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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?

Companies have tended to take the immense value of nature for granted but maintaining biodiversity will involve a global pan-industry effort. For a deeper dive into engagement themes focussing on biodiversity, sustainable land use, fast fashion and business purpose, read the full EOS report here.

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 – 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

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?

Companies have tended to take the immense value of nature for granted but maintaining biodiversity will involve a global pan-industry effort. For a deeper dive into engagement themes focussing on biodiversity, sustainable land use, fast fashion and business purpose, read the full EOS report here.

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 – 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:

Our Responsibility Office takes a look at how European auto firms are reducing CO2 emissions (and how they can accelerate their journey to Paris).

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.

I have been engaging on responsible antibiotic manufacturing and use with companies in the pharma and food-related sectors for many years with the aim to mitigate the development and spread of antimicrobial resistance (AMR). The ongoing pandemic has certainly highlighted our dependency on well-functioning healthcare systems as well as the fragility of these when overwhelmed. As annual deaths caused by AMR is estimated to reach 10 million by 2050, similar impacts on our healthcare systems can be expected, making AMR a key engagement topic. Other priority themes for 2021 are climate change and biodiversity.

Be aware that seeing impactful change at a company can take time and can come about in different ways. In some instances, a strong relationship with the right person can rapidly bring about the desired outcome. However, there are times joint investor actions over a prolonged period of time are needed. A huge benefit of engagement is gaining an insight into company culture, which cannot be gleaned from reading company reporting.

The rapid development of multiple Covid vaccines shows the huge positive impact pharma can have on society. If this momentum can be harnessed, the pharma & healthcare sectors can also contribute in a meaningful way to improving global health and wellness in disease areas with traditionally low profit margins. This would need to be supported by governments being clear on the desired direction of travel as well as providing alternative ways of funding research and development.

I would encourage everyone to think about the food they buy. Food production, especially industrial meat production, is a key driver of climate change, deforestation, biodiversity loss, as well as the spread of AMR. If you want to make an impact on your carbon footprint, reduce the amount of meat and animal proteins that you eat.

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.”

Bruce Duguid, Head of Stewardship
Reuters: European lenders exit Amazon oil trade after scrutiny by campaigners

“The Democrat administration may pressure the Brazilian government to act against deforestation in the Amazon, including by dangling the carrot of Article 6 in the Paris Accord.”

Elena Tedesco, Portfolio Manager ESG Strategies
Institutional Asset Manager: US re-joining Paris climate agreement will galvanise investment in ‘green economy’

“Issuance in 2021 of green bonds – particularly those that are performance linked – will increase exponentially as a proportion of total issuance from where it is today.”

Eoin Murray, Head of Investment
ESG Clarity: Where will ESG product demand be in 2021?

“Requiring UK companies to make mandatory disclosures against the TCFD framework will move discussions from the ‘whether’ to the ‘what’ and ‘how to’ stage: this is an extremely positive development.”

Saker Nusseibeh, CBE, CEO, international
Portfolio Adviser: What’s on the horizon for ESG investing in 2021?

“As the impacts of the pandemic continue, we expect boards to use their judgment to ensure executive pay can be justified in the context of the experience of other stakeholders.”

Amy Wilson, Engager
Bloomberg: Biodiversity, supply chain rank among biggest ESG themes in 2021

Full Circle

That's a wrap for this issue of The Circular