The Circular

Edition 3, 2021

Keeping you in the sustainability loop

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The Circular continues this quarter to show why sustainability is elementary for investors…

Change is in the air: the dynamic ESG movement

Beach near the road

What’s it all about?

After 2,000 or so years in operation, the ancient Greek view that the natural world was composed of four immutable elements – earth, air, fire and water – ultimately gave way to the modern scientific model of dynamic physical states where gas, liquid, solid and plasma are composed of the same underlying matter arranged in different structures. But thinking about climate change needs to evolve much faster than the current  ‘emissions accounting’ approach that treats carbon as static units of reality, according to a new paper by Eoin Murray, Head of Investment, Ben Sanderson, Director of Fund Management, and Robert Hall, Associate Director – ESG, Impact and Innovation.

 

The trio argue that investors need to treat the net zero equation as a “series of asset management decisions with its own financially and economic efficient frontier and return opportunities, not a rhetorical device or necessary sunk cost”.

What’s new?

Federated Hermes has aired its progress towards implementing the Taskforce on Climate-related Financial Disclosures (TCFD) standards across the business in the just-released 2020 report. Over the year the firm has bolstered both internal corporate and external investee company alignment with the benchmark TCFD reporting guidelines across the four key components of governance, strategy, risk management, and, metrics and targets.

 

CEO of the international business, Saker Nusseibeh CBE, notes that the TCFD has lifted the level of climate change debate among investors and the corporate world but “there is much more work to be done if we are to truly enact change before it is too late”.

What’s the impact on investors?

Theory, research and metrics are all very well but investors need to translate nebulous concepts into well-grounded actions. Louise Dudley, CFA, Portfolio Manager and Sam Stephenson, Quantitative analyst, unveil a new Sustainability Assessment Framework that turns thought into expression via an innovative approach to investing in global equities.

 

The new system – based on pioneering Federated Hermes environmental, social and governance (ESG) research and tools – evaluates global companies on both creative and destructive sustainable features.

 

Dudley and Stephenson conclude that “companies that are best placed to benefit from the ever-increasing number of sustainable growth opportunities, should by construction, also outperform on that journey to self-sustainability”.

Even if the entire global energy supply were to transition to renewables tomorrow, this would not be net zero.

Robert Hall, Associate Director – ESG, Impact and Innovation

The heat is on: investors fired up on climate

Image taken through the microscope

What’s it all about?

As deadly fires swept through Turkey, Greece and California, the first instalment of the Intergovernmental Panel on Climate Change’s (IPCC) Sixth Assessment Report released in August put the planet on red alert.

Eoin Murray, Head of investment, told IPE magazine the IPCC report confirms a link between human activity and extreme weather events including looming global temperatures set to be the hottest in almost 125,000 years.

“But the most important piece of the latest IPCC report must be that we are today in our last decade to take the necessary actions to avoid the horrors of predicted climate change, and that it is still within our gift to make the required changes,” Murray said.

What’s new?

While the fate of internal combustion engines and coal-powered electricity generation dominate the climate change agenda, another lower-profile but fundamental industrial process comes under scrutiny in a newly released analysis of global steel manufacturing by a panel of Federated Hermes experts. The Spectrum report titled ‘A burning issue: decarbonising the global steel industry’ finds the metal-making process is responsible for “up to 10%” of the world’s carbon emissions.

 

According to the study, the steel industry faces many hurdles to achieve the necessary net-zero target but short, medium and long-term solutions are in sight such as improving efficiencies of current practices, introducing technological solutions to manage emissions of existing electric arc-furnace infrastructure and, ultimately, replacing the coal-powered industry with hydrogen alternatives.

What’s the impact for investors?

Despite a gloomy big picture emerging from the likes of the IPCC report, a number of companies offer glimmers of hope with innovative strategies designed to tackle climate change piece-by-piece.

 

As the latest quarterly Impact Report from the Federated Hermes Impact team discovers, several firms tuned in to the “green energy transition” – such as wind turbine producer Vestas and US ‘climate solutions’ specialist Hannon Armstrong – provide investors with the chance to generate both good returns and a better future.

Decarbonising the steel industry is far from a simple task, but it is an essential one if we are to achieve a zero-carbon future.

Federated Hermes’ Stephen Martin, Director Small & Mid Cap, Sonya Likhtman, Engagement Professional, Sandy Pei, CFA, Deputy Portfolio Manager, Asia ex-Japan, Andy Jones, Engagement Professional and Anna Chong, Senior Credit Analyst, in the June quarter issue of Spectrum

Down to Earth: the hard-shift from brown to green

Mountain

What’s it all about?

Global economies are slowly changing colour from “brown to green” as the full extent of the climate crisis hits home. But understanding how this impacts companies at the ground level requires a holistic analysis, according to a new paper from the Federated Hermes Fixed Income team. The ‘It’s not easy being green’ study says investors need to ask better questions to dig up “the real, net impact of a company’s decarbonisation strategy”.

What’s new?

Agriculture and land use produce over a quarter of global greenhouse gas emissions while farming practices have been associated with deforestation and diseases.

 

Nicholas Spooner, EOS utilities sector lead, explains in the first of a new series why the global food production system must prepare for a major overhaul in areas such as animal farming that will have spin-off benefits for climate change, labour rights and human health.

What’s the impact on investors?

Brazilian pulp-and-paper firm Suzano piled on debt in 2018 to buy-out its nearest competitor in a deal that some investors saw as financially risky. But as this case study from the Federated Hermes Fixed Income team highlights, the acquisition bolstered Suzano’s operating strength and paved the way for more effective engagement on ESG issues.

 

“Today, the company is strengthening its disclosure on impacts concerning water, raw materials, energy, chemicals use. It has recently issued a sustainability-linked bond,” the note says. The Sao Paulo-based firm offers ESG-focused investors the chance to participate in a company contributing to a number of UN Sustainable Development Goals (SDGs) and sound financial returns.

Animal agriculture plays an outsized role when it comes to contributing to the climate crisis, as well as other environmental and social issues, with 31% of food-related emissions coming from livestock and fisheries.

Nicholas Spooner, EOS utilities sector lead

Going deeper on labour rights

Lettuce

What’s it all about?

The coronavirus pandemic has floated a number of bubbling social issues to the surface including the long-neglected conditions of front-line workers – lauded as heroes in the fight against Covid-19 that has sunk many of them into personal dire financial straits.

 

Will Pomeroy, Head of Impact Engagement – Equities and Lead Engager Small & Mid Cap Equities, sounds out the issue in ‘Shouting, but barely heard’ – an in-depth analysis showing why workers matter and how investors can engage with firms to elevate “the employee voice”.

What’s new?

Water, of course, is an all-encompassing ESG concern, spanning oceans, rivers, lakes and the atmosphere and – as the latest EOS Public Engagement report reveals – it also leaks into social factors like employee rights. Among a raft of reasons why investors must tackle ocean-related problems, the ‘Into the blue’ EOS paper points out that worse things do happen at sea for those working in the fishing industry: about 11% of the 25 million-odd people in forced labour around the world are captured in the agriculture and fishing sector.

What’s the impact on investors?

Elaborating on Pomeroy’s theme, Katie Frame, EOS engager, details how so-called ‘gig economy’ employers are facing social pressure legal actions over onerous working conditions for those stuck on ‘zero-hour contracts’ and other precarious contract terms.

 

Frame says investors have a duty to engage with firms over contract-worker rights both for its own sake and “given the belief that increased productivity and business sustainability is achieved through investment in the workforce”.

One study has shown that workers on zero-hour contracts and in other insecure jobs are twice as likely to have died of Covid-19 as those in other professions.

Katie Frame, EOS engager

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:

Decarbonising the auto sector: This paper will be the first in a series of insights from the European Equities team on decarbonising the auto sector. Including an assessment of how much greener an electric car is than its petrol equivalent. slider-icon
Global Equity ESG half year report: Our 2021 H1 report will explain the strategy’s investment philosophy, examine engagement highlights and ESG outcomes, and provides case studies illustrating how the team integrate ESG and engagement into their investment process. slider-icon
Japanese employment: engaging for greater equality: An update from the SDG Engagement Equity team, exploring the long-standing issues around the under-representation of women within the Japanese labour force. slider-icon

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

In this edition, we quiz Hannah Shoesmith, Engager, EOS
Hannah Shoesmith
Which engagement themes are you focussing on for the remainder of 2021?
As co-lead of the human rights theme, I plan to focus on supply chain human rights, in particular modern slavery and poverty wages.
What do you think is the biggest misconception about engagement?
That just having a decent financial stake will lead to meaningful engagement and progress. It takes much more than that, such as taking the time to research and prepare properly for discussions with the company, building relationships and credibility and knowing when to use which tactics.
In which sectors do you see the biggest opportunities for engagement in Asia?
I think there is good opportunity for engagement across all sectors but in particular in financial services, oil & gas and technology companies. It is also worth thinking about how companies are owned e.g., state-owned, family owned, and considering engagement opportunities depending on the theme. We have also seen some promising developments during the voting season in Japan this year, led by Sachi Suzuki in the team, including shareholder resolutions, and we are keen to increase momentum next year.
Can you tell us about any formative experiences in your career which have shaped the way you see ESG and engagement opportunities?

Before I joined EOS in 2018, I spent about 13 years working in corporate sustainability, with a particular focus on supply chain environmental and human rights impacts, working with and for some of Europe’s biggest brands and retailers. I was so lucky to travel extensively and live overseas, working with colleagues to identify impacts and how to mitigate them.

 

I have experienced some pretty shocking things over the years that have compelled me to keep going and at the same time given me a huge sense of gratefulness for how fortunate I am.

 

In terms of the social impacts, I have worked with victims of modern slavery, such as young women in southern India and child labourers and their families in Turkey and Bangladesh. I’ve had to leave in a rush when facing threats from powerful businessmen who didn’t like my questions about slavery and I have had my team locked up in factories for refusing bribes. I have also worked on cases of exploitation and human trafficking in the UK and France, it’s much closer to home than many realise, and it is in most supply chains if you look hard enough.

 

In terms of environmental impacts, I have woken up in Kalimantan (Indonesian Borneo) to meet local communities there but have been thwarted by so much smoke from palm oil plantation fires that I couldn’t see my own outstretched hand. I have witnessed local community protests shutting down manufacturing facilities due to serious pollution of their land. Don’t even get me started on the filth from denim production!

 

All of this reminds me how much there is to do and how crucial it is that companies take these matters seriously.

The engagers: Federated Hermes in the news

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