Hermes: Taking a localized approach to engagement
Society’s spotlight is shining increasingly brightly across countries and industries worldwide. While corporates globally are becoming ever more aware of their social responsibilities, the driving forces behind this shift vary by country, highlighting the need for a localized approach to company engagement.
In the US, for example, politics, labor shortages and consumer sentiment seem to be giving this once-fringe practice greater prominence. In other markets, regulation has been a greater driving force. Global themes such as demographic shifts and the current and potential future implications of climate change are focusing the minds of management teams from Brazil to Japan, Canada to Sweden.
Similarly, those sectors most exposed to ESG risks or whose products inherently have a positive impact have, unsurprisingly, proven the most receptive or aware – for example, oil & gas, financial services, utilities and healthcare. Those in the technology sector or that are part of an industrial value chain are often at a more nascent stage.
While we do see cross-country alignment toward becoming more socially conscious, we have witnessed a varying understanding of the United Nation’s Sustainable Development Goals (SDGs) across the global map. We draw, therefore, on the deep, global stewardship experience of Hermes EOS, our stewardship and engagement team, and take a localized approach to engagement.
This allows us to tailor our approach appropriately with companies across different countries and industries. Corporate boards and management teams have so far welcomed our ability to share the best practices we have observed elsewhere – and to make connections in order to establish mutually beneficial relationships.
Most of the US companies in our portfolio have been remarkably open to engaging with us on the SDGs. The positive US corporate response is in keeping with our hypothesis that while American companies often lag international peers in their public commitment to sustainability, the agenda is rapidly gaining traction. In particular, mid-sized companies are well positioned to leapfrog counterparts.
We have seen notable progress toward SDG targets at a number of US firms, including AMN Healthcare Services. We have been very encouraged by the leadership of this large US healthcare staffing business and its recognition that the company is well positioned to address the issue of pay inequality among US doctors and nurses. The company acknowledges that it has a personal and professional responsibility to use its abundant resources to do good and help others.
Latin American companies constitute only a small proportion of our investments, but during 2018 we held productive conversations with all firms from the region in the portfolio. We had a constructive call with the CEO of Peru’s largest bank, Credicorp, in which he agreed the institution should be doing more to expand consumer access through technology and tailored product developments.
During the year ahead, we aim to explore with Credicorp how it might establish collaborative partnerships, tailored products and alternative distribution channels. Through such initiatives, we believe Credicorp has great potential to raise the levels of savings and financial security within a country where a high proportion of the population is underbanked.
In keeping with the growing awareness of environmental and social matters among European companies, we engaged in productive dialogues with a number of listed companies in the region. We hope to report on more positive outcomes in the near future, and have witnessed progress so far with companies such as Green REIT. This Irish property development company has embraced our agenda to go beyond the efficient use of natural resources to generating greater positive impacts through its sub-contractor and building-management relationships.
We have been pleasantly surprised by the willingness of our Asian holdings to engage in constructive dialogue, and one company that has made encouraging progress following engagement is Techtronic Industries. This highly innovative Hong Kong-listed power tools company has recognized the need for increased levels of due diligence through its supply chain. Techtronic has highlighted its suppliers of cobalt (used in lithium-ion battery manufacturing) for particular attention.
We have so far found a generally receptive response among the companies we have approached. Clearly, purposeful engagement is resource-intensive and demands pragmatism and patience from all parties. Results cannot be achieved overnight, but those companies showing a willingness to change and making positive steps through a collaborative and tailored engagement approach are worth waiting for.
Hamish Galpin is director and head of small and mid-cap at Hermes Investment Management