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Leon Kamhi, Head of responsibility, Hermes Investment Management


Please give us a bit of background on yourself, and how your organisation plays a leadership role in the impact investing space.

Hermes' participation in the responsible investment and ownership space started over 30 years ago when our then CEO held the board of Marks & Spencer accountable for some specific director perks. We recognised our stewardship role and the need for us to engage with the assets we, and our clients invested in, to try to align them with the long-term interests of all their stakeholders. 

I joined Hermes around 15 years ago and have always been involved in one form or another with stewardship and responsible investment. My current role is to work with colleagues to ensure that across our organisation we act as a responsible firm. This ranges from making sure we have the right remuneration policies right through to making sure our fund managers invest in a responsible way, giving due consideration to ESG (environmental, social and governance) issues. This doesn’t necessarily mean if there’s an issue we’ll immediately liquidate our position, rather that we will engage as a good and responsible owner. 

Overall, our focus at Hermes is to make the mainstream, by which I mean listed corporates and multinationals and the investment industry itself, more responsible and purposeful. We believe these firms do not exist solely to deliver financial returns to investors but also meaningful returns to their other key stakeholders; be they customers, employees, suppliers or society at large. This in our view is crucial in ensuring companies remain sustainable in the long-term. 

How well are companies adapting to the mainstreaming of purpose-driven finance? What ways is impact investing making headway, and where is it lagging?

In the very narrow sense of impact investing, it's very difficult - and probably not desirable - for businesses to switch to a ‘pure’ impact model and change everything they're doing. Instead, we want companies to have a clear purpose in terms of what they're trying to achieve - not just for their financial stakeholders but for their entire stakeholder base. For an investment to be truly successful it needs to do what's right for the customer, the investor, its employees and society, whose needs should all be knitted together by the purpose. 

I think there's been progress on this front and there are many businesses managing and reporting their affairs in a more integrated and purposeful way. This can be seen by the improvement in the quality of annual reporting in recent years. It’s not the case for every company by any stretch, but we are moving away from having ESG issues or metrics in a separate section at the back of a report towards having them increasingly integrated with the strategic review. That makes a big difference.

In fact, I’d say the best practice companies are well ahead of investors on this and - as an investment community - we have sometimes been schizophrenic in the way we’ve engaged with companies. You might have a fund manager who is only interested in the next trading statement and a separate corporate governance team, that isn’t necessarily integrated with the fund manager, trying to appraise the company on responsibility metrics. The approach we take at Hermes is integrated in that we bring together the investment and engagement activities and support those companies leading the way and promote best practice at others.

It’s definitely moving in that direction and there's a lot of talk in our industry about it although I've not seen much in the way of impact investing products in the mainstream equities space. I've seen it in the private markets and so it's lagging in the public equity markets. To be successful in the public equity markets I wonder whether we need to broaden our definition of impact to encompass making the mainstream more responsible. This will mean changing the way we invest, seeking absolute rather than benchmark returns, a greater focus on the long term and deploying patient capital and truly acting as a good owner.

What challenges do you see for the future of purpose-driven finance?

I think the catalyst for this is what society is looking for. It's what I call the social licence to operate. A bank, for example, can't get involved in poor conduct if it expects the population to entrust its savings with them. It has to behave in an appropriate way. 

The challenge with this is that different people in the investment chain don't necessarily feel it's their fiduciary duty to deliver this social and environmental impact. I would however say that the momentum is such that companies and investors are facing significant pressure to deliver to society and gain and maintain that social licence to operate. 

How has impact and ESG-oriented investing evolved in recent years?

It started from an ethical point of view with some investors not wanting to invest in specific industries. That included arms, tobacco, perhaps alcohol companies and extended into coal over the last few years. That led to negative screening or exclusion. This then led to a number of funds starting to do positive ESG investing; investing in companies that do well from an ESG perspective. This isn't always easy to measure but that's what they aimed to do. In terms of pure impact there are a few in private markets but it's still limited in equity markets. 

That's been the evolution to date. I think the big prize is about making the mainstream more responsible, rather than taking the responsible and making it mainstream. 

Practically every investment house is talking about this, which wasn't the case five - or even three - years ago. Everyone is trying to prove their credentials and that will make a difference. Stewardship is becoming an important part of what an investment house provides.

What will you be discussing at The Economist's Impact Investing event in London on June 15th?

I'll be focusing on the purpose of the investment industry, particularly with regards its role in elevating factors above and beyond financial returns in company performance. I’ll also be talking about the industry’s role in encouraging the mainstream to become more responsible and how that can be achieved through greater stewardship.

*The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products. 

To learn more about the Impact Investing event, click here.
To register for the event, click here.