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ESG INVESTING

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 (PRI) – 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.

  • 1800-1899

    • Quakers &
      Methodists

      Socially responsible investing (SRI) originates in religious groups. Quakers and Methodists, establish investing guidelines for their followers. Other religious orders soon adopt a similar faith-based approach to investing.

    • x1

      The Quakers Friends Fiduciary opens and adopts a no weapons, alcohol or tobacco investment policy.

  • 1900-1969

    • x2

      An ecclesiastical group in Boston, United States launch the pioneer fund. It is the first public offering of a screened investment fund, where exclusionary screens are centred on social issues, such as alcohol and gambling.

    • hermes-1

      Following the Great Depression and a number of corporate scandals, investors begin to focus their attention on governance issues. As a result, they drop the ‘S’ from ‘SRI' - and responsible investing is born.

    • x3
      hermes2

      The rise of civil rights and anti-war movements prompt investors to consider shareholder advocacy when influencing corporate behaviour. Vietnam War protestors urge that university endowment funds exclude defence contractors in their investment policies.

  • 1970-1989

    • x4

      Pax World launches the first socially responsible investing mutual fund in the US.

    • x5

      The US Congress passes the Community Reinvestment Act to address discrimination in loans made to individuals from low- and moderate-income neighbourhoods.

    • x6

      Ralph Quartano, former Hermes CEO, urges companies to do the right thing: "I expect M&S to be on the side of the angels."

    • The Chernobyl accident on April 26, and other incidents during the same decade such as Bhopal gas leak and Exxon Valdez oil spill, raise concerns about corporate responsibility, the threat of climate change and ozone depletion.

  • 1990-1999

    • The UN's Rio Earth Summit takes place in Rio de Janeiro, marking the largest environmental conference ever held, with 172 governments in attendance. The Summit's message - that nothing less than a transformation of our attitudes and behaviour would bring about the necessary changes to preserve the planet - is transmitted around the world.

      UN's Rio Earth Summit

      172 governments
      attended

    • $625bn f1

      screened to exclude investment in South Africa

      Investors exert pressure on fund managers to avoid investing in South African companies due to apartheid. In the US, more than $625bn is screened to exclude investment in South Africa.

    • wings

      Alastair Ross-Goobey, former Hermes CEO, seeks shorter contracts for CEOs of all FTSE 100 companies.

    • Boycott clothing companies

      Controversy in the international supply chain of leading clothing companies dominates news headlines. The apparel industry comes under scrutiny for child labour and other human rights abuses in its supply chain, prompting many customers and investors to boycott companies.

    • wings

      Hermes establishes a team focusing on the corporate governance of companies.

    • The Pensions Act 1995 comes into effect on April 6, requiring trustees to disclose their policies on social, hammer 2 environment, and ethical matters in the investment process.

    • The Kyoto Protocol, an international agreement linked to the United Nations Framework Convention on Climate Change, is finalised in Kyoto, Japan. glob It marks the first agreement between nations to mandate country-by-country reductions in greenhouse-gas emissions.

    • wings

      Hermes Real Estate establishes an energy-conservation strategy.

    • The UK Combined Code on Corporate Governance is published. It sets out principles of good corporate governance aimed at companies listed on the London Stock Exchange. The latest version is the UK Corporate Governance Code (2014), which is overseen by the Financial Reporting Council.

  • 2000-2009

    • windmill

      As investors' focus shifts to environmental, social and governance (ESG) issues, ESG investing becomes the latest iteration of sustainable investing.

      ESG

      Environmental • Social • Governance

    • noway flag
      100%

      integration of sustainability

      Norway's Government Pension and the US's largest pension fund, CalPERS, commit to 100% integration of sustainability over 15 years.

    • An amendment is made to the UK Pensions Act, hammer 2 requiring the consideration of ESG issues during the investment process.

    • c x6

      Following the success of its UK activist fund, Hermes developed a European version. But the strong connotations attached to activism meant that we needed a new name to capture the long-term, collaborative nature of our work, and which resonated with continental European companies. We decided on engagement, whose relevance and cross-border appeal ensured that it has become the investment industry's definitive way of describing how responsible investors perform stewardship services.

    • check list

      social
      responsibility

      After admitting widespread problems in its international supply chain, including unsafe machinery and child labour violations, The Gap publishes its first social responsibility report. Other companies follow.

    • x6

      Hermes EOS, our specialist stewardship services team, is founded.

    • The Principles for Responsible Investment (UNPRI) - a set of six investment principles encouraging ESG matters to be incorporated into investment practice - are launched by the UN. The principles were developed by investors - including Hermes, which became a founding signatory - for investors. They are voluntary but have attracted more than 1,750 signatories from over 50 countries, representing approximately $70tn.

      • 1700
        signatories
      • 50
        countries
      • $70tn
        represented
    • The Rockefller Foundation

      The Rockefeller Foundation launches the Impact Investing initiative and coins the term impact investing at a Global Urban Summit.

    • The US Congress
      passes Sudan
      Accountability and
      Divestment Act       of 2007,
      allowing state and local governments to cut investment ties with companies doing business in Sudan. The Act is aimed at pressuring Sudan to end the violence in the Darfur region.

    • boom

      The Global Impact Investing Network (GIIN), a not-for-profit organisation devoted to increasing the effectiveness of impact investing, is launched.

  • 2010-present

    • x6

      Hermes signs the UK Stewardship Code.

      The Hermes Responsible Ownership Principles are published.

    • x6 the300club

      Saker Nusseibeh, Hermes CEO, founds the 300 Club.

      Hermes GPE implements its proprietary ESG Framework into all of its investment decision making processes.

    • $3.74tn

      of professionally managed assets
      in the US consider ESG factors

      The US SIF (The Forum for Sustainable and Responsible Investment) Trends Report finds investors consider ESG factors across $3.74tn of professionally managed assets in the US.

    • check

      Responsible
      Investment Guide

      The NAPF (now PLSA), the industry body for UK pension schemes, launches its Responsible Investment Guide.

    • $45tn

      The UNPRI assets under management by signatories hits $45tn.

    • #10

      The London Stock Exchange becomes the 10th exchange to join the UN Sustainable Stock Exchange initiative, committing to promote debate about ESG issues among companies and investors.

    • tower

      195

      countries adopt the
      global climate deal

      The UN Climate Change Conference COP21 takes place in Paris. The Paris Agreement sees 195 countries adopt the first-ever universal, legally binding global climate deal.

    • town-glob The UN Sustainable Development Goals (SDGs) are established. They serve as a blueprint for significantly changing the world - by ending global poverty, safeguarding the planet and ensuring prosperity for all - by 2030.

    • $23tn

      Value of socially
      responsible assets

      Socially responsible assets under management grows to $23tn in 2016, according to the Global Sustainable Investment Alliance.

    • Under a new EU Pensions Directive, member states have an obligation to "allow Institutions for Occupational Retirement Provisions (IORPs) Asset 21EU Pensions to take into account the potential long-term impact of investment decisions on ESG factors".

    • A number of banks funding the Dakota Access Pipeline pull out of the project, amid environmental and human rights concerns voiced by indigenous people, the public and investors.

    • US President Donald Trump walks away from Paris Agreement, saying it would "hurt the American economy and society alike".

      Donald Trump

    • 51.84

      MSCI EM ESG
      Leaders Index

      MSCI Emerging Markets ESG Leaders Index hits a record high of 51.84. The index has been outstripping the MSCI Emerging Markets benchmark consistently since the 2008-09 global financial crisis.

    • car

      The UK and France announce climate change plans to end the sale of petrol and diesel cars by 2040.

    • wings

      Hermes joins the United Nations Global Compact, the world's largest corporate sustainability initiative. It urges companies everywhere to align their operations and strategies with 10 universally accepted principles in the areas of human rights, labour, the environment and anti-corruption, and to take action in support of UN goals and issues embodied in the Sustainable Development Goals.

    • Apple investors call for action over iPhone addiction among children. In an open letter to Apple, two of its largest investors said: "Apple can play a defining role in signalling to the industry that paying special attention to phone the health and development of the next generation is both good business and the right thing to do." They also want Apple to study the effects of heavy usage on mental health and create new parental controls.

    • New York City files a lawsuit against five oil majors - BP, Chevron, ConocoPhillips, Exxon Mobil and Royal Dutch Shell - accusing them of contributing to climate change.

    • Source: Thomson Reuters, Financial Times, The Guardian, United Nations, and Hermes as at January 2018

    ESG investing is - and will continue
    to be - core to our business as it evolves over time.

Defining ESG

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. Examine the evidence

ESG Strategies

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.


  • Exclusionary screening
    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.
  • Positive screening
    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.
  • ESG integration
    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.
  • Impact investing
    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.
  • Active ownership
    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.