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Stewardship

Good stewardship of assets is – and always has been – a critical component of what it means to be a responsible investor.

The power of stewardship, delivered through active engagement with companies, has been an intrinsic belief of ours from the start. After all, we believe engagement is core to the delivery of holistic returns. It can both mitigate risk and deliver positive impacts by improving companies’ environmental, social and governance (ESG) profiles.

Our first Chief Executive Ralph Quartano urged Marks & Spencer to do the right thing in 1983, when the company’s board made special loans available to its directors. St Michael1, he told them, should be on the side of the angels.

To our mind, good stewardship of assets is – and has always been – a critical component of what it means to be a responsible investor. And armed with our long-standing history of engagement, in 2004 we founded Hermes EOS – a stewardship service that helps clients meet their fiduciary responsibilities more effectively in order to create long-term value for beneficiaries – with a team of six staff.

Today, it boasts one of the largest stewardship resources globally, with $781.4bn in assets under advice2. It is now a diverse and multi-lingual team of 32 staff, who work alongside a number of senior advisers.

Hermes EOS is based on the premise that companies with informed and involved shareholders are more likely to achieve superior long-term performance than those without.

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Why engagement pays off

  • High-quality academic evidence shows that engagement pays off financially and non-financially
    Engagement leads to lower downside risk
  • Successful engagement can translate into significant outperformance : 4.4%-7.1% per annum

2014

Our inaugural study, ESG investing: does it just make you feel good, or is it actually good for your portfolio?, unearthed a strong correlation between corporate responsibility and shareholder returns. It found that companies with poor governance practices consistently under-performed their peers by up to 30bps each month.

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2016

In our subsequent  study, ESG investing: it still makes you feel good, it still makes you money, we found that the 30bps governance premium held true across different geographies and sectors, proving the widespread power of effective corporate governance. 

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2018

In our latest study, ESG investing: a social uprising, we found that companies with good or improving environmental, social or governance characteristics on average outperformed companies with negative characteristics. This is been driven by the strength of their corporate governance and, for the first time since our investigation began in 2014, social metrics.

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Our research found that ESG value is driven by corporate governance and social characteristics3.

We found:

  • no evidence that companies with attractive environmental characteristics have tended to underperform.
  • companies with good or improving social characteristics have tended to outperform their lower-ranked peers on average by 25bps per month from 31 December 2008 to 30 June 2018.
  • Companies with good or improving corporate governance have tended to outperform companies with poor or worsening governance by 24bps per month on average – down from 30bps.


Impactful stewardship

Hermes EOS provides the following services:

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Corporate engagement: we provide engagement services with companies that form part of the public equity and corporate fixed-income holdings of our clients. We analyse our clients’ portfolios to identify companies for engagement. We select companies based on the responsible investment policies of our clients, the size of their holdings, materiality of the risks and likelihood of success and feasibility of achieving change through engagement.

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Voting: Our intelligent voting service is engagement-led, involving communication with company management and boards around the vote to ensure voting decisions are well-informed and include engagement insights where possible.

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Portfolio screening: We provide a quarterly screening service to identify companies which are in or near breach of international norms and conventions to assist with the identification of higher risk companies in the investment portfolios of our clients. This information is designed to help our clients invest responsibly, encouraging the integration of ESG factors into their investment processes.

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Public policy and industry best practice: We have a comprehensive programme of engagement with legislators, regulators, industry bodies and other standard-setters to help shape capital markets.

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Advisory services: We work with our clients to develop their responsible ownership policies. Typically, these policies cover their positions on stewardship and environmental, social and governance issues, exclusions and voting.

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Reporting: We provide a number of reporting avenues to our clients as part of our services, including access to a client portal website, EOSi, which provides insights to our engagement activity, monthly newsletters, quarterly reports on engagement and voting activity, quarterly calls to discuss client priorities, annual reports, and invitations to our bi-annual Hermes EOS Client Advisory Council.

Hermes EOS: 2018 engagement snapshot

  • We engaged with 746 companies on 2,084 environmental, social, governance, strategy, risk and communication issues and objectives.
  • Our holistic approach to engagement means that we typically engage with companies on more than one topic simultaneously.
  • Of our total engagements, 26% included an environmental objective, 22% included a social objective, 33% included a governance objective and 19% included a strategy, risk and communication objective.

Source: “EOS Annual Voting and Engagement Report 2018,” published by Hermes EOS in March 2019.

  1. 1St Michael was a brand that was owned and used by Marks & Spencer from 1927 until 2000.
  2. 2Source: Hermes EOS as at 30 September 2019.
  3. 3“ESG investing: a social uprising,” published by Hermes on 5 November 2018.