The Circular: Edition 3, 2020

Keeping you in the sustainability loop

Covid-19 continues to throw curve-balls in 2020, but for those investors with sustainability in mind, the long game remains in view. We’ve summed up our recent insights on environmental, social and governance (ESG) investing to bring you the latest edition of The Circular.

Going up in smoke: why carbon is dated

What’s it all about?

As told by Eoin Murray, Head of Investment at the international business of Federated Hermes, in this scary fairy-tale version of events, the brief Covid-19 CO2 hiatus offered a glimpse of hope through the smog of climate change. But only a system-wide decarbonisation effort by corporates, governments, individuals and investors can bring about a happy ending for the planet.

What’s new?

Consensus is finally forming around how the financial sector can measure the carbon content of businesses and portfolios. In September, Federated Hermes chaired the first meeting of the UK chapter of the ‘Partnership for Carbon Accounting Financials’ – a coalition initiated by the business to create a standardised pan-industry approach to measuring CO2 that will help all parties “not only better understand the impact of their emissions, but also to work collaboratively in enacting genuine change”.

What’s the impact on investors?

While corporates might have the primary responsibility to decarbonise their business operations, investors can push for change through all assets classes, including novel products such as ‘sustainability-linked bonds’ – now championed by the European Central Bank – or identifying climate-change leaders. In this two-part podcast, Senior Credit Portfolio Manager, Nachu Chockalingam, and Aaron Hay, Lead Engager on the Fixed Income team, discuss why companies ahead of the curve on CO2 controls also tend to offer better investment returns.

We do find that there is a very positive correlation between action that companies are taking on climate change, and in terms of returns.

Nachu Chockalingam, Senior Credit Portfolio Manager.

Stay safe: the growth in health and well-being

What’s it all about?

With the coronavirus global death-toll now surpassing 1m, the need to address human health issues has never been more evident. But as this Federated Hermes Impact Opportunities report reveals, ‘health and well-being’ is one of the global mega-trends driving opportunities for investors and societies alike.

What’s new?

In August 2020, our half-yearly Global Equity ESG Fund report highlighted how Covid-19 has accelerated all sustainability trends. But specifically, the report notes “how companies responded to the health concerns of their workforce and customers was seen as poignant evidence of stakeholders’ rights gaining importance”.

What’s the impact on investors?

The focus on health is a global phenomenon, opening up options for investors beyond developed markets. For example, in this quarterly report, Elena Tedesco, Co-Portfolio Manager of ESG strategies in the Global Emerging Markets team, showcases how one China-based company – Tigermed – has taken a great leap forward in medical drug research, setting a sound base for long-term sustainable returns.

Embracing sustainability is not just about avoiding risks, it is also about finding business opportunities. In this environment, it is that type of thinking which enables businesses to thrive (or survive).

Federated Hermes Global Equity ESG Fund H1 2020 Report

Water and earth: there are no liquid (or planet) alternatives

What’s it all about?

In part three of her series on global habitat destruction, engager Sonya Likhtman from EOS at Federated Hermes (EOS), outlines how deforestation and industrialised agriculture are threatening the very elements that underpin sustainable life on planet earth, including water, climate and soil quality. However, Likhtman says investors can be part of the solution.

What’s new?

Among a host of other problematic side-effects, global plastic pollution adds about $40bn each year in negative social costs, according to the UN Environment Programme, with its effect on aquatic life increasingly in the spotlight. In this episode of the ‘Amplified’ podcast, EOS engagers Amy Wilson and Lisa Lange float the case with Aaron Hay, Lead Engager in the Fixed Income team, on how investors can lead the charge for material change.

What’s the impact on investors?

Investor engagement can push for real corporate improvements that create more sustainable products and the potential for higher returns. This case study, for instance, illustrates how our deep engagement with US marine manufacturer, Brunswick, is helping develop greener boat engines and less water pollution from abandoned non-recyclable vessels.

Forests are natural stores of carbon and integral to the water cycle, reducing the risk of soil erosion and flooding whilst securing a reliable supply of clean water.

Sonya Likhtman, Engager at EOS

Full financial force: how impact investing is hitting home

What’s it all about?

Impact investing assets under management across the world increased from $502bn in 2019 to $715bn this year, according to data from the Global Impact Investing Network. But as Aoifinn Devitt, Head of Investment – Ireland, discovers in the latest ‘Fundamentals’ podcast, impact needs to be more than just a label.

What’s new?

Reflecting on the first half of 2020, Ingrid Kukuljan, Federated Hermes Head of Impact Investing, says in this report that a “paradigm shift” is underway as the market wakes up to the potential of companies building solutions for the “unmet needs of society”.

What’s the impact on investors?

Both the ‘Fundamentals’ podcast and the Federated Hermes Impact Opportunities report reinforce the argument that the goals of investors and broader society are intertwined. By targeting specific areas, impact investment strategies can deliver long-term financial outperformance and proven social outcomes.

While the full effects of the global pandemic are still unfolding, these events have further cemented my vision for impactful companies – that is, that they are the drivers of future growth, and by investing in these new growth areas, we are buying tomorrow’s leaders today.

Ingrid Kukuljan, Federated Hermes Head of Impact Investing

Federated Hermes has one of the largest teams of Engagers in the industry.

In this edition, we quiz Kimberley Lewis, Engager, EOS.

Kimberley Lewis
Which engagement themes are you focussing on in the second half of 2020?
What is the biggest misconception about engagement?
Where do you see the biggest opportunity for positive change in the healthcare sector?
What is one small change each individual can make to have the biggest impact on climate change?

The engagers: Federated Hermes in the news


Full Circle

That's a wrap for this issue of The Circular.