The closure of Henderson Global Investors SRI research team raises questions about investment incentives and motives

In a recent article for Ethical Corporation, Mike Tyrrell set what he saw as the challenges for the socially responsible investment (SRI) industry resulting from Henderson Global Investors’ decision to close its highly regarded SRI research team.

Tyrrell’s conclusions were essentially optimistic: that Henderson’s decision was an isolated one (rather than one that had a implications for the wider responsible investment industry), and that we can rely on responsible investment industry to respond appropriately.

While there is much that is compelling about this argument, I am not swayed by his optimism. My view is that Henderson’s decision actually exposes a set of uncomfortable truths about the incentives for responsible investment, and is likely to tell us much about the real motivations of investors.

Incentives for responsible investment

One of the most common complaints – which is often stated in private but rarely publicly – in the responsible investment industry is that clients (be they asset owners, IFAs, individual investors) pay limited attention to the SRI activities of their investment managers.

Generally, the complaint goes, they offer limited reward for those that do an excellent job of integrating environmental, social and governance issues into their investment processes, to those that proactively engage with the companies on environmental, social and governance issues, or to those that offer high quality SRI (or ethical) funds.

In fact, the pressures tend to be all in the other direction. There is consistent downward pressure on fees, there is limited explicit consideration of responsible investment factors in investment decisions, and there is limited weight assigned to responsible investment factors in appointment/reappointment decisions. Taken together, these pressures send a signal to investment managers that responsible investment is really not valued by the market.

Henderson’s reasoning

Were these the realities that Henderson Global Investors encountered? It would be hugely valuable to know what the decision hinged on.

Was it primarily about Henderson’s positioning and strategy – where it sees the greatest opportunities going forward, for example. Or was it about operational and resourcing issues –did Henderson’s feel it could add more value to its investment processes through hiring non-SRI specialists). Or was it about the economic realities of running high quality SRI funds – eg how much demand is there for such products, and what does the cost base of such funds look like versus the fees that accrue?

Specifically, if it is Henderson’s view – based on one of the most impressive track records in the City of London in this area – that the market demand for SRI funds is limited or that the costs associated with running such funds outweigh the revenues that such funds can generate, these are hugely important lessons for the responsible investment industry as a whole.

Industry response

Thus far, the response to Henderson’s decision has been predictable: a number of “ethical IFAs” have criticised Henderson’s decision and some have even threatened to move their investments to other investment managers.

But, as we all know, there is a significant difference between rhetoric, which is cheap, and action, which may, depending on transaction and other costs, be significant.

The questions that investors – both individual organisations such as asset owners, other investment managers and IFAs, and industry groups such as the UN-backed Principles for Responsible Investment – should be prepared to answer are:

• What are your views on Henderson’s decision?
• How exactly does Henderson’s decision affect your willingness to invest in (a) Henderson’s SRI funds, (b) Henderson’s other investment products?
• What changes have you made to your or your clients’ portfolios as a result of Henderson’s decision?
• If you have moved money out of Henderson’s funds, how much has actually been moved?

Of course, this call for transparency is unreasonable. There is no requirement for investors to make this kind of information publicly available (apparently it would undermine the ability of markets to function effectively), and voluntary disclosures never seem to provide this sort of specificity. 

This problem is recognised by the Principles for Responsible Investment. Its new signatory reporting framework, which all PRI signatories will be required to report against, is likely to ask questions about how responsible investment-related factors are considered in manager appointment and reappointment processes. This will be in the requests for proposals that are issued, in the contracts that are awarded and in the manner in which investment managers are monitored. The reporting framework also encourages respondents to provide examples of how they have taken these issues into account.

A major contribution

These comments should not be seen as a criticism of Henderson’s decision. I agree with Mike Tyrrell that we should acknowledge the major contribution that Henderson Global Investors has made to the development of SRI over the past decade, and that we should also allow them the right to make the decisions that they see as in the best interests of their business.

Where I disagree with Tyrrell is that the responsible investment industry will respond appropriately. Henderson’s decision provides us with a huge opportunity to dig more deeply into the incentives (or lack thereof) for investment managers and other actors to invest time and resources in responsible investment.

This is not yet another call for transparency for transparency’s sake. Rather, it is that we have assumed there is a compelling case for responsible investment and that key actors will take action if/when needed. Henderson’s decision provides us with a real opportunity to test that assumption. If this assumption is not correct, we need to consider how to design rewards and incentives that strengthen the business case for progressive action in this area.

Dr Rory Sullivan is an internationally recognised expert on corporate responsibility, climate change and investment-related issues. He is strategic adviser, Ethix SRI Advisers, a senior research fellow at the University of Leeds and a member of the Ethical Corporation Advisory Board.