Sustainability Is Imperative In Investment Process

Shanny Basar

Andrew Parry, head of sustainable investing at Hermes Investment Management, which has £30.8bn ($41bn) in assets, said incorporating sustainability has moved from being an option to becoming an imperative.

The comments come from an interview with Jake Moeller, head of Lipper UK and Ireland research at Thomson Reuters, in London last week for the Lipper Alpha Insight podcast.

Parry took on his current role in September this year to reflect the commitment of Hermes to building on their success in Responsible Investing. He joined Hermes in 2009 as chief executive and co-head of investment for Hermes Sourcecap, now Hermes European Equities. In 2014 he became head of equities and took on responsibility for developing impact investing in August last year.

Andrew Parry, head of sustainable investing, Hermes

“There are serious opportunities in broader sustainability in both public markets such as equities and credit and private markets including private equity, real estate and infrastructure,” Parry said. “The sheer level of enthusiasm is growing globally including in the US and Far East and it is no longer an option, but has become an imperative.”

He explained there has been a sea change in attitudes towards  climate volatility which has created real world effects. The past three years have all been in the top three hottest on record and extreme storms that were 1-in-100 year events have become 1-in-3 year events.

“The United Nations’ Sustainable Development Goals are a new way to think about emerging growth opportunities,” added Parry. “As a stock picker that is very exciting as you can look at the same universe through a new lens,”

Countries adopted the 2030 Agenda for Sustainable Development and its 17 Sustainable Development Goals in 2015 which covers areas including poverty, hunger, health, education and climate change. Last year the Paris Agreement on climate change entered into force, addressing the need to limit the rise of global temperatures. Governments and businesses are working with the United Nations to mobilize capital in  order to reach the objectives.

This week Hermes announced the launch of an Impact Opportunities Strategy in January 2018. The new fund is a concentrated high-conviction global equity portfolio of 25 to 50 securities, typically held over five to 10 years. The strategy aims to increase prosperity through sustainable impact investing where companies must be linked to at least one UN Sustainable Development Goal. Tim Crockford, who will continue to lead the Hermes Europe ex UK strategy, will manage the new fund.

Crockford said in a statement: “Our unconstrained and benchmark agnostic approach will allow the team to scour the global investment universe for innovative, purposeful companies, that have a positive impact on the lives of all of their stakeholders.”

Parry continued that sustainability helps investors identify risks with established businesses and identify “stranded assets.” These are assets that are currently valuable but many have to  written down due to regulation, technology or climate change e.g oil or gas assets.

He added that stranded assets are not just in the fossil fuel industry but may also be in the auto industry due to autonomous vehicles or in financial services due to blockchain.

“ESG is finance 101,” said Parry. “Why would investors not want a company that is reducing energy and water costs, minimising waste and using materials that are sustainable or can be recycled.”

Parry gave the example of Hermes’ real estate team which has incorporated ESG into the redevelopment of Kings Cross in London. “Larry Page at Google said this is why they chose the site for their European headquarters,” he added.

Investors have complained of a lack of ESG data from companies but yesterday 237 corporates with a combined market capitalization of more than $6.3 trillion publicly committed to support the Task Force on Climate-related Financial Disclosures. This includes 20 of 30 globally-systemically important banks, eight out of ten of the largest asset managers and many leading insurance companies and pension funds, responsible for total assets of more than $81.7 trillion.

Mark Carney, Financial Stability Board

Mark Carney, Financial Stability Board

The task force was led by Michael Bloomberg and established by the Financial Stability Board to develop voluntary recommendations on climate-related disclosures which were published in June this year.

Mark Carney, chair of the Financial Stability Board, said in a statement: “Markets need the right information to seize the opportunities and mitigate the risks that are being created by the transition to a low carbon economy. Over the coming year, issuers will begin to deploy the TCFD framework and through collaboration and engagement with the providers of capital, will together start to release more efficient and decision-useful disclosures.”

Parry said: “ESG reporting from companies and asset managers will increase. If you can measure it, you can manage it.”

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