When we were writing the commentary for our H1 report in 2020, few would have predicted that 12 months on many of us would still be working from home and Covid-19 infections would be rising again. Thankfully, there is now light at the end of the tunnel. Vaccines are being rolled out – quickly in some areas and much too slowly in others – but rolling out, nonetheless.
There are silver linings. The impact of the pandemic has led to a heightened interest in issues of sustainability, among investors and companies alike. We have been pleased to see ever more of our investee companies coming forward with sustainability reports. More pleasingly, we have welcomed them reaching out to us for our input before publication and seeking our assistance in shaping both their approach and their disclosures.
We’re looking for much more than greater disclosure, of course. Nevertheless, this enhanced reporting is testament to the work that is taking place behind closed doors. It is genuinely heartening to note the real commitment of many management teams to making a real social and/or environmental contribution and their recognition that this fits well with their financial goals.
In our 2021 H1 Report, we reflect on our engagement efforts so far this year, present our investment review and take a deep dive into SDG 1 (no poverty). What progress did we achieve during the first six months of 2021?
Federated Hermes SDG Engagement Equity Fund
The fund, launched at the beginning of 2018, is based on the fundamental guiding principle that the best way to create long-term wealth is through responsible investing.
Our aim is to generate attractive returns for investors in a way that has a measurable positive impact on people and the planet.
As a result, the fund employs an investment strategy of buying into companies that have the clear potential to deliver long-term social and environmental benefit. We believe that we can help harness this capacity through a process of engagement, underpinned by the UN’s 17 Sustainable Development Goals (SDGs).
This is an ambitious set of objectives, agreed to by all UN member states in 2015. Its goals are to eliminate poverty, protect the planet, and improve the lives of the world’s population, by 2030.
The targets against which we benchmark our investee companies include generating affordable and clean energy, building resilient infrastructure, and ensuring that patterns of consumption and production are sustainable.
The engagement commitment
We are committed to being a responsible owner of the companies that we invest in, and we believe that engaging with businesses can lead to tangible improvements in the way that they operate, in support of the SDGs.
Our investment approach has led us to find compelling opportunities among the small- and mid-sized players. Many of these are not the typical targets of engagement minded shareholders. The fund’s managers, however, believe that these companies’ operational models and supply chains offer rich opportunities. They also believe that the direct access the companies tend to offer increases the prospect of successful engagement considerably.
Using the SDGs as a mechanism for assessing companies and benchmarking their performances provides investors with valuable insight into how sustainably a business operates and what risks and opportunities lie ahead.
The long-term success of companies is bound into their environments. The position of businesses within their communities and the direct relationships they have with their workforces and supply chains put them in a unique position to promote change.
Companies that actively work in the interests of greater environmental sustainability – and pursue the SDGs – are more likely to enjoy the financial rewards that come from customer loyalty, staff satisfaction, and products that more ably meet the needs of consumers.
Although we believe that a company’s success in meeting the SDGs can be monitored and assessed over the long term, we are aware that change can take time and is not always immediately quantifiable. Nor is it always appropriate to directly compare businesses inside the portfolio, which may have entirely different business models, supply chain impact opportunities, as well as differing exposures to various economies. As such the engagement impact thesis for each company is particular to that company’s circumstances. In one case it may be directed towards the provision of employment to disadvantaged populations, in another it may be the need to innovate towards more resource efficient production.
We consider it important to keep our own investors informed about the progress of our engagements and developments at our investee companies, which ultimately deserve the credit for their achievements.
The fund therefore uses reports such as this to provide regular updates to shareholders. We explain the changes that we believe needed to happen at a number of companies. We then detail the progress they have made, including in specific areas such as committing to specific goals or developing new partnerships.
Where relevant, we reference wider global initiatives, such as when a company embraces science-based targets or specific climate-related disclosures. Ultimately, we measure and report on the change in outcomes that have occurred as a result of the improved practices, allowing investors to understand the full story from an initial engagement thesis to impact generation.
By Hamish Galpin, lead manager and Will Pomroy, lead engager.
For professional investors only. This is a marketing communication. This document does not constitute a solicitation or offer to any person to buy or sell any related securities, financial instruments or products; nor does it constitute an offer to purchase securities to any person in the United States or to any US Person as such term is defined under the US Securities Exchange Act of 1933. It pays no regard to an individual’s investment objectives or financial needs of any recipient. No action should be taken or omitted to be taken based on this document. Tax treatment depends on personal circumstances and may change. This document is not advice on legal, taxation or investment matters so investors must rely on their own examination of such matters or seek advice. Before making any investment (new or continuous), please consult a professional and/or investment adviser as to its suitability. All figures, unless otherwise indicated, are sourced from Federated Hermes. All performance includes reinvestment of dividends and other earnings.
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