Fast reading
- We believe that progress towards, and ultimately the attainment of, the SDGs is not a zero-sum game but is instead an opportunity to create long-term shareholder value by strengthening businesses’ resilience and supporting growth opportunities. To realise this, we place purposeful shareholder engagement at the centre of our approach.
- 2025 was a turbulent year for sustainability. However, our experience on the ground was different. Our dialogues with investee companies have continued unimpeded. Indeed, companies continue, on the whole, to look through the short-term noise and volatility and remain willing to consider and discuss how they can best grapple with those sustainability matters that are important to their continued business success.
- We increased our exposure to artificial intelligence (AI)-related opportunities during 2025. We recognise investors have a critical role to play in shaping how AI is developed and deployed – ensuring benefits are realised responsibly and associated harms are proactively managed across the AI value chain.
Global SMID Equity Engagement: 2025 annual report
Effective engagement on AI is essential
For all companies, the consideration and adoption of a ‘Responsible AI’ strategy is essential if they are to take advantage of this new technology in a successful way.
The last couple of years have sparked considerable excitement about the potential for artificial intelligence (AI) deployment across various sectors – from healthcare to finance and beyond. Meaningful real economy adoption remains nascent, but momentum is clearly building.
AI promises substantial economic and societal benefits – from accelerating productivity to helping address systemic challenges through climate modelling, resource optimisation, and service accessibility.
Alongside this upside, AI also brings complex and material sustainability risks that equity owners need to understand and engage with. The environmental footprint of increasingly compute‑intensive models is expanding, driving sharp increases in energy demand and water consumption. Societal risks are similarly material: job displacement pressures, weakened trust in information ecosystems, and the amplification of entrenched biases all pose challenges, particularly in the absence of mature regulation.
Against this backdrop, we increased our exposure to AI-related opportunities during 2025. We recognise investors have a critical role to play in shaping how AI is developed and deployed – ensuring benefits are realised responsibly and associated harms are proactively managed across the AI value chain.
The rise of AI is arguably the single biggest issue most companies need to grapple with at the present time.
Reasons for optimism
AI has the potential to materially accelerate progress toward global sustainability goals at a time of urgent shortfalls. With only around a third of SDG targets on track by 20251, the world has an increasing need for AI‑enabled efficiency gains and the problem-solving capabilities that software and AI can unlock.
Despite a lot of attention being placed on the environmental footprint of the data centre build‑out, less attention has been given to the substantial resource savings, emissions reductions, and productivity improvements that AI‑enabled optimisation can deliver across a range of sectors.
Similarly, although concerns about AI‑driven job displacement are understandable, demographic realities present a more complex picture. Ageing populations and structural labour shortages mean that AI‑related productivity gains have the potential to increase economic capacity, reduce costs, and create new categories of employment. If deployed thoughtfully, AI could support – not undermine – labour market resilience.
Overall, AI offers a powerful set of tools to address systemic sustainability challenges, provided its adoption is supported by responsible design, governance, and oversight.
The rise of AI is arguably the single biggest issue most companies need to grapple with at the present time.
Realism
Optimism must be grounded in an unflinching assessment of the risks. The environmental impacts associated with AI are already material, particularly in light of the rapid expansion of physical infrastructure.
Energy and water demands are rising sharply, and the sector faces longer‑term challenges – such as inefficient code development, escalating model size, and risk of runaway growth in compute usage – that practices must evolve and adapt to.
In parallel, AI also presents significant societal risks. Poorly governed or unregulated AI systems have the potential to entrench inequalities and compromise individual rights, from privacy to equitable access.
Without careful design and scrutiny, AI could amplify existing biases and even create new forms of harm – especially in high‑stakes applications.
The impact of AI on workforces also requires scrutiny; the risks range from displacement of certain roles to the deepening of labour market polarisation.
These environmental, operational, and societal impacts are not abstract – they are increasingly financial in nature. Rising energy and water requirements, tightening regulation, evolving customer expectations, and reputational sensitivity all influence a company’s cost base, operating resilience, and market competitiveness.
Conversely, firms that lead on AI governance and workforce transition should be better positioned to capture commercial opportunities and productivity gains, enhancing their long‑term competitive advantage.
For investors, these competing dynamics mean that ‘responsible AI’ is not only a sustainability issue, but also a core determinant of value creation.
It is essential to recognise these risks – not to curb innovation, but to ensure benefits are realised inclusively and sustainably. Responsible deployment is not optional; it is a prerequisite for long‑term value creation.
For more information on Global SMID Equity Engagement
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Please note that this Fund’s name changed to Federated Hermes Global SMID Equity Engagement (from SDG Engagement Equity) on 24 April 2025.
The name change highlights that we are a Global SMID Fund – which is important because small and mid-cap companies (SMIDs) are where we believe the greatest sustainability improvement potential lies and engagement is the tool to unlock that potential.
Our engagements are still linked to the UN Sustainable Development Goals (SDGs) and we will continue to report our engagement alignment to the SDGs within our reporting.
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