Environmental, social and governance (ESG) integration has become a salient component of best-practice investment management in recent years.
In 2006, the Principles for Responsible Investment (UNPRI) – a set of six investment principles encouraging ESG matters to be incorporated into investment practice – were launched by the UN. The principles were developed by investors for investors, and Hermes became a founding signatory.
For Hermes, ESG investing is not a recent phenomenon. Responsible investing is core to our business, and we have been at the vanguard of ESG investing for more than three decades. We integrate ESG across all our strategies.
But what is this movement? To truly understand ESG investing, it is important to explore the evolution and development of this investment approach.
From SRI to ESG Investing
Join us as we journey through a 200-year history.
There are many definitions of ESG. Here we present ours:
ESG investing includes environmental, social and corporate governance information in the analysis of financial metrics in order to gain a more expansive view of the risks faced by companies and their potential returns. It aims to improve portfolio risk-reward characteristics and therefore the prospects for long-term outperformance. By considering ESG matters, this approach also contributes to positive impacts on society and the environment.
ESG factors are a sub-set of non-financial indicators gauging the impact of a company’s corporate governance and social and environmental track records, such as managing its carbon footprint and treatment of workers, on its financial performance.
ESG investing: evidence of outperformance
More than 30 years of integrating ESG risks has informed us that it supports long-term outperformance. But there is plenty of external research arriving at the same conclusion.
We believe that a responsible approach to investing is appropriate across all asset classes and for all investment strategies. Investors can mitigate ESG risks and capture opportunities through five distinct ESG strategies. Our aim is to help investors practically understand these strategies, regardless of the ESG methodology they adopt.
Definition: Excluding entire sectors, companies or countries from a fund or portfolio based on ESG criteria, moral or ethical views, or religious beliefs. Objectives: Align investors’ money with their perception of ESG risk or broader beliefs, and to mitigate ESG risks as investors exit ‘sin’ stocks, such as tobacco or gambling companies.
Hermes' application: Our proprietary exclusion list – or screen – is updated on a quarterly basis, and incorporates investors’ bespoke ESG preferences. The exclusion list includes companies:
- Identified by Hermes EOS, our in-house stewardship team, as being involved in providing controversial weapons;
- With a High Severity rating for environmental and social risks in the Hermes EOS Controversial Companies report;
- Generating more than 10% of their revenue from the gambling, tobacco, logging, nuclear energy or armaments industries.
Hermes product: Hermes Global Equity Screened ESG.
Definition: Investing in companies demonstrating positive ESG performance relative to peers. Objectives: Achieve superior capital appreciation by mitigating ESG risks and acting on opportunities provided by companies demonstrating good ESG behaviours.
Hermes' application: We invest in companies with a good or improving ESG track records, robust financial statements, competitive strengths and a proven ability to consistently beat revenue and earnings expectations.
Our proprietary tool, the ESG Dashboard, alerts us to stock-specific ESG risks not specifically covered in fundamental analyses of companies.
Hermes product: Hermes Global Equity ESG.
Definition: The inclusion of ESG factors alongside financial analysis of assets by investment managers. Objectives: Improve long-term risk-adjusted returns, mitigate ESG risks and identify investment opportunities created or supported by positive ESG change.
Hermes' application: ESG factors are integrated into the investment analysis performed in all of our strategies across public and private markets.
We combine company-specific ESG data captured by our proprietary analytical tool, the ESG Dashboard, with qualitative assessments of ESG risks and opportunities. These views are considered alongside the research and insights of our in-house stewardship and engagement team, Hermes EOS.
Hermes product: All Hermes strategies integrate ESG, notably Global Emerging Markets.
Definition: Investing in companies, organisations and funds which have the commercial purpose of solving social or environmental problems. Objectives: Generate strong investment returns by allocating to companies creating tangible benefits for society and the environment that will endure over time.
Hermes' application: We invest for the long term in companies intending to make a positive and sustainable impact on society, and which are succeeding commercially by doing so.
Our impact strategies are also linked, explicitly or implicitly, to the specific targets detailed within each of the UN Sustainable Development Goals (SDGs).
Hermes product: Hermes Impact Opportunities.
Definition: Engaging with companies on ESG concerns that affect their long-term growth, and using shareholder power to positively influence corporate behaviour. Objectives: Promote positive change within companies that strengthens their financial performance, and provide a forward-looking view of ESG performance than can reveal opportunities.
Hermes' application: On behalf of investors worldwide and for our own portfolios, we advise businesses on strategic and ESG concerns. We engage companies as active stewards of capital in face-to-face dialogues at the executive and board levels, and vote at corporate annual general meetings and other shareholder gatherings to help investors perform their fiduciary duty as active owners. We also engage on companies that issue debt and not equity.
Going beyond companies, we advocate shareholders’ interests to legislators, regulators and industry bodies to help shape the policies governing global capital markets and transparency and reporting standards for companies.
Hermes product: Hermes EOS.