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A pioneer of responsible investing

Our story as a leading responsible investor has been decades in the making.

Since our first CEO openly challenged a major UK company to improve its governance, to our current leader Saker Nusseibeh being awarded a CBE for services to responsible business, the international business of Federated Hermes has been at the forefront of responsible investing.

  • By catalysing corporate governance reform since our 1983 inception and engaging internationally from 1996 onwards, we have always championed investors’ interests.
  • Believing that investment outperformance should also generate positive outcomes in the world, and that stewardship evolve to become the core of investment strategies in the 2020s, we have always advocated progressive change in our industry.
  • By integrating ESG analysis and stewardship into the way we invest, and launching the world’s first equity and bond strategies driven by engagement on the Sustainable Development Goals, we have always been at the vanguard of responsible investment.

Our story preserves our heritage, proves our purpose and inspires our future. It has always been – and will always be – driven by our way of responsible investing.

Why do we analyse ESG factors and engage companies?

We act on evidence that our investment approach supports long-term outperformance and positive change.

In equities

governance premium exists: companies with strong corporate governance typically outperform poorly governed peers by an average of 24bps each month.

The social uprising is gathering force: companies with good or improving social factors outperform by 15bps each month on average1.

In fixed income

 We can price ESG risk in debt markets. For corporate and sovereign issuers, there is a correlation between ESG risk and credit spreads: those with the lowest ESG scores tend to have the widest credit spreads, and those with the best scores the tightest spreads2.

The power of engagement

Engagement success can drive outperformance. Companies undergoing positive change can generate an additional 7.1% in additional annualised returns3.

Capturing the ESG advantage

We integrate ESG and engagement insights through proprietary research tools:

  • ESG Dashboard: displays the current and projected ESG risks of companies
  • ESG Portfolio Monitor: gauges the aggregate sustainability risk of each of our strategies
  • Credit ESG-risk pricing tool: measures the correlations between corporate-debt issuers’ ESG scores and their credit spreads
  • SDG Taxonomy: a living research project connecting real investment themes with the underlying targets of the Sustainable Development Goals

Our Responsibility Office oversees ESG and engagement integration and holds as much influence as our Investment Office.

Stewardship: a force for change

We have pioneered stewardship since 1996 and continue to advance best practice:

  • 1983: “It is important that St Michael4 is on the side of the angels” and stop extending special loans to its directors.
    • - Ralph Quartano, our CEO from 1983-1987
  • 1993: We campaign for FTSE100 companies to:
    • End long-term rolling contracts for directors
    • Split CEO and chairman roles
  • The initiative, later adopted by the UK Corporate Governance Code, was led by the late Alistair Ross Goobey, our CEO from 1993-2001
  • 1996: Our first team dedicated to engaging companies on corporate governance is established. It grows to focus on companies in the UK, Europe and Japan
  • 2002: We coin the term ‘engagement’ to define our long-term, collaborative work with companies to improve their ESG and strategic performance
  • 2004: EOS at Federated Hermes, our stewardship services team, is established. It now advises on £662.2bn. Landmark engagements to date include:

Our multi-year engagement with Infineon culminated in a 2010 proxy fight with the computer chipmaker – the first such battle at a blue-chip firm in Germany. Following an 88.6% fall in its stock price over 11 years, we led shareholder opposition to the nomination of a long-standing non-executive director as supervisory board chair. This contributed to his exit a year later and the election of a new independent chair.

Following a compliance crisis, we engaged Siemens on strengthening its governance, and raised our concerns about the composition and effectiveness of its supervisory board. We spoke at seven of the company’s AGMs between 2007 and 2018 pressing for board refreshment, and in 2014 for timely succession planning for the chair. Over the period of our engagement the company has improved its corporate governance in many regards, including supervisory board composition by adding diversity and critically, expertise more relevant to the development of the business, such as in engineering, digitisation and software.

  • Our engagement with BP prior to the Deepwater Horizon drill rig explosion found that its health and safety function was becoming excessively decentralised. Following the disaster, we intensified our efforts to improve BP’s risk management processes and emergency response plans, and engaged across the oil and gas industry to test the robustness of risk oversight structures. We also engage with BP on climate change. As part of Climate Action 100+, a collaborative engagement of more than 370 investors seeking greenhouse gas emissions reductions from the world’s largest emitters, we are the lead co-ordinating investor for BP. In 2019 BP supported a shareholder resolution that we had developed, which called on the company to set out a strategy consistent with the goals of the Paris Agreement.

Following a series of employee suicides, we engaged with Hon Hai about working conditions, human capital management and its governance. As part of this we visited the company’s facilities multiple times, spoke with employees, and raised concerns directly at the 2014 AGM. At the 2018 AGM we also engaged the Chair/CEO about succession planning, requesting separation of the CEO and Chair roles. He stepped down in 2019 and Hon Hai instituted a committee-style governance structure.

After several years of engaging with Microsoft, mainly on social issues, including co-hosting a meeting in Washington DC with the company on human rights, we switched our attention to governance. We called for Steve Ballmer to be replaced as CEO, as we were concerned about the strategy and culture under the long-serving CEO. We also asked that co-founder Bill Gates stand down as chair, because he was not independent, and was more focused on his foundation. Both of these requests had been met by Q1 2014, helping to pave the way for the company’s renewal under an independent chair and CEO. We also sought refreshment of the board, which the independent chair led skilfully after his appointment, completing our objective in Q3 2015.

Advocating progressive policies

We led the working group that developed the Principles for Responsible Investment (PRI). In 2006, when they were launched, we became a founding member

We were a founding signatory of the International Corporate Governance Network, and provided input into the Japanese and Malaysian Stewardship codes

We sit on 39 advisory boards or committees of prominent responsible-investment organisations, including:

  • PRI
  • Impact Management Project
  • CDP
  • Council of Institutional Investors
  • Global Real Estate Sustainability Benchmark

Our future

An exciting new chapter of our story is developing: the confirmation of our shared purpose with Federated Investors, our majority owner, under one brand. The February 2020 listing of Federated Hermes, Inc. on the New York Stock Exchange advances our mutual commitment to global, active, responsible investing.

As Federated Hermes, we are guided by our conviction that responsible investment is the best way to create long-term wealth. Within the group, all activities previously carried out by Hermes now form the international business of Federated Hermes. Our brand has evolved, but we still provide the same distinct investment and stewardship capabilities for which we are renowned – in addition to important new offerings from the entire group.

Together, we focus our fiduciary mindset, investment acumen and stewardship expertise on generating risk-adjusted outperformance for clients while supporting positive change in the wider world.

  1. 1Research findings based on our analysis of global stock returns from 31 December 2008 to 30 June 2018. Source: “ESG investing: a social uprising,” by Hermes Global Equities. Published by the International business of Federated Hermes in Q4 2018.
  2. 2As measured by spreads on the corporate and sovereign issuers’ credit-default swaps. Sources: “Pricing ESG risk in credit markets: reinforcing our conviction,” by Mitch Reznick, CFA and Dr Michael Viehs. Published by the International business of Federated Hermes in Q4 2018. “Pricing ESG risk in sovereign credit,” by Mitch Reznick et al. Published by the International business of Federated Hermes and Beyond Ratings in Q3 2019.
  3. 3Source:.”Active Ownership,” by Elroy Dimsona, Oğuzhan Karakaşb, and Xi Lic, published in 2012. This study analysed an extensive database of corporate social responsibility engagements with US public companies over 1999–2009 addressing environmental, social, and governance concerns. Engagements are followed by a one-year abnormal return that averages +1.8%, comprising +4.4% for successful and zero for unsuccessful engagements. Past performance is not a reliable indicator of future results.
  4. 4St Michael was a brand owned and used by Marks & Spencer from 1927-2000.

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