Our proprietary research has long demonstrated the performance benefits of integrating environmental, social and governance (ESG) factors into investment decisions. The strong returns of the Hermes Global Equity ESG Fund, launched three years ago, provides further evidence that ESG investing not only makes you feel good but can also make you money.
The Hermes Global Equity ESG Fund aims to generate consistent, positive relative returns by investing in companies with strong fundamentals and ESG characteristics. So far, this objective has been achieved: since its 1 May 2014 inception, the Fund has gained a net cumulative 21.3% against the MSCI World AC Index return of 16.7% (see figure 1).
Figure 1. Cumulative performance of the Hermes Global Equity ESG Fund v the MSCI World AC Index since 1 May 2014
Source: Hermes as at May 2017. Performance shown is the Hermes Global Equity ESG Fund Class F USD Accumulating net of fees as at the end April 2017. Past performance is not a reliable guide to future performance.
Hermes advocates the importance of taking ESG factors into account: this improves long-term returns and helps create a more sustainable world for investors and their children. Our research shows that companies with leading corporate governance practices typically outperform their worst-governed peers by 30bps each month, and that investing in companies with better social and environmental impacts does not inhibit performance.
Given these findings, we consider the current level and trend of companies’ ESG performance when analysing companies worldwide. To achieve this, we combine the company-specific data captured by our quantitative ESG dashboard with qualitative assessments, supported by the research and insights of our in-house stewardship and engagement team, Hermes EOS. Importantly, we screen out behaviours instead of industries or companies, as we aim to identify positive ESG change.
The result is a high-active-share portfolio of best-in-class businesses with clear potential to generate strong, sustainable returns.
Figure 2. Key metrics for the Hermes Global Equity ESG Fund, measured since 1 May 2014
|Excess return (net, annualised, currency is USD)
|Active share (average)
Source: Hermes as at May 2017.
A proven process
Like all of our global equity offerings, the Fund emphasises pragmatism over perfection. We identify companies with the best combinations of fundamentals, and which are trading at attractive valuations. These fundamentals include impressive financial statements, competitive strengths and high-quality management, but these characteristics alone do not amount to a complete investment opportunity. It is important that companies also behave responsibly in order for returns to be sustained in the long-term. This approach has enabled the Fund to achieve top-quartile returns within its Morningstar peer group for the 12 months ending 30 April.
By viewing companies from a broad range of perspectives, we identify those that should perform well in different environments, resulting in a style-agnostic portfolio. This provides a defence against large swings in style throughout market cycles, which is evident in an upside capture of 104.8 and a downside capture of 92.5 since inception.
We believe that ESG-aware investors should not rely on data alone, as it is often backward looking and updated infrequently and at a time lag. As such, active ownership is a pillar of our investment approach. With $325bn of assets under advice, the voting and engagement activities of Hermes EOS can promote positive change within companies, unlocking hidden value and also providing a forward-looking view of ESG performance that can reveal opportunities.
Over the past three years, Hermes EOS has engaged on 60 of the Fund’s holdings, addressing 205 strategic and ESG matters including climate change, board diversity, cyber security, human rights and transparency. In the past decade, the world has witnessed large oil spills, the sub-prime mortgage crisis, the use of child labour in emerging economies and emissions-test cheating in the auto industry. These failures to manage ESG risk harmed stock prices and the wider world. Engagement aims to help prevent such episodes.
Strong start, sustainable future
The Hermes Global Equity ESG Fund is driven by an investment process that has been proven to consistently add value over different market cycles. It has done this by investing in a diverse range of companies with strong fundamental and ESG characteristics, building on the team’s knowledge that ESG integration is not only the right thing to do, but also benefits returns. The approach generates returns from stock selection rather than factor exposures, and this is evident in the outperformance of the Fund since its inception.