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Authenticity in ESG integration

From our 1983 inception, the international business of Federated Hermes has been at the forefront of responsible investing. Here, Michael Viehs, Head of ESG Integration, explains why the delivery of Sustainable Wealth Creation has and always will be our core purpose.

Interest in ESG has grown exponentially recently but has been important to Federated Hermes for decades. Can you detail some milestones?

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 always been at the forefront of responsible investing. But, I guess, some milestones that stand out are:

  • The establishment of our dedicated stewardship team, EOS at Federated Hermes, in 2004 – coining the term ‘engagement’ to help explain stewardship to international investors. Today, with $1.3tn in assets under advice, it is now a world-leading stewardship provider;
  • We led the working group that developed the Principles for Responsible Investment (PRI) – and in 2006, when they were launched, we became a founding member;
  • In 2014, in an industry first, we established our Responsibility Office; and
  • Placing responsibility, integrity and client focus at the heart of everything our people do, we established the Federated Hermes Pledge in 2015, which compels us, as employees, to put clients’ interests first and to act responsibly and transparently.

Why is it important to behave in such a responsible manner?

For us, it’s part of our DNA – the delivery of Sustainable Wealth Creation that enriches investors, benefits society and preserves the environment – for current generations and those to come – has always been our core purpose. For wider industry, however, it has become a reputational issue in recent years. Increasingly, asset owners are requesting responsible and sustainable products. But it’s important to authentically integrate ESG in decision-making because, put simply, it is the right thing to do. Of course, there is plenty of academic studies to support such an approach – and our proprietary research has also proven that when you do it correctly and genuinely, you’re also able to deliver financial outperformance over the longer run as well as positive societal outcomes.

Looking back over 2020, how did the ESG landscape change?

The year 2020 in general and in particular the Covid-19 pandemic accelerated a social awakening in the industry. Issues such as human capital management, employee wellbeing, and also diversity and inclusion, all topics that are part of the “S” in ESG, moved into the spotlight. Previously, much of the focus had centred on climate change, environmental damage and biodiversity loss. But last year showed the importance of human capital for companies and investors alike. During the pandemic, employee wellbeing has been important. Another big topic is diversity, particularly gender and ethnic diversity. These are topics we have long been engaging on – and they are an important value drive for companies.

How often and actively do you engage?

Our global stewardship team, EOS at Federated Hermes, which has $1.3tn in assets under advice, is a core part of our business – and our investment teams’ approach. For example, last year, it engaged 1,245 companies, made over 120,000 voting recommendations, and held over 150 discussions with regulators and stakeholders. However, it’s important to understand that almost half of its engagements are now more than nine years in duration. So, EOS is committed to realising positive, enduring change.

It also has a team of 67 with diverse industry experience, enabling them to engage thousands of companies on material ESG considerations, advocate for positive change, making businesses more sustainable and thereby more financially successful in the longer term. Through the team’s constructive engagements and company dialogues, it gains unique insights – something that cannot be provided by a backward-looking third-party ESG provider.

What do you do with the information gleaned from your engagement?

An authentic and credible ESG integration approach by asset managers necessitates the consideration of qualitative engagement insights; insights obtained from a dialogue with key corporate decision makers such as executives and the board of directors on financially material ESG considerations. The qualitative engagement insights gathered by our engagement team are a crucial input for our investment teams. Not everything in the ESG space can be quantified and therefore the qualitative engagement information becomes very important for an authentic ESG integration approach. A lot of stakeholders in financial services want to quantify sustainability, but this isn’t always possible. You need a qualitative overlay beyond ratings from third party providers to make an accurate assessment of the true sustainability performance of investee companies and assets. Third-party ratings aren’t useless, but for us they are just the starting point. We then ask our fund managers and analysts to do their own fundamental, bottom-up ESG research. It’s important that we focus our research efforts on those ESG considerations that are financially most relevant for the particular asset or company that we are analysing. There’s a lot of ESG information for public equities and fixed income, but if you look at private markets – direct lending, real estate, infrastructure or private equity, all assets that we have in our product pipeline – it’s much more difficult to obtain ESG data. For those asset classes, it is even more important that the investment teams to do their own fundamental research on material ESG considerations and factor in the thematic and sectoral ESG insights from our stewardship team.

As the ESG space becomes increasingly competitive, how do you intend to continue to differentiate yourself?

To date, we’ve invented innovative proprietary ESG analysis tools and published pioneering research on the effectiveness of ESG and stewardship integration. We continue to be innovative. For example, we have a carbon tool to assess a company or portfolio’s carbon footprint and a portfolio snapshot tool that looks more broadly at the ESG performance of companies. Further down the line it’s going to be important to provide more incisive information on water, waste, air pollution and social topics like diversity and human capital management. Being able to not only talk about ESG on a very high level but in a very granular sense will be a key differentiator. Everyone is talking about the acronym ‘ESG’ but our understanding of all the different granular sub-ESG themes and our ability to engage with companies on them to create a positive impact will continue to be our secret sauce.

We continue to track and prove the positive impact of ESG investing and stewardship through our continued research efforts.

This interview was originally published in ESG in Focus by Citywire.

  • The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications. This does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

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