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Thought leadership

A pioneer of responsible investing

3 February 2020 |
Active ESG
Our story as a leading responsible investor has been decades in the making.

Since our first CEO openly challenged a major UK company to improve its governance, to our current leader Saker Nusseibeh being awarded a CBE for services to responsible business, the international business of Federated Hermes has been at the forefront of responsible investing.

  • By catalysing corporate governance reform since our 1983 inception and engaging internationally from 1996 onwards, we have always championed investors’ interests.
  • Believing that investment outperformance should also generate positive outcomes in the world, and that stewardship evolve to become the core of investment strategies in the 2020s, we have always advocated progressive change in our industry.
  • By integrating ESG analysis and stewardship into the way we invest, and launching the world’s first equity and bond strategies driven by engagement on the Sustainable Development Goals, we have always been at the vanguard of responsible investment.

Our story preserves our heritage, proves our purpose and inspires our future. It has always been – and will always be – driven by our way of responsible investing.

Why do we analyse ESG factors and engage companies?

We act on evidence that our investment approach supports long-term outperformance and positive change.

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In equities

governance premium exists: companies with strong corporate governance typically outperform poorly governed peers by an average of 24bps each month.

The social uprising is gathering force: companies with good or improving social factors outperform by 15bps each month on average1.

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In fixed income

We can price ESG risk in debt markets. For corporate and sovereign issuers, there is a correlation between ESG risk and credit spreads: those with the lowest ESG scores tend to have the widest credit spreads, and those with the best scores the tightest spreads2.

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The power of engagement

Engagement success can drive outperformance. Companies undergoing positive change can generate an additional 7.1% in additional annualised returns3.

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Capturing the ESG advantage

We integrate ESG and engagement insights through proprietary research tools:

  • ESG Dashboard: displays the current and projected ESG risks of companies
  • ESG Portfolio Monitor: gauges the aggregate sustainability risk of each of our strategies
  • Credit ESG-risk pricing tool: measures the correlations between corporate-debt issuers’ ESG scores and their credit spreads
  • SDG Taxonomy: a living research project connecting real investment themes with the underlying targets of the Sustainable Development Goals

Our Responsibility Office oversees ESG and engagement integration and holds as much influence as our Investment Office.

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Stewardship: a force for change

We have pioneered stewardship since 1996 and continue to advance best practice:

  • 1983: “It is important that St Michael4 is on the side of the angels” and stop extending special loans to its directors.
    • – Ralph Quartano, our CEO from 1983-1987
  • 1993: We campaign for FTSE100 companies to:
    • End long-term rolling contracts for directors
    • Split CEO and chairman roles
  • The initiative, later adopted by the UK Corporate Governance Code, was led by the late Alistair Ross Goobey, our CEO from 1993-2001
  • 1996: Our first team dedicated to engaging companies on corporate governance is established. It grows to focus on companies in the UK, Europe and Japan
  • 2002: We coin the term ‘engagement’ to define our long-term, collaborative work with companies to improve their ESG and strategic performance
  • 2004: EOS at Federated Hermes, our stewardship services team, is established. It now advises on £662.2bn. Landmark engagements to date include:
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Advocating progressive policies

We led the working group that developed the Principles for Responsible Investment (PRI). In 2006, when they were launched, we became a founding member

We were a founding signatory of the International Corporate Governance Network, and provided input into the Japanese and Malaysian Stewardship codes

We sit on 39 advisory boards or committees of prominent responsible-investment organisations, including:

  • PRI
  • Impact Management Project
  • CDP
  • Council of Institutional Investors
  • Global Real Estate Sustainability Benchmark

Our future

An exciting new chapter of our story is developing: the confirmation of our shared purpose with Federated Investors, our majority owner, under one brand. The February 2020 listing of Federated Hermes, Inc. on the New York Stock Exchange advances our mutual commitment to global, active, responsible investing.

As Federated Hermes, we are guided by our conviction that responsible investment is the best way to create long-term wealth. Within the group, all activities previously carried out by Hermes now form the international business of Federated Hermes. Our brand has evolved, but we still provide the same distinct investment and stewardship capabilities for which we are renowned – in addition to important new offerings from the entire group.

Together, we focus our fiduciary mindset, investment acumen and stewardship expertise on generating risk-adjusted outperformance for clients while supporting positive change in the wider world.

1 Research findings based on our analysis of global stock returns from 31 December 2008 to 30 June 2018. Source: “ESG investing: a social uprising,” by Hermes Global Equities. Published by the International business of Federated Hermes in Q4 2018.

2 As measured by spreads on the corporate and sovereign issuers’ credit-default swaps. Sources: “Pricing ESG risk in credit markets: reinforcing our conviction,” by Mitch Reznick, CFA and Dr Michael Viehs. Published by the International business of Federated Hermes in Q4 2018. “Pricing ESG risk in sovereign credit,” by Mitch Reznick et al. Published by the International business of Federated Hermes and Beyond Ratings in Q3 2019.

3 Source:.”Active Ownership,” by Elroy Dimsona, Oğuzhan Karakaşb, and Xi Lic, published in 2012. This study analysed an extensive database of corporate social responsibility engagements with US public companies over 1999–2009 addressing environmental, social, and governance concerns. Engagements are followed by a one-year abnormal return that averages +1.8%, comprising +4.4% for successful and zero for unsuccessful engagements. Past performance is not a reliable indicator of future results.

4 St Michael was a brand owned and used by Marks & Spencer from 1927-2000.

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