Case study by Hermes Investment Management

To maintain a consistent approach as we integrate ESG factors across all asset classes and investment strategies, each of our investment teams use two tools developed by our Global Equities team: our ESG Dashboard and our ESG Portfolio Monitor. Our Responsibility team works with each investment team to share best practice and to identify ESG risks that necessitate engagement by our engagement team, Hermes EOS.

Each investment team can be aware of ESG issues by using the ESG Dashboard to access proprietary and third-party ESG research on each stock in their investible universe. Companies can (subject to available data) be compared against their peers by sector, by region or globally. Information provided includes a proprietary score we assign each stock capturing how well the company manages its ESG risks, and whether this is improving or not.

This stock-specific analysis contributes to both our initial investment decisions and our ongoing monitoring of, and (where appropriate) engagement with, companies. Alongside the Dashboard’s stock-specific information the ESG Portfolio Monitor provides a portfolio-level view.

This tool lets us observe the aggregate ESG risk across our portfolios in both absolute and benchmark-relative terms. Investment teams are able to break these measures down into the constituent environmental, social or governance risks and view the ESG metrics for each portfolio company, along with the best and worst performers in aggregate and for each aspect. Analysts are also able to see whether the company is currently being engaged with by our stewardship team, the progress made in the engagement and whether we have voted against management at general meetings. The Marketing and Sales teams also use the information provided when communicating with existing and prospective clients.

Using the data

Overseeing risk

Our Investment Office, which provides independent oversight of our investment teams in the interests of clients, actively monitors fund risk, helping to deliver sustainable, risk-adjusted alpha while acting as an early warning system to identify potential problem areas. They use the Portfolio Monitor report to promote discussion about thematic ESG risks within and across teams.

Obtaining a fuller picture 

Our Responsibility team coordinates the development of our policies, and their subsequent integration, across our funds and stewardship services. Quarterly meetings are held with investment teams to discuss their portfolios. In advance of the meetings, the Portfolio Monitor provides the starting point to analyse the ESG risks within the portfolio. During the meetings, teams identify which companies might be at risk and, recognising that data does not provide a full picture, mark them for further analysis. Companies are prioritised based on an attribution analysis of the ESG risks in the portfolio and a discussion regarding any changes to how effectively they are managing material concerns.

Formal meetings are held with each investment team at least every two months, along with ad hoc interactions, to discuss more detailed ESG analysis of stocks identified as ‘at risk’. ESG specialists and portfolio managers will discuss the analysis and, if appropriate, agree engagement objectives. We systematically measure and monitor progress on engagements by setting clear objectives and measuring progress against four milestones:

  1. raising the issue with the company;
  2. the company recognising that the concern is valid;
  3. a plan to address the issue; 4. successfully delivering the objective.

Mitigating carbon risk

The portfolio-level view makes portfolio managers aware of the estimated carbon level and intensity of their portfolios, including which investments are the largest contributors. We systematically engage with the highest-emitting stocks with a view to reducing their emissions. The data also provides a starting point to assess the best options to manage carbon risk in the context of a fund’s particular performance and risk objectives as agreed with the client.

Active ownership informs our assessment of risk

Not only does effective engagement – accompanied by intelligent voting – help appraise the level of ESG risk: if successful, it will also mitigate the risk. In turn, our engagement and investment activities are able to focus on the risks that are most relevant and material.

Output of the ESG portfolio monitor

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    A practical guide to ESG integration for equity investing

    September 2016