Hermes Investment Management has published its latest Responsible Property Investment (RPI) report From climate risks to positive impacts: Time for action. The report calls on the industry to take action now, and highlights the Paris Agreement including the Climate Development Goals. They report also focuses on Hermes’ approach to responsible property investment governance, strategy and management.
Time for Action – Paris Climate Agreement
The Paris Climate Agreement demonstrated a clear shift in perceptions among the institutional investment community. There is now a sense among institutional investors that to finance the necessary transition to a low carbon economy, and the adaptation to the physical effects of climate change, requires a significant re-allocation and scaling up of current private efforts.
Despite this significant progress, however, many investors have yet to fully integrate environmental, social and governance (ESG) issues into their investment decision-making processes due to structural barriers as well as cultural issues which are preventing this transformation in practice. Hermes Investment Management believes investors have a positive duty to incorporate ESG risks into their investment practices and proactively engage with companies on these issues.
Managing climate risks and opportunities: Hermes approach
RPI has been a long-term priority for Hermes Investment Management, including mitigating the risks of carbon over the next 20 to 30 years. It has explored and developed a range of decarbonisation activities across the real estate asset classes it invests in, which would be applicable for the wider investment community.
There are four elements to Hermes Investment Management’s strategy to manage these risks including:
- Portfolio managers being aware of the carbon in their portfolios, which investments are the largest contributors and what are the associated carbon risks.
- Portfolio and specific investment decisions must be made using this data as another measure of risk.
- Directly-owned assets should be managed where funds hold assets with significant carbon risk.
- Finally, to engage with public policymakers and sector organisations to support the wider market transformation of the industry.
Continuous performance: Delivering positive impacts
Beyond the medium to long term impacts of climate risks and opportunities, we work to deliver continuous performance today. At Hermes we believe that in addition to delivering excellent performance returns to our clients and beneficiaries, we must equally aim to invest for the benefit of the broader society in which we operate. We have these additional responsibilities because our activities will have impacts on the world in which our beneficiaries live and work today as well as the one in which they will retire into tomorrow. A principle which guides our actions is therefore the aim to deliver holistic returns.
For real estate this means that as well as achieving a nominal financial return we also seek to deliver and manage sustainable cities, communities and buildings, communities which have positive social impact through education and job opportunities and energy efficiency and low carbon buildings.
The report draws on case studies to illustrate this approach in practice:
- Sustainable place making for the future at King’s Cross Central in London;
- NOMA sympathetic regeneration in Manchester to a create a new smart, digital and sustainable neighbourhood, and,
- Driving positive socio economic impacts in our communities through the active management of our shopping centres.
Saker Nusseibeh, Chief Executive Officer, Hermes Investment Management, commented: “Responsibility is ingrained in our DNA, and creating the right outcomes from our investment decisions is of vital importance. The right outcomes on a 30-year time horizon are those that mitigate risk, including carbon risk. This report highlights the importance of integrating environmental, social and governance issues into investment decision making and the welcome shift in perceptions that is taking place among institutional investors to do so. We now need to see action.”
Pension beneficiaries do not only want a good return on investment, they also want a decent and affordable economy to spend it in. Ultimately achieving this mission will mean putting the interests of clients and their underlying beneficiaries’ front and centre, stretching time horizons beyond quarterly performance figures and even beyond the tenure of a traditional mandate.
Chris Taylor, Head of Private Markets of Hermes Investment Management, said: “If we are to think about the future, rather than benchmark against the past, we as an industry need to change our approach to investment, ensuring that environmental, social and governance issues are integrated into investment processes across the sector. Hermes continues to champion these issues and to incorporate them into our investment strategy. This can be seen most clearly in our biggest regeneration projects – King’s Cross in London, NOMA in Manchester, Paradise in Birmingham and Wellington Place in Leeds – which benefit the communities and deliver responsible and sustainable investment returns. This report gives our strongest call yet for the industry to follow suit.”