Martin Jarzebowski is director of ESG and responsible investing at Federated Hermes. He talks to <I>Ben Ashwell</I> about the importance of proprietary ESG research and why engagement is the future of responsible investing
Martin Jarzebowski is director of ESG and responsible investing at Federated Hermes. He talks to Ben Ashwell about the importance of proprietary ESG research and why engagement is the future of responsible investing
We have more than 60 global team members deployed across engagement, stewardship and our responsibility office.
I joined Federated Hermes in 2008 and was an equity portfolio manager and vice president prior to my current role as director of the responsible investing office.
Our responsible investing office oversees the company-wide integration of proprietary ESG analytics as well as active engagement across all asset classes and 30 global investment teams. We are a multi-disciplinary ESG hub responsible for ESG integration, thought-leadership and corporate responsibility.
[Our stewardship group] EOS is a pioneer in active engagement with $1.1 trillion in assets under stewardship, a 15-year database and one of the largest engagement teams in the industry. Our dedicated engagers are ESG experts who maintain a high-touch and long-term collaborative dialogue with the senior leadership of thousands of corporate issuers around the world.
I like to characterize our platform as 360-degree engagement, which includes ESG, fundamental and proxy engagement. To be effective, each of the components requires different skill-sets, which is why we have assembled a fleet of global engagers with deep thematic ESG and sector expertise.
We are directly engaging with multiple corporations every single day on material ESG issues. It’s not just periodic letter writing or something conducted only during proxy season. Engagement and stewardship are key ingredients in our company-wide ESG integration strategy, which includes both engagers and investment teams across all asset classes.
We cross-pollinate the unique ESG insights from the active engagers with the fundamental views of our portfolio managers and analysts. Think of it as combining the best of both worlds.
Portfolio managers and analysts typically interact with investor relations and the chief financial officer while our ESG engagers regularly meet with board directors, C-suite and sustainability officers. By combining multiple vantage points of deep primary research, we get a more comprehensive understanding of any issuer’s ESG risks to help uncover mispriced opportunities.
We have varying degrees of intensity that are determined on a case-by-case basis. Consistent interaction with a variety of directors and senior leadership is key to understanding an organization’s ESG trajectory. One engagement per year to help inform proxy voting is not enough to formulate any meaningful insight or effectively advocate for positive change. It’s very common for a lead EOS engager to interact with a single company more than four times in a given year, having forged a long-term relationship with more than a decade’s worth of meetings. That’s a true collaborative dialogue that can result in positive ESG outcomes. It also serves as the cornerstone of our engagement database.
Our investment teams are equipped with a full suite of proprietary ESG data analytics, which reside directly on the desktop of every portfolio manager and analyst across all asset classes. The ESG toolkit consists of issuer-level and portfolio-level analytics. For example, we have our Federated Hermes QESG score and ESG dashboard, which use 10 leading ESG data vendors combined with our unique engagement database to provide a comprehensive profile of approximately 13,000 companies around the world.
Our data scientists also built a corporate governance tool, a carbon footprint tool and engagement analytics that drill down into a company’s unique E, S, and G characteristics to identify momentum and red flags and how that firm compares with its industry peers.
Third-party providers have done a great job of efficiently analyzing company filings and websites to gather ESG data. Most people forget, however, that they were designed as corporate disclosure aggregators and not for alpha generation, so they provide a good starting point for deeper ESG due diligence to occur. Outsourcing all of your ESG research to a single third-party data provider is becoming one-dimensional and eventually may be commoditized by passive index products.
There is no substitute for having in-house ESG subject matter experts who go directly to the source to make a well-informed assessment of the material ESG risks and opportunities present with that issuer. If third-party data is ESG 1.0, then active engagement is ESG 3.0.
Our investment teams are using our ESG toolkit, engagement and due diligence to uncover mispriced ESG risk. For example, active bond investors look for opportunities that are not fully reflected in a credit agency rating. The same logic applies to ESG research when you have a more proactive and forward-looking understanding of the ESG progress made at an issuer.
We are seeing increasing evidence that supports greater alpha opportunity in companies exhibiting ESG momentum in the form of ESG rating upgrades, then only investing in a company widely considered an ESG leader by the broad market. It’s not where you’ve been, it’s where you’re going. Ultimately, our fixed-income teams want to ensure they are being fairly compensated for ESG risk.
All of the Federated Hermes investment teams have a customized ESG integration strategy that serves as a natural extension of their fundamental process. This applies to fixed income, liquidity, alternatives and private markets. Many of those market segments don’t have robust third-party data, which is why we focus on in-house ESG research based on materiality and engagement. For example, our US High Yield Bond team built its own ESG scoring framework and developed a proprietary DESG score to assess debtholder stewardship.
All credit teams are equipped with proprietary tools to assess material risk for both the security and the issuer. It’s important to note that our engagers from EOS directly engage with the issuer, sponsor and obligor, irrespective of security type, which provides unique ESG insights that can be leveraged across all asset classes. Most investor relations departments have been conditioned to discuss ESG from a shareholder and proxy standpoint, but the pendulum is moving toward a more holistic discussion with investors from both sides of the capital structure.
ESG is not a one-size-fits-all space. We believe different industries have different business models, fundamental drivers and valuation techniques, so why would they be exposed to the same ESG issues? They’re not. Our investment teams focus on the relevant and financially material ESG risk for the industries they cover and, concurrently, our EOS engagers focus on material engagement objectives.
I do believe that. I’m not sure when, but it’s logical that regulators will adopt a materiality framework such as SASB’s for corporate reporting. It would certainly go a long way to reduce the reporting confusion and improve comparability among industry participants.
Also, it would set more of a level playing field for corporations of varying sizes and resources to focus on relevant ESG issues and reduce the cost of generating voluminous and glossy sustainability reports. Sometimes less is more.
The demand for graduate education in sustainability continues to rise. When I was in grad school you could find courses in corporate governance, but few business programs were making the direct connection to environmental and social considerations in their finance curriculum. Partnering with the University of Rochester Simon Business School to help teach sustainable finance and supervise ESG investing research has been very rewarding. We focus on the practical application of bridging the gap between sustainability and investing. I envision our students managing ESG funds and running the sustainability offices of Fortune 500 companies. My job is to prepare the next generation of responsible investors and responsible corporate leaders.
Hear more from Martin Jarzebowski on the latest Governance Matters podcast here