For professional investors only

ESG AND INVESTMENT EFFICACY

HERMES INVESTMENT MANAGEMENT

29 April 2019

Will Pomroy, Director, Engagement

OUTCOMES BEYOND PERFORMANCE

Our approach to holistic returns means we are committed to delivering excellent long-term investment performance and stewardship, while improving the lives of many

1

Source: Hermes as at 31 December 2018. 1 Thematic AUM is also included under equities, credit and private markets.

Investment strategies and stewardship services

LISTED EQUITIES SPECIALIST FIXED INCOME PRIVATE MARKETS THEMATIC1

Strategies

Global Equities

Global Emerging Markets

Asia ex Japan

European Equities

Smaller Companies

Impact Opportunities

SDG Engagement

Investment Grade

Global High Yield

Multi Strategy Credit

Absolute Return Credit

Direct Lending

Real Estate Debt

Other unconstrained credit

Real Estate

Infrastructure

Private Equity

Socially Responsible Investment

ESG Driven Investing

Impact Investing

Impact through Engagement

AUM US$22.1bn / £17.4bn / €19.4bn US$3.6bn / £2.9bn / €3.2bn US$16.9bn / £13.2bn / €14.7bn US$5.6bn / £4.4bn / €4.9bn

Approach to ESG Factors

Investment process integrates ESG leveraging quantitative ESG analysis and Hermes EOS engagement

Responsible and sustainable investment approach across all private markets

capabilities

Tailored, specialist strategies designed to meet specific SRI,

ESG and Impact-related objectives

Stewardship

Investment insights generated by Hermes EOS through its range of active ownership services:

Stewardship and stakeholder engagement services

Public policy advocacy

Hybrid investment and stewardship mandates

US$496.0bn / £389.4bn / €433.9bn

2 3 41

5

2

Source: 2018 Global Sustainable Investment Review.

Significant growth in “ESG assets” and also growth in real substantive attention given to ESG by investment analysts and clients

2018 $444.26 $1,017.66 $1,841.87 $4,679.44 $9,834.59 $17,543.81 $19,770.96

2016 $248.47 $276.16 $818.01 $6,195.40 $8,385.17 $10,353.20 $15,063.57

Growth 2016-18 79% 269% 125% -24% 17% 69% 31%

CAGR 33.7% 92.0% 50.1% -13.1% 8.3% 30.2% 14.6%

ESG is moving into the mainstream

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$0

$5.000

$10.000

$15.000

$20.000

Impact/communityinvesting

Sustainabilitythemed

investing

Positive/best-in-class-

screening

Norms-basedscreening

Corporateengagement

and shareholderaction

ESGintegration

Negative/exclusionary

screening

Bill

ion

s

Spectrum of ESG integration across strategies

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Engagement, stewardship and advocacy

Exclusion based

► SRI strategies

► Low carbon

ESG Aware

► Multi asset credit

► Multi asset inflation

► Direct lending

ESG Momentum

► Global equity ESG

Integrated ESG

► Global equity

► Regional equity

► Liquid credit

► Environmental private equity

Impact

► Impact Opportunities

► SDG Engagement

Hybrid ESG & Engagement

► Global equity/HEOS

All strategies exclude cluster munitions and anti-personnel land mines

Additional specific exclusions based on client objectives

Customised mandates and benchmarks created

Strategies take ESG factors into consideration, but have limited influence on decisions

Strategies use proprietary data to identify companies with improving ESG credentials

ESG data and qualitative insights are integral to the investment process

Engagement integral to generating value

ESG data and proprietary engagement insights are central to security selection

Companies’ impact on UN SDGs assessed and reported

Engagement integral to generating value

ESG data and qualitative insights are integral to the investment process

Engagement provided across the client’s entire equity portfolio by HEOS, independent of the investment mandate

Spectrum of ESG integration across strategies

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Exclusion based

► SRI strategies

► Low carbon

ESG Aware

► Multi asset credit

► Multi asset inflation

► Direct lending

ESG Momentum

► Global equity ESG

Integrated ESG

► Global equity

► Regional equity

► Liquid credit

► Environmental private equity

Impact

► Impact Opportunities

► SDG Engagement

Hybrid ESG & Engagement

► Global equity/HEOS

All strategies exclude cluster munitions and anti-personnel land mines

Additional specific exclusions based on client objectives

Customised mandates and benchmarks created

Strategies take ESG factors into consideration, but have limited influence on decisions

Strategies use proprietary data to identify companies with improving ESG credentials

ESG data and qualitative insights are integral to the investment process

Engagement integral to generating value

ESG data and proprietary engagement insights are central to security selection

Companies’ impact on UN SDGs assessed and reported

Engagement integral to generating value

ESG data and qualitative insights are integral to the investment process

Engagement provided across the client’s entire equity portfolio by HEOS, independent of the investment mandate

Engagement, stewardship and advocacy

We have been leveraging our market leading engagement capability to enhance our investment performance for some time

Source: Hermes as at 31 December 2018.

Comprehensive ESG and engagement integration

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Hermes EOS: Dedicated stewardship team

► 21 engagement professionals

► Circa $500bn assets represented

► Engaging with 700+ companies on 2,000+ objectives

Portfolio Managers

► $34bn assets under management

► 112 investment professionals

► Equity, fixed income and real estate

Public ESG data sources

Hermes ESG analytics

Extracting maximum value from ESG data

Proprietary ESG dataset

Qualitative & quantitative data incorporating engagement insight

Regular two-way dialogue between engagement team & portfolio

managers sharing respective insights –enhancing investment decisions and

robustness of engagements

For illustrative purposes only.

Investment in developing ESG analytics

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FTSE 100 FTSE 250 FTSE SmallCap

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S&P 500 Russell 2500

The disparity between larger and smaller companies regarding basic ESG disclosures is striking

Source: Bloomberg, December 2018.

But: ESG disclosures: consistently inconsistent

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Source: “Ratings that don’t rate: the subjective world of ESG ratings agencies”, by Timothy Doyle, Published by the American Council for Capital Foundation, July 2018.

Serious ESG analysis cannot, and should not, be outsourced

Researchers have identified four failings of ESG ratings which are amplified in SMID universe:

1. Market-cap biascompanies with more communication resources score better (broadly holds true in Denmark too)

2. Geographic biasnational regulatory requirements drive disclosure levels and scores reward disclosure

3. Industry biasratings do not discern between very different business models in same industry and more mature and regulated industries scorehigher

4. Reactivityratings are dragged down for an extended period following a controversy

Therefore…..ratings present an imperfect picture

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Source: Hermes. For illustrative purposes only.

We believe that considering and speaking with companies about their environmental, social and governance issues helps us identify small firms with big futures

Can ESG issues can be factored into investment appraisal?

► Explicit adjustment to revenues or costs

► More likely, less explicit influence on conviction level and market rating

Can positive change be brought about through engagement?

► Ongoing contact provides further qualitative insights into the company which influences ongoing holding size

Getting to the source

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It’s your story

► Companies should be more confident in asserting those ESG issues they believe are material

− Materiality is a loaded term, however, management know the issues they face best

► Providing better information on fewer issues is likely to be more highly valued

− Less is more and is certainly more likely to be read!

► Investors communications have multiple channels - be consistent throughout:

− annual reports, sustainability reports, quarterly results, analyst calls, capital markets days, roadshows

Companies should set the agenda

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If a company fails to use the opportunities they have to set the agenda and convey performance on business relevant sustainability matters they should not be surprised if the investor audience fails to give them the credit they believe they deserve

APPENDIX

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A 2015 meta-study compared the output of over 200 academic studies, industry reports and books

Source: Clark, G.L., Feiner, A., & M. Viehs (2015). “From the stockholder to the stakeholder: How sustainability can drive financial outperformance”. Available on SSRN.

The body of research supporting ESG as a driver of performance continues to grow

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Corporate cost of capital

90% of the cost of capital studies show that sound ESG standards lower the cost of capital

Operational performance

88% of the reviewed studies show that solid ESG practices result in better operational performance

Stock market performance

80% of the studies show that stock price performance is positively influenced by good CSR practices

A pricing model for ESG risks

► Proprietary model shows correlations between QESG Scores and CDS spreads

► Enables us to calculate the marginal price for the ESG risks of companies

► Anticipate the change in valuations as a company moves along the ESG Credit Curve

An informative screening tool

► Avoid issuers with tight spreads and low QESG scores

► Favour issuers with wide spreads and high QESG scores

Implied CDS spreads v QESG scores

Anticipating the transitions between ESG and Credit risk

Source: Hermes, Bloomberg as at 30 June 2018. For illustrative purposes only.

Our proprietary research has found ESG to be equally important in credit markets

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1,15

1,25

1,35

1,45

1,55

1,65

1,75

1,85

1,95

100 90 80 70 60 50 40 30 20 10 0

Ratio t

o h

ighest

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For professional investors only. This document does not constitute a solicitation or offer to any person to buy or sell any related securities, financial instruments or financial products. 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. Any opinions expressed may change. All figures, unless otherwise indicated, are sourced from 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.

The main entities operating under the brand ”Hermes” or “Hermes Investment Management” are: Hermes Investment Management Limited (“HIML”); Hermes Fund Managers Ireland Limited (“HFM Ireland”); Hermes Alternative Investment Management Limited (“HAIML”); Hermes European Equities Limited (“HEEL”); Hermes Real Estate Investment Management Limited (“HREIML”); Hermes Equity Ownership Limited (“HEOS”); Hermes GPE LLP (“Hermes GPE”); Hermes GPE (USA) Inc. (“Hermes GPE USA”) and Hermes GPE (Singapore) Pte. Limited (“HGPE Singapore”). HIML, HAIML and HEEL are each authorised and regulated by the Financial Conduct Authority. HAIML and HIML carry out regulated activities associated with HREIML. HIML, HEEL, Hermes GPE and Hermes GPE USA are each a registered investment adviser with the United States Securities and Exchange Commission (“SEC”). HGPE Singapore is regulated by the Monetary Authority of Singapore. HFM Ireland is authorised and regulated by the Central Bank of Ireland. HREIML and HEOS are unregulated and do not engage in regulated activity.

Issued and approved by Hermes Investment Management Limited which 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.

Important information

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Hermes Investment Management

We are an asset manager with a difference. We believe that, while our primary purpose is to help savers and beneficiaries by providing world class active investment management and stewardship services, our role goes further. We believe we have a duty to deliver holistic returns – outcomes for our clients that go far beyond the financial – and consider the impact our decisions have on society, the environment and the wider world.

Our goal is to help people invest better, retire better and create a better society for all.

Our investment solutions include:

Private marketsInfrastructure, private debt, private equity, commercial and residential real estate

High active share equitiesAsia, global emerging markets, Europe, US, global, small and mid-cap and impact

Credit Absolute return, global high yield, multi strategy, global investment grade, unconstrained, real estate debt and direct lending

StewardshipActive engagement, advocacy, intelligent voting and sustainable development

OfficesLondon | Denmark | Dublin | Frankfurt | New York | Singapore

For more information, visit www.hermes-investment.com or connect with us on social media: