Defining best practice

What analytical tools and insights are needed to be a leading ESG investor?

Badge Of Succes

As innovators and leaders in sustainability and investment, we understand the expertise and attitude required to achieve outperformance and outcomes from ESG investing.

ESG cannot be ‘bolted on’ to an investment process or be the domain of one analyst in a team. It must be an area of expertise for all. Knowing how to gather, analyse and integrate sustainability data as an essential part of research is fundamental in forming a complete view of an asset’s long-term potential.

What defines a leading ESG investor?

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Best-practice ESG: how does your manager stack up?

Research

Best-practice ESG and stewardship integration

Uses third-party ratings only in the first stage of research

Proprietary, transparent ESG analysis tools enable asset managers to research and provide toolkits to help fund managers conduct their own fundamental company research

Minimum standards

Outsources research to third-party vendors

Uses mainstream ESG ratings and data, which are often one-dimensional and backward-looking

Materiality

Best-practice ESG and stewardship integration

Performs in-house research on how the relevance of each sustainability factor influences a company’s performance

Assesses the materiality of each factor in order to focus on what is truly material

Minimum standards

Approaches ESG risks in a generic way

Fails to conduct further research in order to understand the relevance of each factor on an asset’s performance

Engagement and advocacy

Best-practice ESG and stewardship integration

Proactively engages with companies in the long-term interests of clients and their beneficiaries

Believes that effective stewardship lies at the heart of any long-term investment programme and integrates the full benefits of active ownership

Implements a comprehensive advocacy programme with legislators, regulators and industry bodies to seek progressive change in the capital markets

Minimum standards

Engages companies reactively in response to sustainability flashpoints or crises

Votes proxies in the wake of a corporate scandal but not to proactively seek positive change

Corporate philosophy

Best-practicee ESG and stewardship integration

Beyond ESG and stewardship integration in investment processes, responsibility is embedded in the company’s philosophy and tone and reinforced by senior management

Significant resources are committed to developing, integrating and advancing expertise in investing sustainably

Minimum standards

Does not have the track record to truly claim a history of best-practice ESG integration

Claims to responsibility in annual reports might not be substantiated by the corporate culture or level of ESG and stewardship integration in investment processes

Pedigree and history

Best-practice ESG and stewardship integration

Track record of integrating ESG and stewardship ahead of requirements set by regulators

Contributing to trailblazing industry initiatives and policy formation championing sustainability in investment

Minimum standards

Integrates ESG in response to the introduction of regulations and stewardship codes

Integration

Best-practice ESG and stewardship integration

Customises ESG and stewardship integration to each investment strategy, resulting in diverse approaches to regions, sectors and portfolio construction

Emphasises stewardship to embed a forward-looking view in ESG analysis

Champions direct collaboration between in-house engagement experts and portfolio managers

Minimum standards

Limits consideration of ESG issues to a one-size-fits-all approach

Our Responsibility Office oversees and advances ESG and stewardship integration in all our investment strategies and reports directly to our CEO on the integrity of their approaches. This helps to ensure we focus on Sustainable Wealth Creation.

Our proprietary tools

Enabling best-practice ESG and stewardship integration

We developed proprietary ESG-analysis tools before off-the-shelf data sets became available and continue to innovate through industry and academic research partnerships, and by deepening the integration of engagement insights from EOS at Federated Hermes.

To learn more, click on the tiles below.

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QESG Scores

Our ESG score for listed companies, capturing both the current sustainability performance and direction of travel. It is calculated by combining our ESG research and engagement insights with sustainability data from third parties including Sustainalytics, Trucost and Bloomberg.

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ESG Dashboard

The Dashboard provides ESG metrics at the portfolio and company levels, integrating our ESG research and engagement insights with information from third-party data providers. Company-level data are interrogated to show environmental (E), social (S) and governance (G) indicators which are used to form E, S and G scores. In turn, these are used to calculate a headline score, the QESG Score, to gauge the sustainability performance of a company and whether it is likely to improve, worsen or plateau.

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Emerald

Our engagement database, used predominantly by the stewardship specialists in EOS at Federated Hermes to record their interactions with companies, engagement objectives and the progress made towards achieving them. The contents and conclusions drawn from strategic and sustainability dialogues with companies helps inform investment decisions and deliver specific outcomes.

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Corporate Governance Tool

Helps assess the governance quality of companies through targeted information about how they are run. It flags any companies that fall below Federated Hermes’ expectations, as defined by EOS at Federated Hermes in the landmark Responsible Ownership Principles, and compares the company to peers in its industry, sector and country of operations to provide a comprehensive overview of how it is governed.

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Carbon Tool

Enables fund managers and engagers to identify carbon risks in portfolios of listed securities and individual companies that are, or might become, more exposed to emissions in the future. Importantly, it also incorporates our stewardship intelligence and can identify companies that are priorities for engagement on emissions and their progress against objectives.

Data points include:

  • Measuring the carbon risk and footprint of an investment fund relative to its benchmark as well as listed companies relative to their peers, including Scope 1, Scope 2, and Scope 3 emissions.1
  • Calculating the value at risk for an investment capability fund according to different carbon pricing and policy scenarios.
  • Identifying companies with which carbon-focused engagement should be initiated or intensified.
  • Gauging the level of carbon risk being engaged on within portfolios – and the progress achieved.

Scope 1 emissions: all emissions from activities directly controlled by a company.

Scope 2 emissions: indirect emissions from electricity purchased and used by the organisation.

Scope 3 emissions: all other indirect emissions from activities of the organisation, occurring from sources that they do not own or control.

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Portfolio Snapshot

Depicts the ESG performance and engagement activity of specific holdings and in aggregate across portfolios relative to their respective benchmarks, and relevant engagement intelligence. It can be used to evaluate a strategy’s ESG and engagement performance over time on measures including carbon intensity, voting decisions relative to the benchmark, and engagement themes and progress.

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Sustainability in action

Looking for authenticity in investing sustainably? Examine our evidence.

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Our definitions

Seeking clarity on sustainability? We provide definitions that we stand by.

Want to know more about our delivery of Sustainable Wealth Creation?