Five years in, what investment conviction has been most validated by the market?
One of the clearest validations has been the importance of anticipating change rather than simply extrapolating the past. When we launched the Strategy in June 2021, markets were still firmly in the era of ultra-low interest rates, yet our positioning reflected a belief that this environment would not last forever. The subsequent shift to higher inflation and the end of the zero interest rate policy (ZIRP) regime reinforced the value of forward-looking portfolio construction.
This principle has also applied thematically. Identifying structural trends early – such as the rapid evolution and commercialisation of artificial intelligence (AI) – has enabled us to maintain exposure to new winners rather than relying on ‘legacy’ leaders.
Just as important has been our diversified approach across Leaders, Impact and Improver stocks. This framework has provided resilience across different market conditions. For example, during the volatility of 2022, exposure to more cyclical or value-oriented names helped balance the growth bias typical of sustainable strategies and offered participation in inflation beneficiaries.
How, if at all, has your approach to identifying sustainable companies evolved since the Strategy’s inception?
At its core, our investment process remains the same, but the depth and precision of our analysis has improved significantly. Over the past five years, the quality and availability of data have advanced, enabling more granular and accurate assessments.
We have expended resources to support this evolution. For instance, we have enhanced our engagement capabilities in North America through EOS at Federated Hermes Limited, working alongside the broader in-house stewardship team.
At the same time, the increased availability of more granular data has enabled more precise revenue alignment and contribution calculations, improving the integrity of our analysis. We now also benefit from a growing suite of proprietary tools, developed by Federated Hermes’ Director of Responsible Investing, Martin Jarzebowski’s team, which further supports our ability to translate this data into insights.
At its core, our investment process remains the same, but the depth and precision of our analysis has improved significantly.
In a more challenged ESG environment than at launch, what sustains your confidence in this approach?
While the broader ESG narrative has faced increased scrutiny in recent years, we believe that the underlying drivers of sustainability remain intact. Environmental and social challenges – ranging from climate change to income inequality – haven’t disappeared. What has changed is the tone of the debate, with less emphasis on the rhetoric and more focus on practical implementation.
Our approach has always been pragmatic. By investing across Impact, Leaders and Improver companies, and by considering the full value chain, we have avoided overly narrow definitions of sustainability. For example, investing in often overlooked companies, such as ‘Improvers’, provides breadth, diversification, and the opportunity to have real-world impact. Taking a balanced perspective also aligns increasingly well with how policymakers and market participants are now framing the discussion.
In many respects, the current environment represents an evolution of ESG investing, moving toward more nuanced and outcome-focused approaches – something that has been embedded in our philosophy from the outset.
What’s been key to maintaining resilience?
Resilience in a more difficult ESG backdrop has been driven by the underlying characteristics of the companies in which we invest – and our sustainable investment process can enable us to identify companies with greater innovation, durability and operational efficiency.
These qualities are not dependent on political sentiment or short-term market narratives. Instead, they reflect fundamental strengths which support long-term value creation. Companies that innovate effectively, allocate capital efficiently and adapt to evolving economic conditions are better positioned to navigate uncertainty, whether driven by macroeconomic shifts or changing regulatory landscapes.
Maintaining a disciplined focus on these attributes, alongside a diversified approach to investing across the spectrum of sustainable companies – Impact, Leaders, and Improvers – can help build a portfolio with the potential to deliver value across market cycles.
Looking ahead, where does the team see the most compelling opportunities?
The current market backdrop is defined by an unusually broad set of cross-currents – from the rapid evolution of AI, which is reshaping competitive dynamics, to heightened geopolitical uncertainty and shifting expectations for inflation and interest rates. In that context, our approach remains firmly rooted in long-term, bottom-up investing. Periods of volatility are not something we seek to avoid – instead, we believe they often create the conditions to identify mispriced assets and uncover new opportunities.
One area we continue to find attractive is emerging markets (EM). Despite strong structural growth drivers, such as supportive demographics, rising incomes and increasing financial penetration, valuations remain compelling relative to developed markets (DM). This disconnect creates opportunities to invest in high-quality businesses positioned to benefit from long-term economic development. Within financials in particular, we see institutions with robust balance sheets and attractive margins that are well placed to capture rising participation in formal banking systems.
We also see value in capital-intensive businesses. These companies typically benefit from high barriers to entry, embedded customer relationships and tangible assets that are harder to displace. In an environment where the long-term impact of AI on asset-light business models is still uncertain, exposure to these types of businesses can provide a useful source of diversification and resilience.
Finally, commodity-linked companies are benefiting from a supportive backdrop. Supply constraints, geopolitical disruption and the demands of the energy transition are all contributing to stronger pricing dynamics across certain materials. This is creating opportunities in businesses with reliable production capacity and disciplined capital allocation, where cash-flow generation is improving.
Across these areas, our focus remains consistent: identifying companies with strong fundamentals that are aligned to long-term structural trends, while maintaining a diversified portfolio capable of navigating an uncertain and rapidly changing market environment.
For more information on Sustainable Global Equity.
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