Proprietary insights from the enhanced ESG Dashboard allow equity and credit investment teams at Hermes Fund Managers to better gauge companies’ exposures to sustainability factors. For clients, this provides a comprehensive risk control.
ESG portal: The dashboard, originally launched in 2011, combines proprietary research and external data feeds to give Hermes’ boutiques immediate insights into the exposure of stocks to environmental, social and governance (ESG) risks. It was developed by Hermes Quantitative Equities with input from Hermes Equity Ownership Services (HEOS).
“The dashboard fuses the ESG expertise of HEOS with the analytical rigour of Hermes Quantitative Equities to help provide a more complete and clear picture of the risks influencing stock returns,” says Leon Kamhi, executive director at HEOS.
Above is an example of a typical ESG Dashboard report for illustration purposes only.
Proprietary ranking: The QESG Score, a new feature on the dashboard, is a headline rating of a company’s performance on ESG measures. It acknowledges current success in mitigating ESG risks and observed changes in a company’s practices.
Red signal: In 2012, the Hermes Quantitative Equities team identified Wal-Mart as a stock with an attractive risk and return profile. However, newsflow about the company and risks flagged by the dashboard indicated that Wal-Mart was exposed to significant ESG risk. In addition, company management was not responding positively to HEOS’ engagement on separating the roles of its CEO and chair, risk management and labour policies amid news reports of corruption within the retailer’s Mexican business and exploitation of teen workers.
Green signal: CVS Caremark, a health care retailer, was identified as an alternative. It showed similar performance characteristics and less ESG risk through engagement with HEOS. Hermes Quantitative Equities bought the stock on July 17. The stock gained 20.1% against Wal-Mart’s 6.3% rise by April 30. In pursuit of long-term returns, Hermes will monitor the financial and ESG performance of CVS to determine whether its short-term rise is likely to endure and analyse Wal-Mart for signs of improvement.
“Detecting governance and social risks in Wal-Mart led us to find an alternative stock in CVS that exhibited similar financial characteristics but did not have the same level of ESG risk,” says Geir Lode, Head of Hermes Quantitative Equities.
Internal ESG expertise: HEOS’ votes on behalf of shareholders, company-specific research and engagement progress feature on the dashboard. Ratings from its “Controversial Company Report”, which covers more than 300 companies, are also shown. HEOS represents approximately $150bn of institutional investors’ assets in proxy votes, policy submissions and discussions aiming to improve sustainability practices at companies.
External input: Data feeds from Sustainalytics, Trucost, Bloomberg and FactSet determine if approximately 4300 companies are rising or falling against industry-specific ESG standards.
Watch out: Environmental risks include greenhouse gas emissions, air pollution, waste and use of land and water resources. Social risks cover business ethics, policies for health and safety, human and labour rights, and levels of fatalities. Governance risks focus on the independence of company directors, separation of chair and CEO roles, gender equality on corporate boards, whether “say on pay” is offered and pay schemes are aligned with investors’ objectives.
Source: Hermes, Bloomberg, Trucost, Sustainalytics, Factset.
The views and opinions contained herein are those of Hermes Quantitative Equities and Hermes Equity Ownership Services, and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products.