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Salesforce has cut its net greenhouse gas emissions to zero and delivered a carbon-neutral cloud.

Today, we look back on six years of Global Equity ESG.

Thermo Fisher boasts a combination of attractive long-term fundamentals

We present our view on ESG investing.

We need 2018 to be the year of investor leadership on climate change.” So said Mindy Lubber, CEO and President of sustainability non-profit Ceres, reflecting on the 2018 Investor Summit on Climate Risk at the United Nations on 31 January. At Hermes, we agree. Climate change is – both literally and metaphorically – a slow-burn issue, but the grave risk it poses over time is disconcerting. Research shows that unless serious action is taken, the global temperature will rise by much more than two degrees Celsius by the end of the century. Last year marked the 41st consecutive year with global temperatures at least nominally above the 20th century average, and six of the warmest years on record have occurred since 20101. Atmospheric concentrations of greenhouse gases (GHG) are currently at levels not seen in 800,000 years, and in the 10 years to 2010, worldwide emissions of greenhouse gases increased by 35% to 46bn metric tonnes

Water is one of the most essential natural resources – recognised by the United Nations as a human right and a key input to the global economy. Today, water risks are becoming more apparent in companies’ supply chains. But as some struggle with the complexities of water stewardship, we explain how we assess it as an environmental, social and governance (ESG) concern in our investment decisions. Despite their complexity and global reach, an increasing number of companies are embracing their responsibilities towards water risk in their supply chains. Last year, companies reported 3,770 water risks which threaten their license to operate, the security of their supply chains, and their ability to grow, according to CDP. Moreover, companies committed $23.4bn to tackle water risk in 91 countries around the world in 2017. This commitment to water stewardship is illustrated well by the water policy of current holding General Mills. Approximately 99% of General Mills’ water use occurs upstream of its direct operations in agriculture, ingredient production and packaging. Food production, in particular, relies heavily on an adequate supply of clean water, for growing crops and making products for consumers. Today, agriculture accounts for 70% of global water use. As such, companies sourcing agricultural commodities are exposed to physical, regulatory and reputational water risks, which can manifest as financial damage. It is therefore necessary for General Mills to manage its exposure to water as it is critical to its long-term success as a global food company.

Our core investment strategy is built on a solid and proven process. It aims to generate consistent, positive relative returns by investing in companies with strong fundamentals – including robust financial results, competitive strength, leading management teams who appreciate the potency of ESG risks, improving market sentiment and of course, an attractive valuation. These fundamental characteristics constitute a strong investment. But the tools and data used to identify companies which embody these attributes are subject to continual change and improvement. This evolution is illustrated well through our focus on ESG considerations.

In this video Louise Dudley, Porfolio Manager in the Hermes Global Equities team, explains how risk management is addressed from a macro perspective in the investment process.

The potential for strong, long-term returns was the chief ‘pull’ factor attracting investors who first understood the impacts of sustainability on stock performance. Now, ‘push’ factors are driving more fund managers to consider these dynamics. They include the desire of asset owners, governments and the public for evidence that the broader, enduring effects of investments are being assessed and how they contribute to decisions to buy and sell securities.

While the utility sector is not renowned for its ESG credentials, some companies are pioneering the new technologies that will drive the sector in the years to come, cleaning up energy production in the process. One such example is Dong Energy, a leading provider of wind power and a shining reflection of the benefits of responsible energy production. Concern Dong Energy was founded in 2006 when six Danish power companies merged. The company has described its business at the time of the merger as one of the most coal-intensive utilities in Europe. It also owned a large number of oil and gas resources. This exposure to fossil fuels posed significant investment risks. First, the accelerating pace of global warming, and the broadening understanding of it, meant that governments were becoming increasingly likely to limit fossil fuel burning on an absolute basis. This scenario would leave traditional energy producers with ‘stranded assets’: unusable resources which are prematurely written down, resulting in a significant financial loss. This operational risk has become particularly acute following COP21, the United Nations’ climate conference in 2015, where representatives of 195 countries committed to limiting global warming to two degrees Celsius above pre-industrial levels.