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Nov 02, 2015

Passive investment growth to distance investors from companies

Investors may lose ability to influence companies for long-term gain, Hermes Investment survey says

The growth in passive investment vehicles will likely reduce shareholder influence over company management in coming years, according to a survey by Hermes Investment Management.

Sixty percent of 109 institutional investors surveyed for the firm’s responsible investment survey say passive investment will have a negative impact on shareholder engagement. Another 21 percent say they see no importance in challenging a company over poor ESG practices.

‘The growth of low-cost passive management will cause large shareholders to become distanced from many of the companies they invest in, forgo voting rights and stewardship opportunities, and thereby lose the ability to influence companies for long-term gain,’ the study notes. ‘If anything, however, we believe passive investors should engage more, not less. Engagement is the only tool passive investors have to improve the value and manage the risk of the companies they invest in.’

The study also shows that 65 percent of respondents do not consider it important to examine ESG practices within the supply chain of a company they invest in, and less than half believe companies with a strong focus on ESG issues produce better long-term results for investors.

But 67 percent of respondents say significant ESG risks with financial implications justify rejecting an otherwise attractive investment opportunity, and 66 percent predict that pension funds will reject an increasing number of opportunities in the future due to ESG-related issues.

Sixty-one percent of respondents add that fund managers should be more transparent and share their ESG analysis of companies at least once a quarter. The study authors say asset managers are likely to increasingly demand greater transparency from their fund managers in the future.

‘Currently, the engagement process is not as effective as it could be because asset ownership is fragmented and there is a layer of asset managers and investment consultants between institutions and the companies they own,’ the study authors say.