Federated Hermes calls out ‘trilemma’ of crises facing energy

The stewardship team at US asset manager Federated Hermes has identified climate change action and biodiversity as key causes for engagement moving forward, with a focus on the “trilemma” of energy insecurity, rising costs and the risks of climate change itself.

The assessment was made as Federated Hermes’ stewardship programme EOS launches its 2023 Engagement Plan. EOS represents client assets of $1.3trn.

Bruce Duguid, head of stewardship at Federated Hermes EOS, said: “The post-pandemic recovery has led to energy shortages, and also the impact of extreme weather events has partly contributed to rising energy costs and inflation. This creates and highlights the energy trilemma; considering how to achieve decarbonisation, doing so at low cost, and also with energy security.

“A potential challenge to climate action in the short term will be changes that companies need to make in order to react to shortages of energy. However, in the medium term, we see this as actually accelerating the transition away from fossil fuel resources.”

The EOS report also identified further points of engagement for Federated Hermes. For instance, EOS will now expect companies to develop a diversity strategy and action plan to close the ethnic pay gap and achieve proportionate ethnic and gender representation.

When asked by Net Zero Investor on how EOS may be able to assess a company on such a wide range of issues from diversity to decarbonisation, Amy Wilson, Federated Hermes EOS European engagement lead, said: “It’s not our view that good performance in one area cancels out or negates room for improvements in other areas.

“The general principle would be that potentially many issues might be material. Just because a company was doing well on gender diversity, it doesn’t mean that we wouldn’t hold them to account if they weren’t performing well on climate. We would look at those things based on what's material for the company.”

Further points of engagement identified by EOS included seeking robust board oversight and management by companies of the most material long-term drivers of sustainable wealth creation. Additionally, EOS directed Federated Hermes to focus on breaches of the UN Global Compact principles for human rights, including considering voting against directors if a company lags on human rights benchmarks.

Focus on biodiversity

Coupled with climate change, Duguid was also keen to emphasise Federated Hermes’ focus on biodiversity. Statistics were cited, such as one in eight species currently under threat of extinction, and areas of issue were identified, such as the meat industry being a major cause of worldwide deforestation.

“EOS has identified a three-step process. We want companies to identify, assess and measure the impacts and dependencies of biodiversity. It's a complicated area, so understanding and mapping this does take time. We also want companies to understand the impacts. We then want to see a reduction in those impacts,” said Duguid.

An example of engagement from EOS is with footwear manufacturer Adidas, which last year achieved certification from the Science-Based Targets initiative, affirming that its emissions-reduction targets are aligned with a 1.5°C scenario.

Federated Hermes has also been engaging with Brazilian oil and gas giant Petrobas, including working with the company on governance of its subsidiaries and joint ventures and issues such as board composition and effectiveness.

Last year, Federated Hermes were signatory to a letter that called on UK prime minister Rishi Sunak to uphold and accelerate the delivery of the country’s net-zero commitment.