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The Circular
Edition 2, 2021

Keeping you in the sustainability loop

The Circular cuts to the heart of the issues that matter in the second ESG quarterly update for 2021...

Reports from the edge: how ESG performed in an outlier year

What's it all about?

Last year was one for the history (and math) books, featuring market movements at the extremes of experience as the pandemic took investors and economies into ‘unprecedented’ territory. But Covid-19 also revealed the value of ESG, according to the EOS 2020 Annual Review, with our stewardship group, EOS at Federated Hermes, noting important lessons from the year for corporate sustainability. While also highlighting the gamut of engagement and voting activities last year, the report says the period has underlined “why all businesses need to maintain a social licence to operate, underpinned by a corporate purpose”.

What's new?

From the relative, partially vaccinated safety of early 2021, investment managers at the international business of Federated Hermes look back on the tumultuous 2020 through the lens of ESG with a view spanning all asset classes including global equities, credit, and the engagement efforts on the UN Sustainable Development Goals (SDGs) from our SDG Engagement Equity team.

What’s the impact on investors?

In keeping with the sustainability ethos, Dr Hans-Christoph Hirt, Head of EOS, has not let the Covid crisis go to waste. Summarising the year just gone, Hirt distils two unforgettable stewardship lessons for investors and companies alike: all elements of society are interconnected; and, humans cannot exceed ‘planetary boundaries’ without triggering the alarming sustainability issues that we see unfolding today.

“Companies and their investors must recognise the impact that companies can have across a range of sustainability issues, understand the relevant connections between them, and manage them in a holistic manner.”

Dr Hans-Christoph Hirt, Head of EOS

Core issues: real impact with science

What's it all about?

Over the last couple of years, in a trend perhaps accelerated by Covid-19, responsible investing has completed its transition from fringe to front-and-centre but managers must earn genuine ESG credentials.

In this recent Q&A, Michael Viehs, Head of ESG Integration, describes the hallmarks of authenticity in responsible investment, citing the group’s proud record of ‘sustainable wealth creation’ across many decades as an example. Real sustainable investment managers, Viehs says, put ESG at the centre, not the sidelines.

What's new?

Science works. While that should not be news, a recent study found companies using science-based targets (SBTs) achieved more effective decarbonisation results than those relying on ad hoc goals.

Investment managers can also use the SBTs to build better carbon-proof portfolios in the fight against climate change, according to a new paper by Mitch Reznick, Head of Research and Sustainable Fixed Income, and Bertie Nicholson, ESG and Engagement Associate.

What’s the impact on investors?

Combining an authentic, deeply ingrained ESG process with a respect for scientific analysis has helped the international business of Federated Hermes develop a range of new useful tools and metrics, adding credence to the sustainability cause and more comfort for investors.

For instance, in the last half of 2020, the Impact Opportunities Equity team created a novel database to measure the impact profile of companies at a more granular level. Among other outcomes, the bespoke Federated Hermes Impact Database provides clients with a “quantifiable indication of how their capital allocation is helping achieve positive impact” as measured against the SDGs.

“Everyone is talking about the acronym ‘ESG’ but our understanding of all the different granular sub-ESG themes and our ability to engage with companies on them to create a positive impact will continue to be our secret sauce.”

Michael Viehs, Head of ESG Integration

In the middle of now: what matters to investors today

What's it all about?

Eoin Murray, Head of Investment at the international business of Federated Hermes, looks back on the long journey of ESG from outsider to industry mainstay. But, as Murray discovers, the trek is far from over with sustainable investing facing a tough road ahead even if the direction is clear – we progress one step at a time.

What's new?

We are living in a material world but it doesn’t have to be a disposal one, according to Lisa Lange, EOS Engager. Lange opens the closet on the global ‘fast fashion’ industry in a recently published white paper, revealing the environmentally destructive side-effects of the low-cost clothing trend – and how investors can help repair the damage with off-the-rack ‘circular economy’ solutions.

What’s the impact on investors?

The growing influence of ESG investing is clear from the big picture observations of Murray to the tight focus on singular industries such as fashion. However, investors also require strong, objective evidence of the link between sustainable investment and better returns – which is exactly what Mitch Reznick, Head of Research and Sustainable Fixed Income, and Michael Viehs, Head of ESG Integration, provide in this update on the classic 2017 study on the relationship between ESG and credit spreads. The 2020 analytical refresh cements the previous findings that “as ESG factors deteriorate, credit spreads widen”: investors who can track these trends should be rewarded.

“Changing consumer perceptions and the high probability that emerging regulations will impact profitability suggest that apparel companies should invest in more sustainable fibres and production processes and review their existing business models.”

Lisa Lange, EOS Engager

Staying centred: sustainability hub brings it all together

What's it all about?

With investor interest in ESG growing at an exponential rate, the international business of Federated Hermes launched a new Sustainability Hub this year to serve as a central information point.

Covering a vast amount of research, product disclosure, regulatory updates and the like, the new hub showcases a core promise from the international business of Federated Hermes that ‘when we commit to delivering Sustainable Wealth Creation, we mean it’.

What's new?

As well as telling the company ESG story, the Sustainability Hub explains our investment philosophy, how we approach ‘stewardship’ in addition to introducing the firm’s experts, supplying fresh insights and opening a new educational channel for investors via our Academy section.

What’s the impact on investors?

By gathering the ESG resources from the international business of Federated Hermes in one place, investors can build a much deeper understanding of what sustainability means for us in practice.

From in-depth product information to careful analysis of issues and detailed case studies, the Hub explores the multiple ways that sustainability “enriches investors, society and the environment”.

“With a vision to enrich investors, society and the environment over the long term, we set out to create a sustainability hub to show that when we commit to delivering Sustainable Wealth Creation, we mean it.”

Federated Hermes

Reports from the edge: how ESG performed in an outlier year

What's it all about?

Last year was one for the history (and math) books, featuring market movements at the extremes of experience as the pandemic took investors and economies into ‘unprecedented’ territory. But Covid-19 also revealed the value of ESG, according to the EOS 2020 Annual Review, with our stewardship group, EOS at Federated Hermes, noting important lessons from the year for corporate sustainability. While also highlighting the gamut of engagement and voting activities last year, the report says the period has underlined “why all businesses need to maintain a social licence to operate, underpinned by a corporate purpose”.

What's new?

From the relative, partially vaccinated safety of early 2021, investment managers at the international business of Federated Hermes look back on the tumultuous 2020 through the lens of ESG with a view spanning all asset classes including global equities, credit, and the engagement efforts on the UN Sustainable Development Goals (SDGs) from our SDG Engagement Equity team.

What’s the impact on investors?

In keeping with the sustainability ethos, Dr Hans-Christoph Hirt, Head of EOS, has not let the Covid crisis go to waste. Summarising the year just gone, Hirt distils two unforgettable stewardship lessons for investors and companies alike: all elements of society are interconnected; and, humans cannot exceed ‘planetary boundaries’ without triggering the alarming sustainability issues that we see unfolding today.

“Companies and their investors must recognise the impact that companies can have across a range of sustainability issues, understand the relevant connections between them, and manage them in a holistic manner.”

Dr Hans-Christoph Hirt, Head of EOS

Core issues: real impact with science

What's it all about?

Over the last couple of years, in a trend perhaps accelerated by Covid-19, responsible investing has completed its transition from fringe to front-and-centre but managers must earn genuine ESG credentials.

In this recent Q&A, Michael Viehs, Head of ESG Integration, describes the hallmarks of authenticity in responsible investment, citing the group’s proud record of ‘sustainable wealth creation’ across many decades as an example. Real sustainable investment managers, Viehs says, put ESG at the centre, not the sidelines.

What's new?

Science works. While that should not be news, a recent study found companies using science-based targets (SBTs) achieved more effective decarbonisation results than those relying on ad hoc goals.

Investment managers can also use the SBTs to build better carbon-proof portfolios in the fight against climate change, according to a new paper by Mitch Reznick, Head of Research and Sustainable Fixed Income, and Bertie Nicholson, ESG and Engagement Associate.

What’s the impact on investors?

Combining an authentic, deeply ingrained ESG process with a respect for scientific analysis has helped the international business of Federated Hermes develop a range of new useful tools and metrics, adding credence to the sustainability cause and more comfort for investors.

For instance, in the last half of 2020, the Impact Opportunities Equity team created a novel database to measure the impact profile of companies at a more granular level. Among other outcomes, the bespoke Federated Hermes Impact Database provides clients with a “quantifiable indication of how their capital allocation is helping achieve positive impact” as measured against the SDGs.

“Everyone is talking about the acronym ‘ESG’ but our understanding of all the different granular sub-ESG themes and our ability to engage with companies on them to create a positive impact will continue to be our secret sauce.”

Michael Viehs, Head of ESG Integration

In the middle of now: what matters to investors today

What's it all about?

Eoin Murray, Head of Investment at the international business of Federated Hermes, looks back on the long journey of ESG from outsider to industry mainstay. But, as Murray discovers, the trek is far from over with sustainable investing facing a tough road ahead even if the direction is clear – we progress one step at a time.

What's new?

We are living in a material world but it doesn’t have to be a disposal one, according to Lisa Lange, EOS Engager. Lange opens the closet on the global ‘fast fashion’ industry in a recently published white paper, revealing the environmentally destructive side-effects of the low-cost clothing trend – and how investors can help repair the damage with off-the-rack ‘circular economy’ solutions.

What’s the impact on investors?

The growing influence of ESG investing is clear from the big picture observations of Murray to the tight focus on singular industries such as fashion. However, investors also require strong, objective evidence of the link between sustainable investment and better returns – which is exactly what Mitch Reznick, Head of Research and Sustainable Fixed Income, and Michael Viehs, Head of ESG Integration, provide in this update on the classic 2017 study on the relationship between ESG and credit spreads. The 2020 analytical refresh cements the previous findings that “as ESG factors deteriorate, credit spreads widen”: investors who can track these trends should be rewarded.

“Changing consumer perceptions and the high probability that emerging regulations will impact profitability suggest that apparel companies should invest in more sustainable fibres and production processes and review their existing business models.”

Lisa Lange, EOS Engager

Staying centred: sustainability hub brings it all together

What's it all about?

With investor interest in ESG growing at an exponential rate, the international business of Federated Hermes launched a new Sustainability Hub this year to serve as a central information point.

Covering a vast amount of research, product disclosure, regulatory updates and the like, the new hub showcases a core promise from the international business of Federated Hermes that ‘when we commit to delivering Sustainable Wealth Creation, we mean it’.

What's new?

As well as telling the company ESG story, the Sustainability Hub explains our investment philosophy, how we approach ‘stewardship’ in addition to introducing the firm’s experts, supplying fresh insights and opening a new educational channel for investors via our Academy section.

What’s the impact on investors?

By gathering the ESG resources from the international business of Federated Hermes in one place, investors can build a much deeper understanding of what sustainability means for us in practice.

From in-depth product information to careful analysis of issues and detailed case studies, the Hub explores the multiple ways that sustainability “enriches investors, society and the environment”.

“With a vision to enrich investors, society and the environment over the long term, we set out to create a sustainability hub to show that when we commit to delivering Sustainable Wealth Creation, we mean it.”

Federated Hermes

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:

Federated Hermes Academy: An educational hub developed by our experts for our clients and prospects seeking to understand responsible investing and how the integration of ESG and stewardship can help create long-term wealth sustainably. Sign up here.

Regulations and labels classification hub

Case studies for our SDG Engagement High Yield Credit and SDG Engagement Equity strategies.

Federated Hermes has one of the largest teams of Engagers in the industry.

In this edition, we quiz Sonya Likhtman, Engager, EOS.

While many companies have committed to net-zero emissions, not all have robust strategies in place for delivering on this goal. Our focus is on ensuring that credible decarbonisation strategies are in place, along with effective governance of climate change and ambitious emission reduction targets for the short and medium term. Biodiversity is another key engagement topic. We are encouraging companies to commit to having a net-positive impact on biodiversity throughout their operations and supply chains by 2030 at the latest.

Sometimes people assume that engagement only benefits one side – the investor. My experience is that companies often welcome constructive challenge and are equipped through engagement to make a stronger internal case on topics ranging from diversity and inclusion to deforestation. Another common misconception is that we have all the answers. As we are dealing with complex, long-term issues, there is usually no one-size-fits-all solution. We explain our expectations and engage with companies on the approach that will most effectively deliver holistic returns.

I think the biggest opportunity is to support the transition to a sustainable food system by engaging with retailers, food and drinks manufacturers, and agricultural companies. The food system is responsible for approximately one quarter of global greenhouse gas emissions. Growing food requires a lot of land, which competes with the habitats of wild species. Tropical rainforests, which are some of the most biodiverse places on the planet, are under threat from the production of beef, soy, palm oil and other commodities. All companies operating within the food system must play their role in protecting and restoring biodiversity. This involves product innovation, eliminating deforestation risks, and promoting regenerative and climate-smart agricultural practices.

Beyond consuming less meat and enjoying a sustainable diet, I would encourage everyone to recognise and use your power as consumers. Through your purchasing decisions, you can show the market that you value sustainability and transparency. This applies when buying all sorts of things, from clothes to cleaning products to cars. Take any opportunity to embrace the circular economy and reduce your waste footprint. Also, you may wish to look into what your pension is invested in so that it addresses climate risks and opportunities.

The engagers: Federated Hermes in the news

“We cannot allow social media to go the way of climate change whereby delayed action leads to worsening outcomes. Not only does this approach stand to benefit the owners and executives of these companies and their long-term financial performance but, indeed, will serve society at large as well.”

Leon Kamhi, Head of Responsibility
ESG Clarity: Investors must engage with social media companies

“In order to successfully execute a sustainable transition, the industry must employ technical innovation in resource efficiency and recycling, as part of a shift towards circularity-driven value creation for customers. It is in the interest of investors to encourage apparel companies to move to better management of their environmental impacts and more circular consumption models.”

Lisa Lange, Engager
Portfolio Advisor: Five asset managers reveal how they are playing the ‘green’ trade

“COVID-19 has demonstrated the critical interdependence of different elements of society, including businesses, governments, employees, customers, and supply chains.”

Dr. Hans-Christoph Hirt, Head of EOS
Investor Daily: Stewardship during a crisis: Lessons from the pandemic

“There is still much more to come from the global community...From an investment perspective, policy risks remain great for portfolios long term.”

Eoin Murray, Head of Investment
BizNews: Investments in fossil fuels go against 'green wave'

Full Circle

That's a wrap for this issue of The Circular