HERMES GLOBAL EQUITIES HOW ESG INTEGRATION HELPS TO DELIVER CONSISTENT ALPHA June 2019 Lewis Grant, Senior Portfolio Manager 26 June 2019 For professional investors only OUTCOMES BEYOND PERFORMANCE Our approach to holistic returns means we are committed to delivering excellent long-term investment performance and stewardship, while improving the lives of many 1 Hermes Investment Management A diversified platform Total AUM (millions) USD GBP EUR 9% Equity 24,306 18,653 21,647 8% 498 STAFF Real Estate 8,306 6,374 7,397 Located in: 9% US$44.4bn DENMARK Infrastructure 4,060 3,116 3,616 DUBLIN £34.1bn 55% FRANKFURT €39.5bn Fixed Income 3,709 2,846 3,303 19% LONDON Private Equity 4,022 3,087 3,582 NEW YORK SINGAPORE US$587.1bn 216 £450.5bn / €522.9bn Investment and Under stewardship stewardship staff Please note the total AUM figure includes US$8.1bn / £6.2bn / €7.2bn of assets managed or under an advisory agreement by Herm es GPE LLP (“HGPE”), a joint venture between Hermes Fund Managers Limited ("HFM") and GPE Partner Limited. HGPE is an independent entity and not part of the Hermes group. US$30.4m / £23.4m / €27.1m of total group AUM figure represents HFM mandates under advice. Source: Hermes as at 31 March 2019. 2 The Why of Responsible Investment Barcelona and climate change – current situation Heat wave: When maximum o temperatures exceed >30 C o Recorded as a 33.1 C hot day. for three or more consecutive days. >35oC 0 cm Recorded as a Average sea level. torrid day. Source: Barcelona Climate Plan 2018-2030. 3 The Why of Responsible Investment Barcelona and climate change – end of century COMMITTED SCENARIO 33.1oC >30oC 8x more heat waves 2x more hot days o >35 C Significant rise in sea level 5x more torrid days Source: Barcelona Climate Plan 2018-2030. 4 The Why of Responsible Investment Barcelona and climate change – end of century PASSIVE SCENARIO 33.1oC >30oC 16x more 4x more hot days heat waves o >35 C Significant rise in sea level 17x more torrid days Source: Barcelona Climate Plan 2018-2030. 5 The Why of Responsible Investment Barcelona and climate change – Rise in temperature PASSIVE o +3 C SCENARIO o +2 C COMMITTED +1.7oC SCENARIO +1.6oC 17.6oC 2015 2050 2100 Source: Barcelona Climate Plan 2018-2030. 6 The Why of Responsible Investment The increasing importance of intangibles Components of S&P 500 Market Value 100% 90% 20% 16% 32% 80% 70% 68% 60% 83% 50% 40% 80% 84% 68% 30% 20% 32% 10% 17% 0% 1975 1985 1995 2005 2015 Intangible Assets Tangible Assets Source: Intangible Asset Market Value, 7 The Why of Responsible Investment Reputation Risk Returns Wider impact ► Support beneficiaries’ beliefs and ► Management of ESG and other ► Sustainable long term financial ► Long term sustainability ethics sustainable risks – when they returns (including social and are relevant and material environment impact) of every ► Reputation management relative − Positive stakeholder returns investment to beneficiaries and society more ► Alignment of companies and leads to superior investment broadly policy makers decisions to returns and sustainable ► Incentivise positive externalities investors’ long term interests companies and address negative externalities ► Value leakage in investment − Value opportunities from chain from beneficiaries to investing in sustainable ► Affordability of goods and intermediaries products and services services ► Assist in creating a stable society Responsible investment and ownership provides the industry’s ‘social licence to operate’ Optimal approach for each investor will depend on the needs of its beneficiaries and key stakeholders and available resources 8 Responsibility v SRI v ESG Reputation Risk Return Wider impact Negative screening Positive screening ESG integration Impact investing Engagement / advocacy 9 Integrating ESG Sustainability focus is shared and connected across the organisation Corporate Level Responsible investment ESG Integration Sector & public policy engagement Strategy & policy targets policy & strategy Founding signatory of UNPRI; Promote best practice & influence the market provide guidance & structure Driving responsibility A clear vision to unlock hidden value by all assets under management integrate to implement responsible investment investing responsibly. ESG considerations. principles. Portfolio Level Risk management Tracking ESG Risks Independent assessment Sustainability & responsible Managing aggregate exposures to ESG Portfolio ESG Monitor highlights the best & Regular meetings with Hermes EOS & the investment tools integrated Managing responsibly risks worst companies across our holdings Hermes Responsibility team to discuss throughout the investment ESG risks process Stock Level Stock Selection Systematic assessment Active ownership Combining insights from Hermes Avoiding companies with unnecessary ESG ESG embedded in fundamental analysis Voting & engagement insights from Hermes EOS with specialist external Investing responsibly risks & identifying companies undergoing via the QESG score & ESG Dashboard EOS along with controversial company research positive change reports 10 Integrating ESG: Ethics v Sustainability 11 Integrating ESG: Wide range of views MSCI vs Sustainalytics Overall ESG Scores Sustainalytics ESG Score by MSCI ESG Rating Source: Hermes Global Equities using Sustainalytics and MSCI data. 12 Integrating ESG: Green-washing Actions speak louder than words 13 Integrating ESG: Level and change Orsted Green energy share in power and heat production (%) 100 90 80 70 60 % 50 40 30 20 10 0 2006 2008 2010 2012 2014 2016 2018 2020 target 2025 target Green Energy Black Energy Source: Orsted. This information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments. 14 Integrating ESG: Engagement Using engagement to identify and to promote positive change in companies ► Successful engagement requires senior experienced practitioners ► Long term relationships with companies, often local language conversations ► Two-way collaboration between engagers and portfolio managers ► Focus both on material ESG issues and also on wider impact issues ► Voting, engagement and public policy advocacy 15 The QESG Score An early indicator of changing ESG risks 16 Performance from ESG factors Validating the philosophy 0.25 0.24 0.20 0.15 0.15 % 0.09 0.10 0.05 - Environmental Social Governance Monthly decile spread (%) 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. Any investments overseas may be affected by currency exchange rates. Past performance is not a reliable indicator of future results and targets are not guaranteed. Source: Hermes Global Equities, 30 June 2018. Note: Monthly decile spread is the average difference in monthly return between companies ranked in the top 10% and companies ranked in the worst 10%. Figures calculated using constituents of the MSCI World index assuming monthly rebalancing. 17 Poorly governed companies underperform Performance by decile of governance ranking Average monthly relative return (%) 0.15 0.10 0.05 0.00 -0.05 % -0.10 -0.15 -0.20 -0.25 1 2 3 4 5 6 7 8 9 10 Decile Good (or improving) governance Poor (or worsening) governance Source: “ESG Investing. A social uprising” by Hermes as at 30 June 2018, calculated using data from 31 December 2008 to 30 June 2018. Note: Calculation based on the monthly return of the Hermes proprietary ‘QG’ governance score, ranked by decile. Figures calculated using constituents of the MSCI World index assuming monthly rebalancing. 18 Companies with poor social practices underperform Performance by decile of social ranking Average monthly relative return (%) 0.15 0.10 0.05 0.00 -0.05 % -0.10 -0.15 -0.20 -0.25 1 2 3 4 5 6 7 8 9 10 Decile Good (or improving) governance Poor (or worsening) governance Source: Hermes calculated using data from 31 December 2008 to 30 June 2018. Note: Calculation based on the monthly return of the Hermes proprietary ‘QS’ social score, ranked by decile. Figures calculated using constituents of the MSCI World index assuming monthly rebalancing. 19 Consistent across sectors Performance of companies with lowest governance and social rankings Governance Social Consumer Discretionary Consumer Discretionary Consumer Staples Consumer Staples Energy Energy Financials Financials Health Care Health Care Industrials Industrials Information Technology Information Technology Materials Materials Real Estate Real Estate Telecommunication Services Telecommunication Services Utilities Utilities -0.60 -0.40 -0.20 0.00 0.20 -0.60 -0.40 -0.20 0.00 0.20 % % Source: Hermes Global Equities, 31 December 2008 – 30 June 2018. Average monthly relative return of companies ranked in decile 10 (%). Note: Calculation based on the monthly return of stocks with a Hermes proprietary ‘QG’ governance score and ‘QS’ social score ranked in the bottom decile. Figures calculated using constituents of the MSCI World index assuming monthly rebalancing. 20 Consistent over time Annual return of companies with lowest governance and social rankings Governance Social 0.30 0.30 0.20 0.20 0.10 0.10 0.00 0.00 -0.10 -0.10 % % -0.20 -0.20 -0.30 -0.30 -0.40 -0.40 -0.50 -0.50 -0.60 -0.60 -0.70 -0.70 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Hermes calculated using data from 31 December 2008 to 30 June 2018. Note: Calculation based on the monthly return of the Hermes proprietary ‘QG’ governance score and ‘QS’ score. Figures calculated using constituents of the MSCI World index assuming monthly rebalancing. 21 Governance less important for hyper-growth Relative return of companies ranked in decile 10 (%) 0.00 -0.05 -0.10 % -0.15 -0.20 -0.25 Non Hyper-growth Hyper-growth Environmental Social Governance Source: Hermes calculated using data from 31 December 2008 to 30 June 2018. Note: Calculation based on the monthly return of the Hermes proprietary ‘QG’ governance score and ‘QS’ score. Figures calculated using constituents of the MSCI World index assuming monthly rebalancing.