do investment by creating something akin to a think tank that includes chief investment officers. It all stemmed from the crisis of 2008 and the fact that a lot of those looking at forecasting models just didn’t see it coming.
With the combined impact of climate change, geopolitics, and macroeconomic factors it’s clear that we need to challenge and change the mentality of the investment management industry.
The idea with the 300 Club was that we simply weren’t interested in selling anything or putting forward a specific set of ideas. Instead, all that we’re interested in is questioning how the system works and how to make it better for the underlying investor — whose money is being invested. That’s reflected in the name — the 300 Spartans at Thermopylae didn’t win the battle, they just set an example and spurred other Greek states to solve the problem.