Industry Voice: Impact investing - a key role to play in reshaping the future

clock • 7 min read
Industry Voice: Impact investing - a key role to play in reshaping the future

Today, the world is confronting the global coronavirus pandemic: so far, it has spread to 188 countries, infecting more than 18m people and killing more than 690,000, in turn putting a severe strain on health systems and economies worldwide.

But amid this crisis, we have a chance to build a better future. For responsible investment strategies, Covid-19 has resulted in a paradigm shift: it has put a focus on the critical need to build resilience in healthcare, food and water security, and across supply chains. It has also put climate change and worker rights under the spotlight.

Impact investing is forward-looking: it aims to identify businesses and organisations pursuing purpose-led activities whose products and services tackle the pressing needs of the global economy and environment. Indeed, our thematic approach to impact investing seeks to identify opportunities created by megatrends - and as a result, we have been investing in pandemics long before the outbreak of Covid-19.

Here we dive into the details of two megatrends, exploring their sub trends and how they are shaping our investment thinking. We also identify companies that can tackle these challenges and opportunities.

Megatrend: climate change

Climate change is the defining issue of our time: it threatens the lives and livelihoods of billions of people, natural disasters and extreme weather destroy crops and deplete fisheries, leaving people without income or food. Since 1998, extreme weather events have resulted in 16,000 deaths and economic losses of $142bn every year.[1] To respond to a changing climate, we must build resilience to these threats.

Sustainable technologies can be particularly impactful when it comes to addressing the climate crisis. We see renewable energy, electric vehicles and energy efficient housing as some of the main pillars in the fight against climate change. We continue to see a huge opportunity in renewable energy across the globe. Production costs have fallen precipitously: renewable wind can now compete with fossil fuels on an un-subsidised basis. As such, we anticipate strong growth in the industry for many years to come.

Portfolio examples: Our exposure ranges from a renewables-focused utility to a wind turbine manufacturer. Ørsted is leading the way in renewable energy. As a global leader in wind technology and bioenergy, it is striving to build an entirely ‘green world'. Meanwhile, Kingspan, a recent portfolio addition, helps create energy efficient housing. The company is a global leader in insulation and its products not only reduce carbon emissions, but some of them are made from recyclable materials. We believe products like these, which can help reduce emissions from buildings, are critical to tackling the climate emergency as buildings account for about 40% of all global carbon emissions[2].

Megatrend: water

For six consecutive years, water crises has been listed as a one of the World Economic Forum's top five global risks[3].

One of our impact themes is water and it is aligned to SDG 6 (clean water and sanitation) and SDG 13 (climate action). We believe that improving access to quality water supply and preservation of the resource are critical to the environment. After all, water is essential for agriculture and food security, and it is the lifeblood of our ecosystems.

As one of our most precious natural resources, efficient and sustainable management of water is critical, particularly as climate change is expected to exacerbate water scarcity.

Portfolio examples: Two of our key holdings, Ecolab and Xylem, help to create positive impacts towards this theme by providing solutions across the water cycle. Ecolab is a global leader in water and sanitation solutions across food service, food processing, hospitality, healthcare, industrial and oil and gas markets. Through its cleaning and sanitation products and analytics capabilities, it helps deliver clean water and safe food to its customers, while reducing their water use, carbon footprint and waste. Meanwhile, Xylem delivers wastewater treatment solutions - and it is a pioneer in creating innovative water technology solutions, including Flygt Concertor, the world's first wastewater pumping system with integrated intelligence. These companies demonstrate how sustainable technologies can be used to produce a better long-term environment.

Investing in pandemics

There has been much debate about how the global coronavirus pandemic has changed the way people live around the world. For many, the lockdown has provided time for reflection - an opportunity to consider what is truly important. For us, we believe the pandemic will serve as a catalyst to accelerate existing trends, thereby increasing the awareness of risks facing economies, the environment and society alike.

One of our theses is that we will increasingly see a transfer of funds from governments to the private sector to help address pressing environmental and societal challenges worldwide - issues which governments do not have the capacity or expertise to tackle or have failed in their attempts to do so previously.  As governments worldwide look to fiscal stimulus to support the re-opening of economies, we believe that companies addressing the SDGs are best placed to benefit - and in doing so, they can help shape a sustainable future for all.

Read our full Federated Hermes Impact Opportunities Fund H1 2020 report, to find out more about our recent activity and performance, our engagement progress, and how we have been investing in pandemics through our impact themes.

 

Ingrid Kukuljan, Head of Impact Investing, Federated Hermes

 

 

 

 

 

 

 

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.

For professional investors only. This is a marketing communication. This document does not constitute a solicitation or offer to any person to buy or sell any related securities, financial instruments or products; nor does it constitute an offer to purchase securities to any person in the United States or to any US Person as such term is defined under the US Securities Exchange Act of 1933. It pays no regard to an individual's investment objectives or financial needs of any recipient. No action should be taken or omitted to be taken based on this document. Tax treatment depends on personal circumstances and may change. This document is not advice on legal, taxation or investment matters so investors must rely on their own examination of such matters or seek advice. Before making any investment (new or continuous), please consult a professional and/or investment adviser as to its suitability. All figures, unless otherwise indicated, are sourced from Federated Hermes. All performance includes reinvestment of dividends and other earnings.

Federated Hermes Investment Funds plc ("FHIF") is an open-ended investment company with variable capital and with segregated liability between its sub-funds (each, a "Fund"). FHIF is incorporated in Ireland and authorised by the Central Bank of Ireland ("CBI"). FHIF appoints Hermes Fund Managers Ireland Limited ("HFMIL") as its management company. HFMIL is authorised and regulated by the CBI.

Further information on investment products and any associated risks can be found in the relevant Fund's Key Investor Information Document ("KIID"), the prospectus and any supplements, the articles of association and the annual and semi-annual reports. In the case of any inconsistency between the descriptions or terms in this document and the prospectus, the prospectus shall prevail. These documents are available free of charge (i) at the office of the Administrator, Northern Trust International Fund Administration Services (Ireland) Limited, Georges Court, 54- 62 Townsend Street, Dublin 2, Ireland. Tel (+ 353) 1 434 5002 / Fax (+ 353) 1 531 8595; (ii) at https://www.hermes-investment.com/ie/; (iii) at the office of its representative in Switzerland (ACOLIN Fund Services AG, Leutschenbachstrasse 50, CH-8050 Zurich www.acolin.ch). The paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1/am Bellevue, P.O. Box, CH-8024 Zurich.

Issued and approved by Hermes Fund Managers Ireland Limited ("HFMIL") which is authorised and regulated by the Central Bank of Ireland. Registered address: The Wilde, 53 Merrion Square, Dublin 2, Ireland. HFMIL appoints Hermes Investment Management Limited ("HIML") to undertake distribution activities in respect of the Fund in certain jurisdictions. HIML is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. Telephone calls will be recorded for training and monitoring purposes. Potential investors in the United Kingdom are advised that compensation may not be available under the United Kingdom Financial Services Compensation Scheme.



[1] "Brown to green: The G20 transition towards a net-zero emissions economy, 2019," published by Climate Transparency in 2019.

[2] Source: World Green Building Council, as at September 2019.

[3] "The Global Risks Report," published by the World Economic Forum in January 2020.

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