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The Circular: keeping you in the sustainability loop

Welcome to the launch issue of The Circular - key analysis and insights about sustainable investment.

Why sustainable equals commercial

Environmental, social and governance (ESG) is about commerce, not just conscience.

According to our Head of Investment, Eoin Murray, in 2019 all investors will have to wake up to the “commercial imperative” of sustainable investing.

What’s this all about?
Murray says the sustainable investment debate has moved beyond semantics to real-world outcomes as asset managers must address issues like climate change and employee diversity.

What’s new?
Savvy investors have now recognised that companies focused on sustainability will likely be the profit engines of the future. Insights from Hermes’ Mitch Reznick and Ingrid Holmes also reveal how ESG investing has entered the regulatory mainstream around the world.

What’s the impact on investors?
Investment managers that ignore ESG factors will miss out on the most important transformational trends sweeping through societies and markets today. As our Head of Fixed Income Andrew Jackson puts it, evidence suggests that investors can “generate alpha from looking at investments through a sustainability lens”.

“This year there’s going to be a single theme that’s going to dominate all the different aspects of sustainable investing – and that is the commercial imperative.”
- Eoin Murray, Head of Investment

Clarity now: the path to universal ESG understanding

Let’s be clear: investors need certainty about what we mean by sustainability.

What’s this all about?
From ethical to ESG to impact, the language of sustainable investment has evolved into a hotchpotch of confusing terms. But with sustainability now a front-and-centre theme for all investors, we need definitions that everybody can understand.

What’s new?
We recently surveyed five terminology guides covering environment, social and responsibility (ESG), looking for consistent meaning, only to find a less-entertaining version of buzzword bingo. So we published an article to cut through the noise and help bring clarity to the terminology which we group under the two broad definitions: responsible investment and responsible ownership.

What’s the impact on investors?
If investors learn to understand ESG terminology, they will also better understand the various investment strategies on offer – and which ones suit their particular needs. Asset managers, too, must clearly communicate what makes their sustainable investment strategies tick – as we aim to do in our ESG Dashboard.

"... what seems to be missing from the discussion is how the rapid ascent of ESG into mainstream has been accompanied by a sharp rise in the volume of terms used to describe ESG."

- From the H1 2019 issue of Equitorial, by Hermes Global Equities

ESG in income: sustainability beyond shares

ESG investing is not just for equities. Investors are now applying sustainable thinking to all asset classes.

What’s this all about?
Historically, the case for ESG analysis centred on listed equity investments. Equity investors have since developed ever-more focused objectives and sophisticated techniques on assessing ESG characteristics and engaging companies – such as those practiced by Hamish Galpin and Will Pomroy of the Hermes SDG Engagement Equity Fund. But investors in other asset classes are making progress, too.

What’s new?
Fixed income is increasingly seen as fertile ground for ESG-focused investors – particularly in emerging markets, as Nachu Chockalingam and Andrey Kuznetsov, two Portfolio Managers specialising in this sector, explain

Responsible investment practices are also evolving elsewhere, with our real estate team advancing its ability to implement meaningful place-making projects to create community-based, commercial centres within cities.

What’s the impact on investors?
ESG integration can deliver strong returns and a better world no matter the asset class – from equities to fixed income and real estate. Further, it can lay the foundation for positive outcomes experienced by a broad range of stakeholders, from companies, employees and investors to communities and the environment.

“Seen more broadly, responsible property investment creates tangible social and environmental benefits for society in the form of healthier, happier and more prosperous communities that benefit from job creation, skills development and attractive amenities and public realm.”

- Tatiana Bosteels, RPI & Sustainability

Climate change (and other hot issues)

This planet has plenty of problems, so investors need to focus on the highest-impact solutions.

What’s this all about?
Global warming, plastic pollution, deforestation, rising inequality... the number and intensity of existential threats facing humanity seems to increase every day. But companies across the world are developing innovative – and profitable – solutions that investors need to identify and support.

What’s new?
It is possible for investors to target companies operating in key areas of global change – such as energy transition and water quality – to help future-proof their portfolios and the planet against sustainability risks. But how do they identify the companies leading the sustainability charge? We think the ‘Future-Fit Business Benchmark’ helps answer that question. The Future-Fit tool is an “open-source, systems-science based set of goals that all companies, regardless of industry or geography, must strive to reach to become truly sustainable”.

What’s the impact on investors?
Companies targeting the big challenges of the day may potentially be the winners of the future. Identifying those winners, though, requires a strong sustainable investment process and a long-term approach. Importantly, investors don’t have to give up returns for reforms: the Hermes SDG Engagement Fund achieved its investment objective in its first year, while delivering measurable impacts aligned with the Sustainable Development Goals.

“Climate change, too, is a prime example of the tragedy of the commons, where individual players alone can’t swing the game in their favour: this must be a team effort.”

- Hamish Galpin, Lead Manager and Will Pomroy, Lead Engager

Circular economy: what comes around, goes around

To create a virtuous circle, we must begin with the end in mind.

What’s this all about?
Investors need to think more broadly about the impact they have in society, according to Hermes Global Equities Portfolio Manager Louise Dudley. Forward-thinking corporates have stepped back to take a big-picture view of how products and services flow through the economy, from source to the end of their intended use.

What’s new?
Last year, Hermes Engager Emma Berntman described how circular thinking is beginning to yield dividends in the food and plastics industries. In a recent podcast, she pursues another ubiquitous product – pharmaceuticals – right to the end of the line with an analysis of how the overuse of medicines has fomented the dangerous growth of drug-resistant bacteria.

What’s the impact on investors?
We didn’t need further evidence to prove that companies can no longer operate in isolation from the societies that sustain them, but it continues to emerge. Investors can no longer ignore the full-cycle impact of the firms they allocate capital to. This fact was reinforced in 2019 by the Shareholder Rights Directive II coming into force in Europe, which, among other factors, will require investors to report on the level and quality of their long-term shareholder engagement.

We see the Directive as “part of a wider push to align interests along the investment chain – companies’ boards/managers, asset managers and owners and end beneficiaries”.

“There’s no area of the world that we live in that doesn’t require some thinking around the sustainability of the products...”

- Louise Dudley, Portfolio Manager

Full circle

That’s a wrap for the first issue of Circular. We hope that you enjoyed the round trip through our recent sustainability analysis and insights – and look forward to keeping you in the loop.


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