Portfolio Adviser • Portfolio Adviser Magazine December 2021 • SPONSORED CONTENT

Why sustainable global equity and why now? What makes the fund unique? These are some of the questions our clients and prospective investors are asking about the Federated Hermes Sustainable Global Equity Fund

A: The corporate sector is at a tipping point. Globally, governments have come to recognise that without mobilising corporate investment and innovation, a shared sustainable future cannot be achieved. Encroaching regulation, the crises triggered by Covid-19, and the increasingly visible impact of climate change on our everyday lives are changing the paradigm for growth in the corporate sector. This profound shift in global economic focus represents a multi-decade opportunity.

The Federated Hermes Sustainable Global Equity (SGE) Fund seeks to invest in those companies we believe will contribute most to this transition. Alongside financial outperformance, the fund targets key environmental outcomes with a lower carbon, waste and water footprint relative to the benchmark.

The fund was launched as part of Federated Hermes’ product line reclassification and expansion, which provides clarity to investors aligned with EU regulation. The EU’s Sustainable Finance Disclosure Regulation, the first part of which went live in March 2021, aims to address the lack of consistency in sustainable investing.

We believe this will help clients as the clear positioning of the fund helps investors to identify it as a sustainable offering – something that is becoming increasingly important considering the recent proliferation of ESG-related products in the market.

A: SGE is a high-conviction strategy that invests in companies helping to create a more sustainable future. It is the culmination of what we do best at Federated Hermes, a business with nearly 40 years’ experience of responsible investing. As a concentrated, high-active share fund that follows a ‘best ideas’ strategy, SGE benefits from three key sources of alpha: sustainable leaders, impactful companies and future leaders.

We only invest in companies that make a difference. This is reflected in the strategy holdings, which are all aligned with, and facilitating progress on, one or several of the UN’s Sustainable Development Goals (SDGs). To make these links, we leverage the combined resources of more than 50 people within Federated Hermes, all of whom are experts in their field and skilled at identifying truly sustainable investment opportunities that are consistent with the UN’s framework.

A: SGE draws on the very best equity investment expertise at Federated Hermes. Martin Todd is the lead portfolio manager and brings to the fund his experience managing a sustainable focused European equity strategy for the past five years. Martin also co-manages the Impact Opportunities strategy.

Ingrid Kukuljan and Henry Biddle are co-portfolio manager and deputy portfolio manager, respectively. Ingrid is head of impact and sustainability at Federated Hermes and has over 22 years of experience in financial services. Henry, meanwhile, has experience running Federated Hermes’ US SMID Cap strategy so has a background in searching for companies underneath Wall Street’s radar.

We are also fortunate in being able to draw from the best ideas of a large analyst pool. The 40 stocks in the portfolio have 14 different covering analysts.

A: Our belief in what constitutes a sustainable company starts with understanding that companies contribute to sustainability in different ways. And some of these ways go far beyond just ESG.

●What a company does: what they sell to their customer as a product or service.

●How a company does it: the operations of the business and how they treat their employees and suppliers.

●The business model: are they helping to foster greater wealth creation over time.

Essentially, sustainable investments should be companies with a business model built for the long term, a positive or improving ESG profile, and whose activities have an overall positive impact through what they sell.

That tends to mean businesses with a clear purpose, who have invested to enable greater control over their own destiny, together with a sharp focus on innovation and future growth.

We may target companies who are leaders in ESG by virtue of the way they operate, while we also look at companies that are making an impact through their products. Finally, and most crucially, we target companies that may not be seen as sustainability leaders today, but the rate of change and/or their direction of travel leads us to believe the company has the potential to be a leader in the future.

All three of these types of companies can be very attractive long-term investments and our process is designed to uncover and capture these opportunities at attractive valuations.

A: Over the past decade, impact investing (investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return) has gone from being largely the preserve of philanthropy and private markets to becoming a credible public market strategy.

SGE helps drive impact through a robust and repeatable process that focuses investment on themes linked to the UN SDGs, considers the impact of companies and their products, and leverages EOS (which has US$1.75trn in assets under advice as of 30 June 2021) to give us greater influence to affect positive change.

In the wake of the Covid-19 pandemic, the estimated funding gap for achieving the SDGs has soared to US$84-101trn.¤ Governments can help direct investment though stimulus, policy and regulation, but they can’t tackle the problem alone. The private sector is required to drive the innovation and adaptation required. With the market capitalisation of global public equity markets approximately US$117trn¥, the sheer volume of capital provides the potential for transformational impact. It is therefore essential that public-market capital is directed towards solving the structural, underserved needs of society.

Public equity sustainable funds channel capital towards companies that are having a positive impact on people and the planet, helping to reduce their cost of capital. For investors, they provide the opportunity to invest in impactful companies that are driving the sustainable transition in a liquid, scalable and accessible way.

In addition to reducing the cost of capital for such companies, investors can also use their leverage as stakeholders to promote change and accelerate impact at the companies they hold. Through active and sustained engagement, we help businesses become more impactful for the wider benefit of society and the environment.

Furthermore, our public advocacy efforts are helping to further increase awareness of the most pressing issues facing us today.

A: Direct engagement with the companies we invest in is vital to achieving long-term impact and a key differentiator of this fund.

We work in collaboration with our world-leading stewardship business, EOS at Federated Hermes, where we are supported by 38 engagement professionals with dedicated engagers per theme within the fund.

As well as working closely with EOS, we benefit from ESG analysis and engagement from Will Pomroy, head of impact engagement – equities, who acts as lead engager sitting within the investment teams.

By engaging with companies on specific, relevant objectives aligned with UN SDGs, we gain valuable insights into investment risks and longer-term opportunities that the company is exposed to. Such insights cannot be uncovered through ratings; they include how a firm manages scarce resources, how it invests in its people, and how it supports equitable economic growth.

Engaging as a constructive partner is necessary to establish management buy-in, while true impact needs investor intentionality and additionality. This involves sharing insights and contacts in a purposeful manner. Furthermore, change does not happen overnight, so engagement requires patience and perseverance. We use our proprietary milestone system, developed by EOS, to track our progress towards each engagement objective.

Disclaimer: The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future results and targets are not guaranteed. For professional investors only. The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications. This does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

Issued and approved by Hermes Investment Management Limited which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET.