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The Circular
Edition 3, 2020

Keeping you in the sustainability loop

Covid-19 continues to throw curve-balls in 2020, but for those investors with sustainability in mind, the long game remains in view. We’ve summed up our recent insights on environmental, social and governance (ESG) investing to bring you the latest edition of The Circular.

Going up in smoke: why carbon is dated

What's it all about?

As told by Eoin Murray, Head of Investment at the international business of Federated Hermes, in this scary fairy-tale version of events, the brief Covid-19 CO2 hiatus offered a glimpse of hope through the smog of climate change. But only a system-wide decarbonisation effort by corporates, governments, individuals and investors can bring about a happy ending for the planet.

What's new?

Consensus is finally forming around how the financial sector can measure the carbon content of businesses and portfolios. In September, Federated Hermes chaired the first meeting of the UK chapter of the ‘Partnership for Carbon Accounting Financials’ – a coalition initiated by the business to create a standardised pan-industry approach to measuring CO2 that will help all parties “not only better understand the impact of their emissions, but also to work collaboratively in enacting genuine change”.

What’s the impact on investors?

While corporates might have the primary responsibility to decarbonise their business operations, investors can push for change through all assets classes, including novel products such as ‘sustainability-linked bonds’ – now championed by the European Central Bank – or identifying climate-change leaders. In this two-part podcast, Senior Credit Portfolio Manager, Nachu Chockalingam, and Aaron Hay, Lead Engager on the Fixed Income team, discuss why companies ahead of the curve on CO2 controls also tend to offer better investment returns.

“We do find that there is a very positive correlation between action that companies are taking on climate change, and in terms of returns.”

Nachu Chockalingam, Senior Credit Portfolio Manager.

Stay safe: the growth in health and well-being

What's it all about?

With the coronavirus global death-toll now surpassing 1m, the need to address human health issues has never been more evident. But as this Federated Hermes Impact Opportunities report reveals, ‘health and well-being’ is one of the global mega-trends driving opportunities for investors and societies alike.

What's new?

In August 2020, our half-yearly Global Equity ESG Fund report highlighted how Covid-19 has accelerated all sustainability trends. But specifically, the report notes “how companies responded to the health concerns of their workforce and customers was seen as poignant evidence of stakeholders’ rights gaining importance”.

What’s the impact on investors?

The focus on health is a global phenomenon, opening up options for investors beyond developed markets. For example, in this quarterly report, Elena Tedesco, Co-Portfolio Manager of ESG strategies in the Global Emerging Markets team, showcases how one China-based company – Tigermed – has taken a great leap forward in medical drug research, setting a sound base for long-term sustainable returns.

“Embracing sustainability is not just about avoiding risks, it is also about finding business opportunities. In this environment, it is that type of thinking which enables businesses to thrive (or survive).”

Federated Hermes Global Equity ESG Fund H1 2020 Report

Water and earth: there are no liquid (or planet) alternatives

What's it all about?

In part three of her series on global habitat destruction, engager Sonya Likhtman from EOS at Federated Hermes (EOS), outlines how deforestation and industrialised agriculture are threatening the very elements that underpin sustainable life on planet earth, including water, climate and soil quality. However, Likhtman says investors can be part of the solution.

What's new?

Among a host of other problematic side-effects, global plastic pollution adds about $40bn each year in negative social costs, according to the UN Environment Programme, with its effect on aquatic life increasingly in the spotlight. In this episode of the ‘Amplified’ podcast, EOS engagers Amy Wilson and Lisa Lange float the case with Aaron Hay, Lead Engager in the Fixed Income team, on how investors can lead the charge for material change.

What’s the impact on investors?

Investor engagement can push for real corporate improvements that create more sustainable products and the potential for higher returns. This case study, for instance, illustrates how our deep engagement with US marine manufacturer, Brunswick, is helping develop greener boat engines and less water pollution from abandoned non-recyclable vessels.

“Forests are natural stores of carbon and integral to the water cycle, reducing the risk of soil erosion and flooding whilst securing a reliable supply of clean water.”

Sonya Likhtman, Engager at EOS

Full financial force: how impact investing is hitting home

What's it all about?

Impact investing assets under management across the world increased from $502bn in 2019 to $715bn this year, according to data from the Global Impact Investing Network. But as Aoifinn Devitt, Head of Investment - Ireland, discovers in the latest ‘Fundamentals’ podcast, impact needs to be more than just a label.

What's new?

Reflecting on the first half of 2020, Ingrid Kukuljan, Federated Hermes Head of Impact Investing, says in this report that a “paradigm shift” is underway as the market wakes up to the potential of companies building solutions for the “unmet needs of society”.

What’s the impact on investors?

Both the ‘Fundamentals’ podcast and the Federated Hermes Impact Opportunities report reinforce the argument that the goals of investors and broader society are intertwined. By targeting specific areas, impact investment strategies can deliver long-term financial outperformance and proven social outcomes.

“While the full effects of the global pandemic are still unfolding, these events have further cemented my vision for impactful companies – that is, that they are the drivers of future growth, and by investing in these new growth areas, we are buying tomorrow’s leaders today.”

Ingrid Kukuljan, Federated Hermes Head of Impact Investing

Going up in smoke: why carbon is dated

What's it all about?

As told by Eoin Murray, Head of Investment at the international business of Federated Hermes, in this scary fairy-tale version of events, the brief Covid-19 CO2 hiatus offered a glimpse of hope through the smog of climate change. But only a system-wide decarbonisation effort by corporates, governments, individuals and investors can bring about a happy ending for the planet.

What's new?

Consensus is finally forming around how the financial sector can measure the carbon content of businesses and portfolios. In September, Federated Hermes chaired the first meeting of the UK chapter of the ‘Partnership for Carbon Accounting Financials’ – a coalition initiated by the business to create a standardised pan-industry approach to measuring CO2 that will help all parties “not only better understand the impact of their emissions, but also to work collaboratively in enacting genuine change”.

What’s the impact on investors?

While corporates might have the primary responsibility to decarbonise their business operations, investors can push for change through all assets classes, including novel products such as ‘sustainability-linked bonds’ – now championed by the European Central Bank – or identifying climate-change leaders. In this two-part podcast, Senior Credit Portfolio Manager, Nachu Chockalingam, and Aaron Hay, Lead Engager on the Fixed Income team, discuss why companies ahead of the curve on CO2 controls also tend to offer better investment returns.

“We do find that there is a very positive correlation between action that companies are taking on climate change, and in terms of returns.”

Nachu Chockalingam, Senior Credit Portfolio Manager.

Stay safe: the growth in health and well-being

What's it all about?

With the coronavirus global death-toll now surpassing 1m, the need to address human health issues has never been more evident. But as this Federated Hermes Impact Opportunities report reveals, ‘health and well-being’ is one of the global mega-trends driving opportunities for investors and societies alike.

What's new?

In August 2020, our half-yearly Global Equity ESG Fund report highlighted how Covid-19 has accelerated all sustainability trends. But specifically, the report notes “how companies responded to the health concerns of their workforce and customers was seen as poignant evidence of stakeholders’ rights gaining importance”.

What’s the impact on investors?

The focus on health is a global phenomenon, opening up options for investors beyond developed markets. For example, in this quarterly report, Elena Tedesco, Co-Portfolio Manager of ESG strategies in the Global Emerging Markets team, showcases how one China-based company – Tigermed – has taken a great leap forward in medical drug research, setting a sound base for long-term sustainable returns.

“Embracing sustainability is not just about avoiding risks, it is also about finding business opportunities. In this environment, it is that type of thinking which enables businesses to thrive (or survive).”

Federated Hermes Global Equity ESG Fund H1 2020 Report

Water and earth: there are no liquid (or planet) alternatives

What's it all about?

In part three of her series on global habitat destruction, engager Sonya Likhtman from EOS at Federated Hermes (EOS), outlines how deforestation and industrialised agriculture are threatening the very elements that underpin sustainable life on planet earth, including water, climate and soil quality. However, Likhtman says investors can be part of the solution.

What's new?

Among a host of other problematic side-effects, global plastic pollution adds about $40bn each year in negative social costs, according to the UN Environment Programme, with its effect on aquatic life increasingly in the spotlight. In this episode of the ‘Amplified’ podcast, EOS engagers Amy Wilson and Lisa Lange float the case with Aaron Hay, Lead Engager in the Fixed Income team, on how investors can lead the charge for material change.

What’s the impact on investors?

Investor engagement can push for real corporate improvements that create more sustainable products and the potential for higher returns. This case study, for instance, illustrates how our deep engagement with US marine manufacturer, Brunswick, is helping develop greener boat engines and less water pollution from abandoned non-recyclable vessels.

“Forests are natural stores of carbon and integral to the water cycle, reducing the risk of soil erosion and flooding whilst securing a reliable supply of clean water.”

Sonya Likhtman, Engager at EOS

Full financial force: how impact investing is hitting home

What's it all about?

Impact investing assets under management across the world increased from $502bn in 2019 to $715bn this year, according to data from the Global Impact Investing Network. But as Aoifinn Devitt, Head of Investment - Ireland, discovers in the latest ‘Fundamentals’ podcast, impact needs to be more than just a label.

What's new?

Reflecting on the first half of 2020, Ingrid Kukuljan, Federated Hermes Head of Impact Investing, says in this report that a “paradigm shift” is underway as the market wakes up to the potential of companies building solutions for the “unmet needs of society”.

What’s the impact on investors?

Both the ‘Fundamentals’ podcast and the Federated Hermes Impact Opportunities report reinforce the argument that the goals of investors and broader society are intertwined. By targeting specific areas, impact investment strategies can deliver long-term financial outperformance and proven social outcomes.

“While the full effects of the global pandemic are still unfolding, these events have further cemented my vision for impactful companies – that is, that they are the drivers of future growth, and by investing in these new growth areas, we are buying tomorrow’s leaders today.”

Ingrid Kukuljan, Federated Hermes Head of Impact Investing

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:

The upcoming edition of Spectrum, from our Fixed Income team, looks at the impact of the energy transition on oil and gas companies

The next Impact Opportunities quarterly report looks at the importance of biodiversity

Our quarterly newsletter from the Global Emerging Markets team, ESG Materiality, includes two case studies, demonstrating engagement activity and focusing on positive impact.

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

In this edition, we quiz Kimberley Lewis, Engager, EOS.

If the first half of 2020 was about Covid-19 response, the second half is about diversity. Diversity has always been an engagement priority, but it was predominately gender diversity. We are now increasing our engagement on ethnic diversity as a result of the Black Lives Matter movement. In addition, we are engaging beyond the Board and executive team and defining our expectations on diversity at all levels of the organisation.

There is probably a misconception about the pace of change. Sometimes we can get some quick wins, especially if the area we are seeking to change is already at the top of the company’s agenda. However, for the most part, a successful engagement can take up to five years and is a series of small, incremental steps.

The healthcare sector is full of opportunities to achieve a tremendous amount of social impact. At the moment, my engagement priority is with pharmaceutical companies to encourage them to increase R&D into novel anti-infectives. Antimicrobial resistance is one of our biggest global health threats and pharma companies play an important role in addressing this crisis (read more from Kimberley on this topic here).

Eat less meat. Intensive livestock-rearing is one of the biggest sources of greenhouse gas emissions. If you do eat meat, try to support local, sustainable farms.

The engagers: Federated Hermes in the news

“Above all, it (the ECB), like us at Federated Hermes, believes that to address the climate crisis, companies can and must decarbonise their own processes of creating economic value. This can only happen at the company level; not just at the green-financed project level.”

Mitch Reznick, Head of Research and Sustainable Fixed Income
IPE: ECB makes ‘exceptional exception’ for sustainability-linked bonds

“In fact, any investor who has a long-term time horizon must, by definition, be looking at ESG,” as Nusseibeh puts it. “Find the best fund manager who has a long-term time horizon and a fantastic return, and she will, whether she knows it or not, have taken into account ESG and sustainability factors in what she does.”

Saker Nusseibeh CBE, CEO, International at Federated Hermes
IPE: Strategically speaking: Saker Nusseibeh, Federated Hermes

“Engaging with companies on the SDGs provides investors with valuable insights into their current levels of sustainability and longer-term commercial risks and opportunities. We have seen a profound shift in the fixed income market, with bondholders engaging with issuers on SDG objectives and corporates linking their coupons to sustainable targets.”

Eoin Murray, Head of Investment
Nordsip: The UN SDGs five years on

“Ecolab is a global leader in water and sanitation solutions across food service, food processing, hospitality, healthcare, industrial and oil and gas markets. Through its cleaning and sanitation products and analytics capabilities, it helps deliver clean water and safe food to its customers, while reducing their water use, carbon footprint and waste.”

Ingrid Kukuljan, Head of Impact Investing
Citywire Selector: Long way to go: How asset managers engage with UN SDGs

Full Circle

That's a wrap for this issue of The Circular