The Circular

Edition 1, 2022

Keeping you in the sustainability loop

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As Earth ticks off another twirl around the sun, down at ground level the planetary alarm clock ticks on – faster than ever. The Circular issues a sustainable wake-up call for investors in 2022…

COP in: shifting the dial on climate change

Shifting the dial on the flowers meadow

What’s it all about?

The late 2021 COP26 conference in Glasgow showcased the urgency, difficulty and possibility confronting the world in the face of the undeniable impact of a warming planet. Post-COP, Federated Hermes brought it all together in a new hub allowing investors easy access to the latest thinking on climate change – and how to change it.

What’s the impact on investors?

In a side-bar to the COP26 event Federated Hermes hosted world-leading experts in its ‘Further, Faster’ conference on November 4-5 last year to push ahead on solutions for the “three interlinked emergencies” of climate, nature and social injustice – all of which require dedicated action from investors to the tune of US$5-7 trillion by 2030, Impact Investing Institute chief, Sarah Gordon, told the crowd.

We’ll have to alter the way we travel, the way we live, the way we work, our offices, our houses, our cars, where we go, how we go on holiday. People are really realising that all these things are going to change.

Sarah Gordon, Impact Investing Institute Chief

Tick-tock: time for sustainable finance to shine

The sun's rays breaking through the tree

What’s it all about?

Money changes everything – well almost, according to Impact Investing Institute chief, Gordon, and Head of Research and Sustainable Fixed Income – Credit, at the international business of Federated Hermes, Mitch Reznick. The pair told delegates at the ‘Further, Faster’ conference that while finance alone can’t stop climate change, the industry has a highly influential part to play along with government, regulators and business.

What’s new?

While climate change is the ultimate big-picture issue, investors must also focus on specific, achievable goals within the planet-sized problem. Late last year, EOS at Federated Hermes (EOS) engager, Haonan Wu, outlined why investors must engage with Chinese companies to reduce greenhouse gas output in a country responsible for more than a quarter of all global emissions. 

What’s the impact for investors?

Corporates and financial institutions are under increasing pressure to improve the quality of their climate-related disclosure and reporting – both to understand risks and take advantage of opportunities. Despite some significant holes in the current climate disclosure regime, Kate Fowler, Senior Responsibility Analyst, at the international business of Federated Hermes, explains how the financial industry is co-operating with business and regulators to develop global best-practice reporting standards set to streamline the information flow across the investment chain, and drive timely, real-world economic changes to boot.

As a financial stakeholder, you are in a very good position to influence a company to change.

Mitch Reznick, Head of Research and Sustainable Fixed Income – Credit

Debunking debanking: how to fast-forward all-inclusive financial services

Busy street in the middle of the city

What’s it all about?

Access to efficient and affordable financial services is one of the key tenets of the UN Sustainable Development Goals (SDGs) – and for good reason. Figures cited in our Q3 2021 issue of quarterly newsletter Spectrum show 1.7 billion adults across the world remain unbanked with about half of those residing in the poorest countries. As well as helping lift billions out of poverty, true ‘financial inclusion’ can improve the wider global economic prospects – potentially generating 95 million jobs and adding $3.7tn to GDP by 2025, according to IMF estimates – with flow-on investment benefits for everyone.

What’s new?

The COVID-19 pandemic has seen both inequality and financial inclusion improvements stall somewhat, but as Spectrum points out, there are many grounds for optimism built on the incredible advances in digital technology (pushed by a growing band of innovative ‘fintechs’ and incumbent players) along with further input from governments, regulators and investors.

What’s the impact on investors?

Financial inclusion offers a wide palette of opportunities for sustainability-minded investors – featuring as targets in eight out of 17 SDGs, according to the UN – across multiple asset classes. For instance, the Q4 2021 issue of fixed income report ‘360°’  highlights at least three benefits of financial inclusion investments covering diversification, exposure to fast-growth companies and economies, and a complementary component of broader sustainability portfolios.

The types of businesses which can form part of a financial inclusion-focused portfolio include banks, insurers, homebuilders providing affordable housing, credit bureaus and of course fintech, which is providing innovative solutions to some extremely entrenched issues.

Filippo Alloatti, Head of Financials – Credit
Henry Biddle, Portfolio Manager – US Equities at the international business of Federated Hermes
Roland Bosch, Engager, EOS

Moving along right: second chances as investors set ESG clock for 2022

Flowers at the meadow

What’s it all about?

Profit-and-loss has long been the sole determinant of investment decisions. But the bottom-line is that investors now need to look beyond the bottom-line to calculate future risk and returns, experts at the ‘Further, Faster’ symposium told delegates last November. Vicky Sins, World Benchmarking Alliance climate and energy lead, for example, called for fundamental financial industry reforms to remove “perverse incentives which are the opposite of the sustainable development goals”.

What’s new?

The electric vehicle (EV) revolution has been – not so quietly – humming along for the last decade or so, albeit with many sceptics still doubtful of its net benefit. However, a recent paper from the Federated Hermes European equities team puts the balance in favour of EVs in spite of ongoing complications. The paper notes the world “is still a long road ahead to make cars as green as they could be, at least we are headed in the right direction”.

What’s the impact on investors?

If 2021 was a year of government, corporate and investor commitments to sustainable goals “then 2022 has to be a year of action”, Saker Nusseibeh, CBE, CEO, International at Federated Hermes says in the group’s peek into the next 12 months. Spanning views of the manager’s leading executives from the broad economic overview to detailed asset class analysis, the 2022 outlook features a mix of sobering facts mixed with optimism that investors can help tackle the big issues facing humanity, spurring Eoin Murray, Head of Investment, International at Federated Hermes, to write: “As we bridge the gap in our understanding between investment and climate change, a better world IS possible.”

If 2021 was a year of pledges and commitments, then 2022 has to be a year of action. As does the next year, the year after that and frankly every year to come until our climate and biodiversity are no longer in crisis.

Saker Nusseibeh, CBE, CEO International at Federated Hermes

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:


Spectrum

Keep an eye out for the next edition of Spectrum, our quarterly thematic newsletter that explores an important topic impacting markets. This time we’ll be looking at the great rotation – the move from growth to value.
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Equitorial

The latest update from our Global Equity ESG team, as they continue to explore how to balance the carbon equation.
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Biodiversity hub

The importance of biodiversity is hard to overstate. In this soon to be launched education hub, we’ll bring together the latest expert insights from across the business, including thought leadership, case studies, videos and podcasts.
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Federated Hermes has one of the largest teams of Engagers in the industry.

In this edition, we quiz Jaime Gornsztejn, Engager, EOS at Federated Hermes

Jaime Gornsztejn
Which engagement themes are you focussing on in 2022?

In addition to key themes like climate change, human capital management and human rights, within Emerging Markets (EM) we are focussing on corporate governance, which underpins all our engagement in EM.  Often regulatory frameworks lag behind industry best practice, compared to Developed Markets (DM). 

What is the biggest misconception about engagement?

There is no common definition about what engagement actually entails. Some might call a regular catch up meeting with a company, engagement.  Others, an annual letter written to a company.  For us, it’s much deeper than that – it’s about establishing trust and dialogue with a view to not just gather information, but to influence and effect change.

 

EM companies are less advanced in terms of engagement, and some see it as an interference. So that’s a misconception.  As long-term responsible investors, we don’t want to interfere with how a company is run, but as stewards of our client’s capital, we need to collaborate with companies to make sure best practice is being followed. 

Are there any engagement challenges specific to Emerging Markets?

The lack of stewardship from local investors is a challenge, because it means a culture of engagement is not well developed.  Companies are often not used to our approach of establishing dialogue, building trust and collaboration.

 

Another challenge is that ownership of EM companies is often very concentrated – most have a controlling shareholder, either a family or the state. This is reflected in board composition – often populated by family members or government officials. It can be challenging to persuade companies on the benefits of a diverse and independent board.

Which sector do you see the biggest opportunity for progress this year?

EM companies are increasingly becoming part of global supply chains, which means they are increasingly more exposed to the expectations and pressures from investors and consumers in DM.  For example, UK supermarkets are reluctant to buy beef from deforested land, and many EM companies form part of that global supply chain.  They are no longer shielded from these global environmental issues.  There are significant opportunities for engagement here and we are seeing EM companies increasingly more open to engagement and proactive in dialogues around international best practice.

The engagers: Federated Hermes in the news

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Full Circle

That's a wrap for this issue of The Circular.

We hope you found this quarterly round up of insights and analysis from our sustainability experts useful. To receive the next edition of The Circular in your inbox, subscribe below.