Sharpe thinking - Hermes Investment Management

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Newsletter, Q1 2017

Hermes Equities

Sharpe thinking How sustainability benefits profits, people and the planet

Andrew Parry, Head of Equities

Key points As economic, social and environmental problems intensify, investors are becoming more aware of the broader outcomes of their decisions

Our research shows that helping people and the planet can help profits, too

While sustainable investing has previously been practised by specialist investors, it is now a mainstream consideration

By embedding sustainability into their investment processes, investors can pursue better outcomes for all stakeholders, including clients

For professional investors only

Newsletter, Q1 2017 

Hermes Equities

With a complex web of macroeconomic challenges currently destabilising societies and economies, the impact of business operations has come under more scrutiny than ever. At the same time, interest in sustainable investment has grown exponentially, as investors and their clients seek to understand how they influence the well-being of the planet and society. Taking a sustainable approach can not only benefit society and the environment but can also make businesses more resilient and strengthen their performance in the long term. Sustainable investing: high on investors’ Why take a holistic approach? A recent medical study clearly illustrated why a holistic perspective on agendas in an uncertain world the interaction between businesses and the public is essential. The The world is currently facing a myriad of macroeconomic challenges. Globalisation and cross-border collaboration are under threat, seemingly replaced by insularity and self-interest. The recovery from the global financial crisis, driven by quantitative easing, has been uneven across societies while trust in the political establishment is at an all-time low. Rapid technological developments mean an everincreasing range of jobs is under threat from robotics and artificial intelligence. And despite 2016 being the warmest year on record, climate change denial is back on the political agenda. It is unsurprising that against this backdrop, investors’ interest in sustainable investing has surged, as they seek ways to counter the retrograde consequences of populism.

study pointed to a causal link between living in proximity to heavy traffic routes and an increased risk of developing Alzheimer’s disease. This reinforces the notion that you do not need to believe in climate change to recognise that an indifferent attitude to pollution could be damaging the quality of life for millions now, and building immense future healthcare costs for society. Beijing and Shanghai often hit the headlines for their appalling levels of pollution, but the air in London and Paris has also reached near toxic levels on some days. This puts the shareholder opprobrium and regulatory fines heaped on Volkswagen in the US following its decision to cheat emissions tests into appropriate context. Actions like these not only negatively impact people and the planet but ultimately damage shareholder returns.

People, planet and profits

Historically, sustainable investment has been left to specialist sections of the market focusing on socially responsible investing (SRI), environmental, social and governance (ESG) or social enterprise approaches, where social and environmental considerations were often placed ahead of financial returns. Increasingly, however, the focus is on integrating these considerations into all investment approaches as investors recognise that this can add long-term value to portfolios. In effect, investors are now applying the principle of ‘do no harm’ to investing.

Although sustainable investing is not new, its influence is accelerating as it attracts a rapidly growing pool of assets. Increased regulation has played