Ever since our 1983 origin, our purpose has been to provide Sustainable Wealth Creation: generating wealth through investments that enrich investors, society and the environment over the long term. Indeed, we have long believed that the investment management industry has not only the potential, but a duty, to be a driving force in addressing the climate crisis.
Saker Nusseibeh, CBE, CEO – International, said: “The position that we sit in as the investment management industry is one of unique potence. By way of intelligent and considered stewardship of capital we have the potential to effect genuine and positive change, but conversely, collective inertia risks compounding the crisis we face to an irreversible extent.
“Climate change also presents risks to us as a business. It is for all of these reasons that we have a responsibility to make the right choices, to the benefit of our clients, their end beneficiaries and indeed society at large.”
Reporting in accordance with the recommendations of the TCFD
Today, we publish our 2020 climate disclosure report, highlighting our progress in implementing the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Published in 2017, the TCFD recommendations have evolved as the go-to template for the investment industry to disclose the physical and transitional risks of climate change faced by companies, including asset managers.
The TCFD framework requires companies to group climate disclosure efforts across four sub-categories, covering:
- risk management; and,
- metrics and targets.
In our TCFD report, we disclose against these four key TCFD pillars, with a more comprehensive overview of our Scope 1, 2 and 3 GHG emissions. We also for the first time start to provide information about targets used to by the organisation to manage climate-related risks and opportunities.
Governance: on board for change
The responsibility for implementing our climate agenda lies with all staff but we have established a number of structures and teams with dedicated responsibility to ensure a cohesive approach across the business. The board, for example, has a specific mandate to oversee the group’s climate management in both its investment portfolios and corporate behaviour. Meanwhile, our Responsibility Office coordinates implementation and reporting across the business, supporting our investment teams.
Furthermore, our dedicated stewardship team, EOS at Federated Hermes (‘EOS’), engages directly with investee companies on issues including climate change. For example, EOS is lead or co-lead for 31 companies in the Climate Action 100+ collaborative investor engagement initiative.
To enhance collaboration across the business, we also created the Climate Change Working Group that in 2020 worked on an enhanced climate change approach.
Our strategy for managing climate risks and opportunities
At the international business of Federated Hermes, we focus our strategic climate change efforts primarily on investment management, assessing both physical and transition risks across portfolios on short-, medium- and long-term timeframes.
The climate investment strategy targets four key elements of:
- engagement; and,
In 2020, we continued our climate risk and impact assessment over most asset classes with scenario-modelling tools and deep fundamental analysis on a company and sector basis. We will apply similar analytical rigour to developing our entity-level climate resilience strategy from here on in.
Risk management: making a chain reaction
We also introduced a wide palette of tools, communication strategies and reporting procedures to embed climate risk within our investment approach and corporate ethos.
Our 2020 report details many climate-related outcomes last year through engagement focused on specific sectors or with particular firms – such as a commitment from Taiwanese semiconductor foundry TSMC to use more renewable energy.
Among other highlights last year, we laid out six climate change expectations and our investee companies, including TCFD compliance, governance standards, transition planning, supply chain resilience and ‘net zero’ targeting.
Our report outlines: “Companies, regardless of their sector, industry, or location, need to understand and plan to manage the potential physical risks the climate emergency poses to their operations and supply chains.
“We cannot wait for action from governments across the world, the threats posed by the climate crisis are too grave.”
Metrics and targets: keeping score (and more)
Over the last few years climate-related tools and metrics have developed in quantity and quality as new methodologies and data come to the fore.
However, the ‘carbon footprint’ remains a core climate-related metric, which we currently calculate for 97% of our listed equities investments and 68% of credit exposure with similar high levels of coverage for real estate and infrastructure. We use the carbon footprint data in other calculations, including weighted average carbon intensity.
We are also considering how to extend the carbon footprint data analysis to the structured credit, real estate debt and direct lending activities or fund structures.
Commenting on the report, our CEO Saker Nusseibeh, CBE, said: “We are proud of the progress we have made, both as a business and in encouraging our industry to ask itself the difficult questions which must be answered if we are to achieve our goals in earnest. We do, however, recognise that there is much more work to be done if we are to truly enact change before it is too late.”
To find out more, read our Climate-related Financial Disclosures 2020 Report here.