Federated Hermes credit team has said it will be scrutinising ESG practices from corporates this earnings seasons to ensure invested companies are delivering on their promise to implement sustainable business models.
Fraser Lundie, head of credit, and Audra Delport, deputy head of credit research, at the international business of Federated Hermes, said they welcome companies that are becoming increasingly more vocal about their sustainability efforts as investor interest in corporate ESG behaviours continues to grow.
“As the world increasingly mobilises to tackle climate change, we continue to encourage our invested companies to implement sustainable business practices,” they said in a note.
The pair added they have recently seen companies highlight their efforts by improving disclosure, inaugural or enhanced sustainability reports, and dedicating time to highlight key ESG developments during earnings calls.
“Some two-thirds of global companies already have some form of ESG reporting with their earnings release. We see this as best practice for corporates to provide updates on their progress of their sustainability journey.”
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Lundie and Delport identified the leaders as companies that proactively incorporate ESG efforts into their long-term strategy.
“[These companies] set out specific goals and detail how they are going to achieve them,” the note said. “It is also critical for companies to demonstrate how their ESG initiatives translate into improved financial outcomes – such as specifically quantifying how much cash savings the issuer generates by increased usage of recycled water, substituting fossil fuel energy with renewables, or improved employee retention by investing in improved human capital management.”
They pointed out, with climate change being identified as one of the biggest risks facing humanity, in 2020 there were an increasing number of corporates making commitments to carbon neutrality.
“Across multiple sectors, from banks to energy producers, announcements were made on medium and long-term emission reduction targets associated with those commitments. We expect this momentum to accelerate, with more companies likely communicating their carbon neutrality ambitions in the first quarter and throughout the year.”
The next step for these firms, they said, is to now provide a detailed strategy of how they will be achieved.
They added: “We have been impressed by the likes of Barclays detailing its BlueTrack methodology to measure financed emissions and Occidental Petroleum providing updating progress on its large-scale, direct air capture plant – the world’s first – with the potential for the company to generate more profits from carbon management than from oil and gas. We expect other corporates to come forward and follow their lead.”
Lundie and Delport added the investment team at Federated Hermes firmly understands the critical importance of engagement to form views on companies, particularly around earnings season.
“Good ESG policies and behaviours not only serve as risk mitigants, but enhance cash flow and enterprise value as well as helping issuers to reduce their cost of capital.
“Our engagement strategy allows us to gain a better understanding of how companies approach ESG risks and how genuine their efforts are. Collaborative engagement enables us to share best practices and constructively influence issuers to pursue even more ambitious ESG policies and behaviours as well as improved disclosure.
“This reporting season will provide us with the right tools to form our investment decisions and we hope to see companies meet our lofty yet necessary expectations.”
Further standardisation
Nonetheless, the pair highlighted challenges remain despite the best efforts from corporates in being more vocal about their sustainability initiatives.
“While leading bodies like SASB (The Sustainability Accounting Standards Board), GRI (Global Reporting Initiative) or TCFD (Task Force on Climate-related Financial Disclosures) have made great strides, further standardisation is needed, such as definitions of high-carbon sectors,” they continued.
“Additionally, corporate disclosure still requires advancement and investors are left with data gaps on important metrics such as scope 3 greenhouse gas emissions (indirect emissions that occur in a company’s value chain).
“However, harmonisation efforts are growing – the UK government expects all listed issuers and large asset owners will be reporting in accordance with the TCFD’s recommendations by 2022. In our view, a much needed and welcome objective.”
ESG Clarity recently explored the anticipated improvements in data and disclosure in the responsible investment space, with many industry professionals describing this year as a turning point with much more focused legislation coming through.
Improved reporting and disclosure should mitigate greenwashing while Barclays Private Bank’s head of sustainable and impact investing, Damian Payiatakis, said those demonstrating “authenticity” will be leaders of the pack.
“Many firms today, and into 2021, will state or promote that they are responsible investors. It’s reminiscent of the principle of full disclosure in economic theory, with every male frog croaking at night. But, similarly, the reality is there a range of capabilities across, and importantly within firms, around the strength of their responsible investment practice. Firms that can demonstrate their authenticity and expertise in 2021 have the opportunity to stand out among this increasingly crowded and noisy field.”
