Harvard Case - Federated Hermes - Improving ESG Through Active Engagement with Portfolio Companies
"Federated Hermes - Improving ESG Through Active Engagement with Portfolio Companies" Harvard business case study is written by Kenneth Goh, Jovina Ang. It deals with the challenges in the field of Business Ethics. The case study is 11 page(s) long and it was first published on : Aug 30, 2021
At Fern Fort University, we recommend that Federated Hermes implement a comprehensive ESG integration strategy across its investment processes and operations. This strategy should prioritize active engagement with portfolio companies to promote positive ESG practices, while also leveraging data and technology to enhance transparency and accountability.
2. Background
Federated Hermes, a leading global asset management firm, faces increasing pressure from investors to incorporate Environmental, Social, and Governance (ESG) factors into their investment decisions. The case study highlights the firm's efforts to develop a robust ESG strategy that balances financial returns with ethical considerations.
The main protagonists are:
- Federated Hermes: The asset management firm seeking to improve its ESG integration.
- Investors: Increasingly demanding ESG considerations in their investment portfolios.
- Portfolio Companies: Businesses that Federated Hermes invests in, who need to be engaged on ESG issues.
3. Analysis of the Case Study
This case study can be analyzed using the Stakeholder Theory framework, which emphasizes the importance of considering the interests of all stakeholders in decision-making. This includes:
- Investors: Seeking ethical and sustainable investments.
- Portfolio Companies: Need to be incentivized to improve their ESG performance.
- Employees: Benefit from a strong ESG culture and responsible business practices.
- Communities: Impacted by the operations of portfolio companies.
- Environment: Affected by the environmental impact of portfolio companies.
Federated Hermes faces several challenges in implementing its ESG strategy:
- Measuring and Assessing ESG Performance: Developing robust metrics to evaluate ESG performance across diverse industries and geographies.
- Engaging with Portfolio Companies: Effectively communicating ESG expectations and encouraging positive change.
- Balancing Financial Returns with ESG Considerations: Ensuring that ESG integration does not compromise investment performance.
- Transparency and Reporting: Clearly communicating ESG efforts and progress to stakeholders.
4. Recommendations
Federated Hermes should implement the following recommendations to improve its ESG integration:
- Develop a Clear ESG Policy and Framework: Articulate a comprehensive ESG policy that defines the firm's commitment to ESG principles, outlines specific goals and targets, and establishes clear expectations for portfolio companies.
- Enhance ESG Integration into Investment Processes: Incorporate ESG factors into investment analysis, portfolio construction, and risk management processes. Develop robust ESG scoring systems and utilize data analytics to identify companies with strong ESG performance.
- Implement Active Engagement Strategies: Engage with portfolio companies on ESG issues through dialogue, shareholder resolutions, and collaborative initiatives. Employ a multi-pronged approach that combines constructive dialogue with the potential for divestment in cases of significant ESG concerns.
- Leverage Technology and Data Analytics: Utilize data analytics platforms to monitor ESG performance, identify ESG risks and opportunities, and facilitate transparent reporting.
- Foster Transparency and Accountability: Publish regular ESG reports that provide detailed information on the firm's ESG efforts, investment strategies, and engagement activities.
- Develop a Robust Whistleblower Program: Establish a confidential and accessible channel for employees and stakeholders to report concerns related to ESG violations or unethical practices.
- Collaborate with Industry Peers and Stakeholders: Engage in industry-wide initiatives and partnerships to promote best practices and raise the bar for ESG performance.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: Integrating ESG into investment processes aligns with Federated Hermes' mission to deliver long-term value for investors while promoting responsible investment practices.
- External Customers and Internal Clients: Investors are increasingly demanding ESG considerations, and employees are more likely to be engaged in a company that prioritizes ethical conduct and sustainability.
- Competitors: Many asset management firms are already incorporating ESG into their investment strategies, making it essential for Federated Hermes to remain competitive.
- Attractiveness ' Quantitative Measures: Studies have shown that companies with strong ESG performance often outperform their peers financially, demonstrating the potential for both ethical and financial returns.
6. Conclusion
By implementing these recommendations, Federated Hermes can establish itself as a leader in ESG investing, attract a growing pool of investors seeking ethical and sustainable investment options, and contribute to positive change in the global marketplace.
7. Discussion
Other alternatives not selected include:
- Passive ESG Investing: Investing in index funds or ETFs that track companies with strong ESG ratings. This approach offers less control over engagement with portfolio companies.
- ESG-Focused Investing: Investing solely in companies with strong ESG performance, potentially limiting investment opportunities.
Risks and key assumptions:
- Greenwashing: Companies may overstate their ESG performance to attract investors.
- Data Availability and Quality: Reliable and consistent ESG data may be limited for some companies.
- Financial Returns: ESG integration may not always lead to higher financial returns in the short term.
8. Next Steps
Federated Hermes should prioritize the following steps to implement its ESG strategy:
- Develop a detailed implementation plan: Outline specific timelines, resources, and key performance indicators for each recommendation.
- Establish an ESG committee: Assemble a cross-functional team to oversee the implementation of the ESG strategy.
- Engage with stakeholders: Communicate the ESG strategy to investors, portfolio companies, employees, and other stakeholders.
- Monitor progress and make adjustments: Regularly review the progress of the ESG strategy and make necessary adjustments based on performance and feedback.
By following these steps, Federated Hermes can effectively integrate ESG into its investment processes and operations, contributing to a more sustainable and ethical future for the global financial system.
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Case Description
This case study is set in May 2021. It describes how Sarah Lee, Director of Engagement at Federated Hermes (FH) has been engaging with Ruby Goods (Ruby), a consumer goods company that operates in Asia, Europe, Latin America and the United States, to reduce greenhouse gas (GHG) emissions in its dairy operations. The case illustrates how an external stakeholder, an investment management company with minimal formal organisational authority, can influence and drive ESG (environmental, social and governance) performance improvements. While Lee was successful in getting Ruby to streamline its ESG approach and establish the Ruby Corporate Responsibility Council to drive company-wide ESG initiatives, she encountered resistance from Ruby's senior management and the board to commit to the more ambitious science-based targets critical for achieving carbon neutrality by 2050. What should she do to pressure Ruby's senior management into commitment and action while preserving FH's carefully cultivated relationships with Ruby's senior management?
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