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Corporate purpose: how can companies create social value?

How can we make purpose more meaningful and embed it into the operations of companies? What is the difference between long-term and patient investors? And do good environmental, social and governance (ESG) practices really translate into better market performance?

In this episode of Amplified, Hans-Christoph Hirt, Head of EOS at Federated Hermes, is joined by Alex Edmans, Professor of Finance at the London Business School and Academic Director of the Centre for Corporate Governance, and Michael Viehs, Head of Integration at the international business of Federated Hermes, as they discuss responsible business, corporate purpose, and how this relates to ESG integration and stewardship.

An intrinsic approach: growing the pie

Professor Edmans talks about his book, ‘Grow the Pie: How Great Companies Deliver Both Purpose and Profit’ where he develops the idea of Pieconomics – the concept that “an enterprises’ ultimate goal is to create value for society – and by doing so, it will increase profits as a by-product. Profits are an outcome, not a goal.”

Edmans argues that a responsible business is ‘not just about not doing harm – it’s about actively doing good’.

‘It’s about serving society, not just by donating profits, but through innovation. This involves making products that transform customers’ lives for the better, providing employees with a healthy and enriching place to work and preserving the environment for future generations.’

 ‘Piecomomics is an intrinsic approach that we’re going to invest in our people just because it’s the right thing to do and then as a by-product we’ll become more profitable as a result.’

In it for the long term

Edmans argues that ‘An investor who can help grow the pie is one with a large stake. Why? Because if you have a large stake, you have a huge incentive to really get into the weeds of a company, to look beyond its short-term earnings and understand whether it is actually creating social value’

‘What is a long-term oriented investor? It’s not an investor who holds for the long term, but an investor who uses long-term factors to drive their investment decisions.’

Holistic returns: do ESG factors drive performance?

Viehs calls the question of whether good ESG behaviours improve stockmarket performance ‘the holy grail question’.

‘Our Global Equities team has investigated how far ESG performance or ESG characteristics leads to better stockmarket returns. This is in particular driven by the governance and social pillars’ (read more about this in our report, ‘ESG: a social uprising’.

‘ESG, corporate purpose and stewardship are not only relevant for the equities side, but also for fixed-income investors’ (read more about this in our piece, ‘Pricing ESG risk: reinforcing our conviction’.

Our approach to responsible investing

Viehs explains that the Responsibility Office at the international business of Federated Hermes ensures that the investment teams ‘integrate stewardship and ESG factors into their activities, develops and leads the implementation of our advocacy positions and also holds each department accountable for ensuring that… the firm acts as a responsible business and in the interests of our clients and beneficiaries.

‘It makes me proud to say that we integrate ESG considerations across the entire product platform.’

To find out more, tune in to Amplified.

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