CLOSE

We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website https://www.hermes-investment.com, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2016, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept
CLOSE

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

Proceed

The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie policy.

EOS’ engagement in extractives enhances value, says research

Home / Hermes EOS Blog / EOS’ engagement in extractives enhances value, says research

Although the inclusion of environmental, social and governance (ESG) factors in investment decision-making has been steadily on the rise, one major obstacle has stood in the way of a more meteoric increase.

That is the continued belief held by many that the integration of ESG is a threat to returns in their investment portfolio.

Of course, pension funds need to put the interests of their beneficiaries first. First and foremost that means ensuring they will have a pension when they retire. But fiduciary duty now also requires pension funds to take into account material ESG risks in their investment decision-making to ensure pensioners can retire into a relatively safe and sound environment.

And these two goals are not at odds with each other.

Research
Research[1] undertaken of Hermes EOS’ proprietary ESG engagement data in the extractives sector by Andreas Hoepner, Ioannis Oikonomou and Xiao Yan Zhou of the ICMA Centre at the Henley Business School in the UK has revealed that companies engaged with generate on average 4.4% higher annualised returns compared with their equivalent non-engaged peers.

In addition, the study found that engagement has a risk-reducing effect. Engaged companies are less volatile and reductions in downside risk are material, ranging from 110 to 340 basis points per average monthly risk exposure, depending on the risk measure applied.

Better stock market performance of the companies engaged with – in terms of risk reduction as well as return enhancements – is driven by Hermes EOS’ self-assessed success rate. Hoepner’s team could not identify a single other statistically significant driver of the improved performance at engaged companies versus propensity score matched control companies in the same sector. Their research came to the conclusion that intervention with a company’s chair and corporate social responsibility managers enhances the chances of successfully completing an engagement, while a confrontational tone reduces its success. Furthermore, persistence in contact with companies – for example follow-up calls – also appears to have return-enhancing effects, while frequent interactions with top management seem to constrain upside potential. However, the same frequent interactions with top management are the most significant drivers of downside risk reduction for the average company engaged with. Thus, there appears to be a risk-return trade-off for the specific case of interactions with top management.

Progress
The research focused on the engagement themes of climate change/carbon intensity, oil sands, health and safety, human rights, board structure, remuneration, capital structure and risk management. Engagement progress was assessed according to Hermes EOS’ milestone system. Milestone 1 involvers raising an issue with the company or other relevant third party, while milestone 2 indicates recognition by the company or relevant third party that the concern is valid. Milestone 3 means a plan has been put in place to address the particular issue, and milestone 4 is the successful delivery of the objective.

Engaged companies which achieved milestone 3 or 4 produced on average 1.8% more relative return than those which only achieved milestone 1 or 2. In addition, those that achieved milestone 3 or 4 bear on average 3.9% less relative downside risk than those companies that only achieved milestone 1 or 2.

It can therefore be concluded that engagement is value enhancing. Previous research undertaken by Hoepner also found that ESG criteria can lead to greater portfolio diversification. And in 2014, research released by Hermes Global Equities showed that corporate governance standards have a meaningful impact on shareholder returns, proving that companies with poor or worsening standards of corporate governance have tended to underperform.

Hoepner’s team started with research on the extractives sector as the industry has been forced to tackle ESG issues around the world because each stage of natural resource development is widely considered as one of the most environmentally and socially disruptive activities. Every stage of the natural resources development from exploration, extraction, processing to transportation involves high environmental and safety risks, particularly as most natural resources are extracted in developing countries and often within the territory of indigenous peoples, where national regulation can be insufficient. Therefore, ESG risk management seems a particularly crucial notion for the extractive industry.

The team around Hoepner will now focus its research on other sectors.

The ESG research on the extractives sector can be accessed by emailing Hoepner at a.hoepner@icmacentre.ac.uk and will shortly be available on the ICMA Centre’s Discussion Paper series.

Share this post:
Nina Röhrbein Nina Röhrbein focuses on client and external reporting and communications. Before joining Hermes EOS, she was the senior staff writer at Investment & Pensions Europe where she wrote extensively about pension legislation, asset management and environmental, social and governance issues across various jurisdictions. Prior to that, she was a reporter at Argus Media, covering global energy markets. She holds an MA in Newspaper Journalism from Nottingham Trent University and a BA Honours degree in English Literature and Linguistics from the University of Central Lancashire. She is fluent in English and German.
Read all articles by Nina Röhrbein

Find posts by author

  • Bill Mackenzie
  • Bruce Duguid
  • Christine Chow
  • Colin Melvin – Global Head of Stewardship
  • Darren Brady
  • Dominic Burke
  • Emma Hunt
  • Freddie Woolfe
  • Hans-Christoph Hirt
  • Jaime Gornsztejn
  • Jennifer Walmsley
  • Jon Brager
  • Justine Lutterodt
  • Karin Ri
  • Leon Kamhi – Head of Responsibility at Hermes investment Management
  • Lui Goldie
  • Mais Hayek
  • Manuel Isaza
  • Mark Sherlock, CFA
  • Matthew Doyle
  • Maxine Wille
  • Michael Viehs
  • Naheeda Rashid
  • Natacha Dimitrijevic
  • Nina Roehrbein
  • Nina Röhrbein
  • Rochelle Giugni
  • Roland Bosch
  • Sachi Suzuki
  • Saker Nusseibeh
  • Tim Goodman
  • Victoria Barron

Find posts by category

  • Select category
  • environment
  • governance
  • social
  • strategy