Responding to ‘accelerating investor demand’ for sustainable investments – even as Covid-19 ravaged stock markets – investment manager Federated Hermes, which has $575.9 bn in assets under management as of December 31, 2019, has been expanding its impact investing team.
As part of that expansion, Ingrid Kukuljan will be leading the manager’s impact opportunities team from London. With 22 years’ experience under her belt, Kukuljan joins Hermes from PDM Capital, where she managed a thematic equity fund with impact at its core.
‘Using the UN Sustainable Development Goals (UN SDGs) as a lens to measure impact, her investment approach was closely aligned to that of our impact opportunities strategy at Federated Hermes,’ writes the investment manager in a statement announcing Kukuljan’s appointment.
Here she talks to IR Magazine about what impact investing means for Hermes.
What do you see as the key drivers behind the growth in demand for sustainable investment solutions?
Covid-19 has resulted in a paradigm shift for responsible strategies in general as it has put focus on the critical need to build resilience in healthcare, food and water security, and across supply chains. Businesses that are leading the way in these areas have proven more resilient and provided better returns as investors appreciate that the demand for their products or services has been resilient.
One of our investment theses is that we will increasingly see governments transfer funds to private sectors that have the appropriate expertise to address these pressing needs – something that has proven true during this crisis. We would also note that as governments worldwide provide fiscal stimulus to support the reopening of economies, we believe companies addressing the UN SDGs remain best placed to benefit.
How have you seen this change since the start of the pandemic?
As investors have become aware of these shifts, it appears there has been greater demand for products investing in sustainable or impactful businesses. Hopefully the outperformance of impact funds such as ours during the first half of this year will provide investors with more confidence that investing in impactful businesses does not detract from the opportunity to achieve attractive financial returns.
There’s a lot of talk about rebuilding post-Covid-19 economies with a stronger green focus. What are your thoughts on this, and what would such action look like to you?
There is a lot of debate about the way this pandemic will change how people live. The lockdown has provided time for reflection, an opportunity to consider what is really important. We see it as more of a catalyst to accelerate the existing trend of increasing awareness of the risks around climate change rather than as an agent of change in and of itself.
One of the few silver linings of this terrible pandemic has been the impact on the environment. Year-to-date global emissions have dropped nearly 5 percent year on year, and in some countries total energy demand is down more than 10 percent year on year. This is the biggest single-year drop in emissions we’ve seen, far in excess of the roughly 1 percent drop we saw in 2009 during the financial crisis.
If we are to come close to meeting the Paris climate objectives, we need the nudge of regulation to accelerate the transition in our economy. We were encouraged to see the European Commission’s commitment to continue with the main Green Deal initiatives, including the 2030 Climate Target Plan, despite delaying a number of other initiatives due to Covid-19.
But we are mindful that challenges remain, vested interests that lobby aggressively for the status quo. Corporate lobbies and intransigence remain, and a cohesive plan for climate change needs multinational co-operation. Therefore, political division is another key risk. Innovation remains the key, and technological advances will play a crucial role in helping us achieve a more sustainable environment.
We continue to see a huge opportunity in renewable energy across the globe. Our exposure ranges from renewables-focused utilities to a wind turbine manufacturer. Production costs have fallen precipitously, to the stage now where renewable wind can compete with fossil fuels on an unsubsidized basis. We anticipate double-digit growth in the industry for many years to come.
We are also invested in companies exposed to the auto industry, helping facilitate the transition to fully electric vehicles from internal combustion engines. In addition, we have exposure to companies enabling reduced emissions from buildings; these are critical products given that buildings account for around 40 percent of all global carbon emissions.
Given the unprecedented impact on many companies, do you think there’s a danger some firms will feel a need to focus purely on the financials, taking the emphasis off ESG issues? What would you say to these companies?
In certain industries there may be companies that have been impacted significantly by the crisis and therefore must focus on balance sheet strength in the short term – and that may delay their funding of sustainability initiatives. We have, however, been encouraged by interactions with our companies since the outbreak of Covid-19: most have reiterated their financial strength and a few have been taking the opportunity to improve their credit positions.
These businesses should therefore be able to maintain their commitments to ESG improvements. We only invest in companies where providing impact is within the nature of the business, so while they may choose to hold off from short-term expansion capex, we are confident they will continue to provide positive impact.
The recent crisis has not only put climate change in the spotlight but has also highlighted the need for good employment practices and workers’ rights. We believe companies that already have good working practices – or implement them in the future – will be more resilient and attract the best workers.
When you select ‘impactful companies providing solutions to unmet needs in society as represented by the UN SDGs’, what exactly are you looking for?
We take a thematic approach and seek to capture opportunities that are created by mega-trends. By assessing the UN SDGs’ underlying targets, we have alighted on nine key impact themes that are investable. We believe that by investing across these themes we can provide a diversified portfolio with access to companies targeting the most pressing needs of the world.
We assess the positive impact of each of our investments in a quantifiable way. We analyze the whole ‘chain’ from input to output, with a preference for proven business models with strong financials, which should allow our investments to show resilience. Unless we are convinced the company fulfills our strict criteria, we do not invest.
We are active managers looking for mispricing in the market and opportunities to buy into companies that are exposed to long-term growth themes at attractive prices. Nevertheless, our style is relatively low turnover as we are patient capital investors, looking to capture the time premium from durable trends. To ensure a greater probability of success, we conduct ongoing, active engagement with the companies in which the portfolio is invested, supported by our leading stewardship team.
Can you sum up your investment philosophy for us?
We believe companies providing products or services that are helping to solve the unmet needs of society or the environment will be exposed to sources of enduring demand and structural growth. By investing in these companies, we believe we can provide investors with the opportunity to help deliver a better world as well as attractive financial returns.
The Hermes Impact Opportunities Equity Fund is a high-conviction global equity strategy. It aims to generate attractive financial returns by investing in companies creating positive impact for people and the planet.
What do you want to see from companies when it comes to communicating around their ESG efforts?
We would like all companies to provide insights into their environmental and social practices as well as the more easily published governance topics, [though] we realize that reporting on sustainability practices requires resources – and therefore budget – if not currently set up.
We engage with companies to discuss best practices in terms of reporting and benchmarking. We do not want companies to pick SDGs to align to lightly, but instead provide quantifiable metrics of how their company’s practices, products and services are helping toward the UN goals. Some companies can provide some very clear metrics, KPIs and goals, which we can monitor and engage around. With others we will encourage them to do so. A long-term holding of ours – Ecolab – provides some great infographics to display its impacts on different industries.