This is a sponsored article from Federated Hermes.
What are the core principles of sustainable investing and why does it make sense in this environment?
What are the core principles of sustainable investing, why does it make sense in this environment, and what kind of companies do we look to invest in? Mitch Reznick, head of Sustainable Fixed Income at Federated Hermes, shares his team’s view.
How do you differentiate sustainable investing from ESG integration?
In differentiating ESG integration and sustainable investing, there is clearly an overlap when we talk about environmental and social factors. But with ESG integration, we look at how these non-fundamental factors affect a company’s cash flows for enterprise value and credit risk.
With sustainable investing, however, we turn that around and ask, “How is the company affecting environmental and social factors?” That is sustainable investing.
What are the core principles of sustainable investing?
At the basic level, for sustainable investing to be credible, you need to show that sustainable considerations affect portfolio construction and investment decisions. To achieve this, your sustainable investment approach must be built on three core principles.
The first is a proprietary approach. You have to own the intellectual property that goes into that assessment. We have decades of experience in that area.
Second, assessing a company’s sustainability credentials must be independent of other factors. You have to own that in the absence of, for example, valuations. Of course, all those factors go into the final investment decisions but must not influence the credibility assessment.
And the third key factor is that the sustainability assessment is forward-looking, ex-ante. As a result, we invest in companies from a sustainability perspective the same way we do from a financial perspective. One caveat is that this is necessarily a qualitative process, which is why we have built a sustainable fixed income team on a global basis to assess the sustainability credentials of the companies that we invest in.
Why does sustainable fixed income investing make sense?
The reality is we are witnessing a structural change in the economy. This change is being driven from a top-down perspective by regulators on a global basis – whether it is carrot or stick or ‘disclose your initiatives’.
On a global basis, regulation is going in one direction. From a bottom-up basis, we see changes in value chains because companies at the end are shifting to sustainability, affecting the whole value chain.
Consumer preferences are also evolving. The companies with the governance and vision to see this are the companies that are tilting toward that structural change and will be the resilient companies of the future. Those are the companies that we want to invest in: doing good and doing well.
What is the impact of fixed income investor engagement?
First of all, as financial stakeholders in a company, creditors have the right – if not the obligation – to engage with the company because engagement can reinforce the resilience of a company, which affects valuations. That bodes well for credit investments.
In addition, companies are in the markets on a recurring basis, refinancing their debt annually in many cases. This is the oxygen of a company, so the fact that these companies are constantly reappearing in capital markets implies a level of dependency that gives creditors a voice that equity holders may not have.
For further insights on sustainable fixed income, please click here.
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.
These strategies have environmental and/or social characteristics and so may perform differently to other strategies, as its exposures reflect its sustainability criteria.
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.
Distributed in Singapore by Hermes GPE (Singapore) Pte. Ltd which is regulated by the Monetary Authority of Singapore.
This is a sponsored article from Federated Hermes.
