The Circular: Edition 1, 2021
Keeping you in the sustainability loop
Rounding-off a truly (we hope) one-off year, The Circular returns with must-read environmental, social and governance (ESG) news to sustain investors for another quarter and on to 2021… Here we’ve summed up our recent insights on ESG investing to bring you the latest edition of The Circular.
Nurturing nature: why biodiversity is a live issue for investors
What’s it all about?
Diversification is a central tenet of investment but it’s a concept that nature has always excelled at. Unfortunately, about 1 million species face extinction due to the growing human monoculture. But, ultimately, all humans (even investors), will suffer in a depleted natural world, which is pointed out in the latest Public Engagement Report from EOS at Federated Hermes (EOS).
What’s new?
Maintaining biodiversity will involve a global pan-industry effort. However, several companies are helping tackle some of the fundamental threats to the natural world such as water pollution. Louise Dudley, Global Equities Portfolio Manager at the international business of Federated Hermes, illustrates in a recent analysis how one company – the Japan-based Kurita Water – has developed purification technology that meets many ESG investment standards including those addressing UN Sustainable Development Goals (SDGs) 14 and 15, which centre on life below water and on land, respectively.
What’s the impact on investors?
Declining biodiversity across multiple ecosystems could drain $10tn from the global economy by 2050, according to figures cited in the latest Federated Hermes Impact report. As the report notes, “we cannot continue our current relationship with nature”. Investors can both lead and benefit from the trend to restore the balance between human activities and the underlying ecosystems that sustain them.
For the most part, companies have taken the immense value of nature for granted, despite relying heavily on the public goods that it enables.
Sonya Likhtman, Sector Analyst, EOS
Transition ignition: sparking energy reform
What’s it all about?
The move away from fossil fuel-based energy sources shifted up a gear in 2020 with the trend set to accelerate further now that the new US President Joe Biden has signed the country back on to the Paris climate accord. In the December quarter ‘ESG Materiality’ newsletter, Elena Tedesco, Co-Portfolio Manager of ESG strategies for the Global Emerging Markets Team at the international business of Federated Hermes, explains why the US return to Paris will give further momentum to an already unstoppable green energy transition.
What’s new?
Despite a massive disruption to global auto manufacturers during the COVID-19 -hit 2020, the industry continues to invest heavily in electric vehicle (EV) technology. According to Ilana Elbim, Senior Credit Analyst at the international business of Federated Hermes, the ‘EV profitability ‘tipping point’ is close. EV strategies are now a “clear differentiating factor” for auto industry leaders, Elbim says.
What’s the impact on investors?
With long-term coal and oil demand set to decline a respective 40% and 20% by 2040, investors must position to land on the right side of the historic change in energy use, our most recent ‘Market Risk Insights’ says. While energy transition is a cross-asset opportunity (and risk), credit investors, in particular, face fossil fuel challenges as detailed in the recent ‘Delta’ podcast, hosted by Federated Hermes Head of Fixed Income, Andrew ‘Jacko’ Jackson.
While many auto firms look very similar today, each firm’s respective EV plans mean that their outlooks are vastly different.
Ilana Elbim, Senior Credit Analyst
In recovery: how COVID-19 could lead to a healthier world
What’s it all about?
Amid a worsening global pandemic last October, the 75th anniversary of the UN passed largely unnoticed. The coronavirus crisis has shown the world more than ever needs to adopt the global response to collective problems epitomised by the UN. We have an opportunity to build back better from the pandemic and create a positive societal and environmental impact.
What’s new?
The corporate ‘social licence’ to operate has emerged as a major talking point in the wake of the global pandemic. But as Amy Wilson, Retail Sector Lead at EOS says in this thought-provoking analysis, ESG investors must “hold companies to account” on their ‘business purpose’ utterances. Wilson notes that the pandemic “has added a practical dimension to the debate about business purpose, posing real-world dilemmas”.
What’s the impact on investors?
Some 71 million people were likely pushed into poverty as COVID-19 savagely reduced employment and income across the world in 2020. Despite the horrific statistics, panellists in the latest episode of the ‘Fundamentals’ podcast discuss how the crisis has turned the spotlight on the need for ‘decent work’ – as laid out in SDG 8 – and why companies addressing the problem will create the successful, sustainable businesses attractive to long-term investors.
The coronavirus has shown us that to tackle a global crisis, governments and companies need to come together. This type of collaboration – but on a much larger scale – will also be crucial if we are to tackle the climate emergency.
Saker Nusseibeh, CBE, CEO, International at Federated Hermes
ESG with everything: the chips are down in all asset classes
What’s it all about?
Federated Hermes has been a pioneer in ESG investing dating back to 1983. From an early focus on equities, we have subsequently integrated ESG into many other asset classes – even, more recently, in the notoriously opaque private debt market as detailed here – and investment styles (such as our impact investing initiative). Sustainability is now ubiquitous – and that’s a good thing for everybody, everywhere.
What’s new?
Property presents particular difficulties for ESG strategies but also one of the greatest opportunities for investors to create demonstrable, concrete changes to the world. For instance, last year Federated Hermes set out a proposed pathway to ‘net zero emissions’ for our £6.1bn real estate portfolio. The goal cements our desire to remain a “leader in the implementation of sustainable asset and investment management activities which mitigate climate risks” but it also reflects client objectives, including the need to generate real long-term returns.
What’s the impact on investors?
ESG can no longer be considered a fad or a niche strategy for fringe investors – but does it also make money? The latest analysis of our global equities return data suggests ESG is strongly associated with outperformance. In a research paper published last month, Lewis Grant, Senior Portfolio Manager Global Equities at the international business of Federated Hermes, reviews our fourth biennial research project that confirms previous results that found over the long term companies with “good or improving” ESG characteristics tend to outperform while those at other end of the spectrum have historically under-performed.
... we have also been clear that ESG metrics measure more than quality: they suggest a mindset of long-term thinking which investors should favour, not just because of the here and now but because sustainability requires a long-term focus and will deliver long-term results.
Lewis Grant, Senior Portfolio Manager
Round the corner:
what’s coming up?
As a fast-evolving sector, sustainable investing requires a constant flow of new information and analysis. Here’s what’s coming up in the next few months:
Round the corner: what’s coming up?
A special sustainability edition of the next instalment of our quarterly Fixed Income report, 360°.
Annual Reports and case studies for our Global Equity ESG, SDG Engagement Equity and SDG Engagement High Yield Credit strategies.
Federated Hermes has one of the largest teams of Engagers in the industry.
In this edition, we quiz Emma Berntman, Engager, EOS.
The engagers: Federated Hermes in the news
Where investors see a mismatch between banks’ sustainability commitments and actions on the ground, investors will take steps to encourage change.
