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Excellence. Responsibility. Innovation.

Integrating ESG risks into our investments

For professional investors only www.hermes-investment.com

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Integrating ESG risks into our investments 2015

Contents

03 Responsibility: A core value 03 Our ESG heritage 04 Record of responsibility

06 ESG integration 06 Responsible property investment 07 The regeneration of King’s Cross 08 Proprietary ESG intelligence 08 Analysing stock-specific

ESG risks 08 Wal-Mart: It pays to

shop around 08 Detecting ESG risk

in portfolios 09 China Mengniu Dairy:

Noxious to nutritious 09 Sports Direct: Playing a team game

10 Pioneering stewardship 10 Reducing risk at BG Group 10 Engagement and voting 12 The impact of engagement 12 Advocacy 12 Our governance

13 Sustainable progress

www.hermes-investment.com | 3

Hermes Investment Management

We believe that companies with strong governance and astute management of their environmental and social responsibilities, such as emissions control or labour rights, not only make a more positive contribution than those that do not, but also provide greater long-term value for shareholders.

To put this belief into practice, we analyse the financial, environmental, social and governance risks that our investments are exposed to, and exercise shareholder voting rights. We also engage with companies, becoming more active when investor involvement can clearly contribute to better long-term performance. By participating in public policy debates, we work to ensure that the global financial system operates in the interests of ultimate asset owners rather than their various agents. By such means, we aim to contribute to the overall success of the economy within and beyond the timeframe of our investment mandates, because this is important to our clients and helps to deliver strong long-term returns. To align our interests with those of clients, senior investment managers co-invest in the funds they oversee and their bonuses are linked to long-term performance and responsibility targets. The Hermes Investment Office acts as a champion for clients by independently reviewing and, where appropriate, challenging the management of our funds.

Our responsibility to clients, including the 320,000 pension fund beneficiaries that ultimately own our business, is realised in three principal ways:

�� Financial analysis of companies and assets, to identify the most attractive long-term investments

�� Integration of ESG risks into investment decisions, to ensure that we are informed but not constrained by ESG considerations

�� Shareholder voting, engagement, and publicly policy work to promote the long-term interests of shareholders

Here we discuss a fundamental part of our responsibility to clients: integrating ESG risks into investment decisions.

“We will always act in the interest of clients and their beneficiaries: to maximise long-term value while striving to improve the society they live in through our investment decisions.”Saker Nusseibeh,Chief Executive Officer, Hermes Investment Management

Our ESG heritageHermes’ focus on ESG risk began in the early 1990s, when Alastair Ross-Goobey, then CEO of Hermes’ forerunner PosTel, wrote to the chairman of each FTSE 100 company seeking shorter contracts for CEOs. Later, we definitively stated what we expect of listed companies, and what listed companies should expect of us, in the Hermes Principles.

We then launched Hermes Equity Ownership Services (Hermes EOS), a pioneering engagement service that acts on behalf of investors to increase long-term value by improving the strategic and ESG performance of companies. It is now one of the largest shareholder stewardship resources in the world. With more than £120.3bn in assets under advice and a large team speaking a breadth of languages and applying diverse business skills, it is a hugely important resource both to clients and to Hermes’ investment teams.

Since our real estate team defined the responsible property investment (RPI) principles that it instils in its investment process, it has been at the forefront of sustainable property development and management practices aiming to benefit investors, communities and the environment. More recently, our global equities team has developed ESG risk analysis tools that combine proprietary research and engagement data from Hermes EOS with leading external research. These tools, which assess stock-specific and portfolio-wide ESG risks, are used by all of our investment teams.

Responsibility: A core valueWe aim to deliver sustainable, risk-adjusted outperformance to clients for the long term. Our approach to responsibility is critical to achieving this.

Our long-term ownership of investments and strong alignment with the chief objectives of our clients – the long-term, sustainable growth of both shareholder wealth and the global economy – is fundamental to this.

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The landmark Hermes Principles explain what shareholders should expect of companies, and what companies should expect of shareholders

‘02

Alastair Ross-Goobey, then CEO of PosTel, the predecessor of Hermes, writes to FTSE 100 chairmen seeking shorter contracts for CEOs

1993

Hermes sets up a dedicated governance team to vote and selectively engage on BTPS’ investments

‘96

Hermes Real Estate establishes its first energy and policy strategy

‘97

Hermes Focus Asset Management is created to provide shareholder activism strategies to BTPS and other investors

‘98

Hermes Equity Ownership Services is founded, offering a stewardship service focused on voting and engagement on strategic and ESG matters to third-party institutional investors

‘04

Hermes Real Estate clarifies the responsible property investment principles to be embedded in the way it invests in the paper Defining the challenge

Hermes becomes a founding signatory of the United Nations Principles for Responsible Investment, after playing an integral role in their development

‘06

Hermes Real Estate publishes the inaugural Responsible Property Investment annual report, which reviews responsible investment initiatives in both the real estate sector and broader investment industry

‘07

The Hermes Responsible Ownership Principles are published to update the seminal 2002 Hermes Principles and include lessons from the financial crisis.

Hermes signs the UK Stewardship Code launched by the UK Financial Reporting Council

‘10

Saker Nusseibeh, Hermes CEO, founds the 300 Club. It is independent of Hermes but pursues a complementary mission by aiming to influence the investment industry to better serve clients

‘11

Hermes Global Equities is awarded a mandate customised to meet the ESG objectives of a large Australian SuperannuationFund

With Hermes EOS providing comprehensive engagement services, Hermes Focus Asset Management is sold

The ESG Dashboard, a proprietary ESG risk analysistool, is created for use by all Hermes investment teams inassessing company-specificESG matters

‘12

Hermes Emerging Markets is appointed to include ESG considerations and engagement in its investment activities by a leading US sustainability focused investor

The ESG Portfolio Monitor, alsoa proprietary analysis tool, is developed to enable Hermes’ investment teams to gauge portfolio-wide ESG risks

‘13

The Hermes Global Equity ESG Fund is launched. It invests in attractive companies exhibiting positive or improving ESG risk exposures

Hermes becomes a signatory to a number of agreements:

• Japan’s Principles for Responsible Institutional Investors • The Malaysia Stewardship Code, after helping to create the document• Statement on Fiduciary Duty and Climate Change Disclosure

2014

Record of responsibility



The landmark Hermes Principles explain what shareholders should expect of companies, and what companies should expect of shareholders

‘02

Alastair Ross-Goobey, then CEO of PosTel, the predecessor of Hermes, writes to FTSE 100 chairmen seeking shorter contracts for CEOs

1993

Hermes sets up a dedicated governance team to vote and selectively engage on BTPS’ investments

‘96

Hermes Real Estate establishes its first energy and policy strategy

‘97

Hermes Focus Asset Management is created to provide shareholder activism strategies to BTPS and other investors

‘98

Hermes Equity Ownership Services is founded, offering a stewardship service focused on voting and engagement on strategic and ESG matters to third-party institutional investors

‘04

Hermes Real Estate clarifies the responsible property investment principles to be embedded in the way it invests in the paper Defining the challenge

Hermes becomes a founding signatory of the United Nations Principles for Responsible Investment, after playing an integral role in their development

‘06

Hermes Real Estate publishes the inaugural Responsible Property Investment annual report, which reviews responsible investment initiatives in both the real estate sector and broader investment industry

‘07

The Hermes Responsible Ownership Principles are published to update the seminal 2002 Hermes Principles and include lessons from the financial crisis.

Hermes signs the UK Stewardship Code launched by the UK Financial Reporting Council

‘10

Saker Nusseibeh, Hermes CEO, founds the 300 Club. It is independent of Hermes but pursues a complementary mission by aiming to influence the investment industry to better serve clients

‘11

Hermes Global Equities is awarded a mandate customised to meet the ESG objectives of a large Australian SuperannuationFund

With Hermes EOS providing comprehensive engagement services, Hermes Focus Asset Management is sold

The ESG Dashboard, a proprietary ESG risk analysistool, is created for use by all Hermes investment teams inassessing company-specificESG matters

‘12

Hermes Emerging Markets is appointed to include ESG considerations and engagement in its investment activities by a leading US sustainability focused investor

The ESG Portfolio Monitor, alsoa proprietary analysis tool, is developed to enable Hermes’ investment teams to gauge portfolio-wide ESG risks

‘13

The Hermes Global Equity ESG Fund is launched. It invests in attractive companies exhibiting positive or improving ESG risk exposures

Hermes becomes a signatory to a number of agreements:

• Japan’s Principles for Responsible Institutional Investors • The Malaysia Stewardship Code, after helping to create the document• Statement on Fiduciary Duty and Climate Change Disclosure

2014

6


ESG considerations are also important for the following reasons:

�� Environment: the responses of governments and corporations to climate change, natural resource depletion, pollution and global energy needs materially impact both investment returns and society

�� Social: the observance of basic human and labour rights, developing the full potential of human capital and effectively combating bribery and corruption are essential for the long-term sustainability of companies

�� Governance: the quality of corporate governance within businesses is linked with better risk management, company performance and higher investment returns over long periods

Companies are primarily responsible for generating shareholder value and do not have limitless societal obligations. However, we believe that businesses must consider how their impact on society and the environment affects their long-term prospects. We expect them to successfully manage relationships with employees, suppliers, customers and other stakeholders with a legitimate interest in their activities. Externalities, such as environmental pollution, should be minimised because supporting negative practices – however indirectly – does not serve the interests of diversified, long-term investors or society.

We own extensive real estate and infrastructure assets and embed ESG considerations into our management of them. How sustainable and socially beneficial a property is, and can continue to be, will influence future occupancy rates, income and valuations. Such environmental and socioeconomic considerations inform Hermes’ RPI principles. To prudently manage infrastructure assets, including those that deliver vital energy and water services to the public, we appoint and monitor specialist operational teams and aim to maintain healthy relationships with key stakeholders.

Responsible property investmentThrough RPI, we aim to increase energy efficiency, minimise pollution, enhance liveability for occupants and to help improve the quality of life in the communities in which our buildings exist. This helps to increase the value of properties, retain tenants, reduce vacancy periods, lower operating costs and ultimately generate stronger income for investors.

Our clear RPI strategy – informed by key sustainability metrics, benchmarks, and tenant and community engagement programmes – is integrated into our property investment and management processes. Detailed reporting of important indicators – such as risk and safety processes, carbon emissions and waste – is used by all of the people involved in running the properties, from on-site facility managers to portfolio managers. This helps to monitor operations, identify additional projects – from engaging tenants to enhancing technology – and enables resources to be used more efficiently.

RPI is led by a dedicated staff member, practiced by the investment team and is overseen by Chris Taylor, CEO of Hermes Real Estate. In 2014, four of the team’s funds earned green stars from the Global Real Estate Sustainability Benchmark (GRESB) – the organisation’s highest accolade – proving that it is at the forefront of sustainable property management.

ESG integration Our ability to mitigate ESG risks, and to capture investment opportunities arising from these considerations, is essential to achieving consistent investment outperformance.

Through its approach to RPI, our real estate team participates in the following industry initiatives:

�� Chair of the property programme in the Institutional Investors Group on Climate Change

�� Co-chair of the property group of the UNEP Finance Initiative

�� Part of the European Sustainable Development Council of the Urban Land Institute

�� Part of the policy and sustainability committees of the British Property Foundation

�� Board member of the Better Buildings Partnership

�� Part of the advisory board of the Building Performance Institute Europe

�� Part of the advisory board of the Global Real Estate Sustainability Benchmark (GRESB)

�� Member of the technical committee of the IPD Eco-Portfolio Analysis Service



In 2008, Hermes Real Estate joined the landowners and their property development partner to create the new office and residential buildings, streets, major public spaces and refurbished historic buildings comprising London’s first new postcode in a century, N1C. The 67-acre site provides unique opportunities for urban regeneration, and also delivers considerable socio-economic benefits: cultural diversity, affordable housing, a creative industry hub, green and attractive public spaces and progressive utility solutions, such as a green energy centre. These developments also contribute to sustainable economic growth.

During development, a dedicated construction skills centre was established on York Way to ensure that local apprentices constituted at least 5% of the staff of all on-site operators. This target was achieved, and full-time jobs were secured at the end of the programme. After construction, a recruitment centre was opened in 2013 and appointed a staff comprised 35% of local people into jobs servicing the development.

The Central Saint Martins campus of the University of the Arts London has relocated to the area’s Granary Complex, bringing more than 6,000 students and increasing the creativity and diversity of the area. Office buildings are rented by businesses including the Guardian, Macmillan Science and Education publishing, Eurostar and High Speed 1, and a new community building for the local council, the London Borough of Camden, has also opened.

Local students visited the development site as part of lessons on geography, construction, enterprise and financial literacy, and a new primary school, nursery and community centre is under construction. The Frank Barnes School for Deaf Children has moved to the area, and social housing estates Rubicon Court and Saxon Court provide more than 300 homes to people in the community.

Heritage buildings fronting the area’s canal have been restored and converted into shops and restaurants. The two-acre Camley Street Natural Park, which also borders the waterway, and other new open spaces host recreation, arts, community engagement and horticulture activities.

The regeneration of King’s Cross In Victorian times, King’s Cross was an industrial centre. By the late 20th century, it had declined into the “railway lands”: a collection of disused buildings, railway sidings, warehouses and contaminated sites. The decision in 1996 to link the Channel Tunnel railway to St Pancras catalysed change and to capture the opportunities brought by a major transport hub, the landowners redeveloped the area.

Within N1C

2primary schools

10new public squares

45,000 people living,

working and studying

2,000new homes

300 social housing units

20new streets

1university

campus

2020

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Proprietary ESG intelligenceResearch by our stewardship team, and the unique insights that it acquires through engagement, help to inform our investment analysts and portfolio managers about ESG risks affecting the performance of companies.

Investment teams can also ask for further research on specific risks and suggest particular topics to be raised during engagements. This is complemented by frequent company-specific discussions and formal quarterly meetings between investment and stewardship teams to review portfolio ESG risk exposures and discuss engagement progress on current or prospective investments. Given Hermes’ long-term focus, both the potential for ESG risk at companies to improve or worsen, and the track records of management and boards, are assessed.

Two online, proprietary risk-management tools developed by our global equities team – the ESG Dashboard and ESG Portfolio Monitor – enable all of Hermes’ investment teams to pinpoint ESG risks and opportunities at both the company and portfolio levels.

Analysing stock-specific ESG risks Our ESG Dashboard delivers an immediate and thorough analysis of each listed company’s exposure to ESG risks. Key engagement insights and research and voting activity from our stewardship team is presented alongside data from specialist external researchers Sustainalytics, Trucost and Bloomberg.

Each company is compared against peers on a sector, region or global basis against generic ESG considerations, such as board structure, and industry-specific considerations, like energy efficiency

for transportation businesses. Our stewardship team’s controversy indicator, which spotlights elevated risks and progress on engagements aiming to mitigate them, is provided alongside links to the latest Controversial Company Report. The dashboard also connects with further internal and externally produced research.

A proprietary ranking, the QESG Score, conveys how well each company is managing ESG risk. Importantly, it includes the trend in ESG risk for each company: we believe that identifying change in ESG exposure is equally as important as determining the absolute level of risk. By detecting such change, the QESG Score can provide an early warning of harmful ESG performance, or signal a turnaround. It is a valuable input to investment decisions.

Detecting ESG risk in portfolios The Portfolio ESG Monitor gauges the aggregate ESG risk in the portfolios managed by each investment team in both absolute and benchmark-relative terms. It can break these measures down into either environmental, social or governance risks, and displays the ESG metrics for each portfolio company.

Similar to the dashboard, the monitor captures engagement and voting activity from our stewardship team and flags controversy indicators for individual companies. This proprietary information is combined with data from Sustainalytics, Trucost, Bloomberg and FactSet to provide a more comprehensive view of ESG risk. QESG Scores show the distribution of ESG risk in a portfolio and its benchmark. Scores are also shown for individual companies, enabling portfolio managers to focus on those exhibiting positive change and stocks with the greatest risk.

Wal-Mart: It pays to shop aroundTeam: Hermes Global Equities

Overview: Trading at an attractive valuation, the US retailer seemed a good investment until the ESG Dashboard flagged potent risks.

ESG considerations: In mid-2012, Wal-Mart was priced more cheaply than peers and was benefiting from positive sentiment. But the ESG Dashboard identified significant risks. Further inspection revealed why: the company is a perennial engagement target and features on our list of controversial companies. Ongoing labour rights disputes, resulting in high-profile lawsuits, and allegations of bribery and corruption in its Mexican, Brazilian, Indian and Chinese operations continued in defiance of its strict ethical guidelines. The company, meanwhile, appeared reluctant to engage and was sluggish in acknowledging the need to improve its ESG performance. (Wal-Mart has subsequently begun to engage positively with Hermes EOS.)

Decision: Our global equities team avoided the stock, judging that social and governance risks would undermine long-term shareholder value. Instead, it invested in CVS Caremark, a US retailer with similar performance characteristics that was mitigating ESG risks through engagement that Hermes EOS initiated.



China Mengniu Dairy: Noxious to nutritious

Team: Hermes Emerging Markets

Overview: With new management and a government focus on improving food safety, the company has recovered from a scandal to fast become a world-class consumer-goods producer.ESG considerations: In 2008, several infants died from drinking melamine-poisoned milk produced by 22 companies, including China Mengniu Dairy, and further cases of contaminated milk were reported in 2011. The dairy company’s management team was rightly fired over the tragedies and a former Coca Cola CEO took charge, appointing a team with international experience in production and distribution. So began the company’s turnaround story.Identifying this change, our emerging markets team invested in the stock in early 2012. Hermes EOS subsequently engaged the dairy producer and confirmed that it was implementing positive changes: a new quality-control division reporting directly to the CEO, the provision of detailed guidance to suppliers, moves to streamline sourcing in a market with an extremely fragmented supply chain, and greater use of third-party checks on product quality. These internal improvements occurred amid improving regulations about food safety. In 2013 the head of our emerging markets team visited one of China Mengniu Dairy’s milk-processing plants. He saw “spotless” new German and Swedish equipment automatically producing dairy goods that were tested twice for 100% purity before being packaged in containers that were digitally tagged. The machinery, sealed off from glass-enclosed walkways, was flushed clean every 24 hours.Driven by a better supply chain, a stringent focus on food safety and quality control, the promotion of its key brands and partnerships with Danone and Danish dairy company Arla, the company more than doubled in value from early 2012 to April 2014.

Sports Direct: Playing a team game

Team: Hermes Sourcecap

Overview: Our European equities team recognised the business success of Sports Direct but remains concerned about a number of areas related to the company’s corporate governance.

ESG considerations: The team researched Sports Direct for a number of months before initiating a position in November 2013. They acknowledged that the UK retailer has had a chequered history in corporate governance, which flared up again in 2014 when it sought to introduce a share scheme for its founder, Mike Ashley. The team engaged with the company’s remuneration committee chairman in order to better understand the motivations behind the scheme, but ultimately voted against the proposal – which was eventually pulled due to a lack of shareholder support. They also voted against the re-election of the remuneration committee chairman at the 2014 annual general meeting to convey the gravity of their concerns about Sports Direct’s governance. However a subsequent proposal for an improved incentive scheme, with longer-term timeframes and EBITDA targets ahead of consensus expectations, was approved by shareholders. Despite this, the team had persistent concerns and met the chairman to explain its views on the company’s board structure and broader corporate governance while re-iterating its support for Mike Ashley and the company’s strategy.

Decision: The team continues to see huge potential for Sports Direct to increase value for shareholders as it grows its European and online businesses, and recognises that Mike Ashley’s contribution to the company and his entrepreneurial vision are fundamental to its success. It will therefore continue to engage the board in order to promote improved corporate governance, which should support performance while reducing risk.

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Engagement and votingWe target companies experiencing serious financial, strategic and ESG risks, or those contravening clients’ responsible investment policies. The boards and senior management teams of such companies are approached and, if appropriate, other investors too, in an effort to create greater long-term shareholder value. Engagement has defined, realistic and measurable objectives that can take several years to achieve. It is constructive and conducted discreetly – preferably without media coverage – because the best results are usually attained in private discussions. It requires a broad range of skills – including legal, consulting and management capabilities – to be deployed in an integrated approach. Practiced globally, it also requires fluency in multiple languages and knowledge of business practices in various markets.

Key elements of stewardshipAdvice Helping clients to develop responsible ownership

policies, which include systems that integrate ESG and other long-term risks and opportunities into their investment processes

Research Identifying a full range of strategic, financial and ESG factors that can lead to long-term value creation or destruction within companies

Assessing companies that are considered to be violating client policies, detailing these violations and assessing whether engagement is feasible through the Controversial Company Report

Voting Assisting investors in using their shareholder votes to manage long-term risks at companies worldwide

Engagement Engaging corporate directors and senior management teams on clients’ behalf to promote and achieve beneficial change relating to risk management, governance, sustainability and corporate strategy

Advocacy Working with policy makers and industry bodies on policies to ensure that markets support active ownership, and to promote stewardship and sustainability

Pioneering stewardship We strive to be active owners of the companies we invest in. For more than a decade, our stewardship team has driven positive change at companies worldwide through constructive engagements, informed shareholder voting on strategic and ESG matters and our advocacy of investor rights in industry and regulatory forums. Through this work, we are recognised internationally as a leader in stewardship services.

Reducing risk at BG Group

Strategy and risk concerns spurred Hermes EOS to engage with BG Group, a multinational oil and gas producer, in 2014. Several workers, mainly contractors, have died working on the company’s oil and gas projects in recent years. With projects in several high-risk countries, such as Egypt, some of its projects have been stalled by political unrest. Bribery allegations were levelled at its Kazakhstan business although no evidence of this was found. Involved in the exploration of shale gas reserves in the US and Australia, BG Group is exposed to the risk that hydraulic-fracturing drilling could either contaminate local water supplies or fail to gain access to long-term water sources. The lack of a viable successor to its former CEO Chris Finlayson, who resigned in April 2014, called into question BG Group’s succession planning.

In its engagement with BG Group, Hermes EOS questioned the company’s processes for preventing injuries and fatalities. BG Group then committed to employing fewer but more highly trained, skilled and experienced contractors to reduce the risk of personal harm and death in its operations. With encouragement from Hermes EOS, its reporting of such incidents could improve dramatically: previously, work suspended by safety fears was not recorded, but the company is now considering doing so. The engagement team was provided with further evidence that analyses of the impacts of political situations in various countries is embedded into BG Group’s business decisions through continuous risk reviews at the board level. The company expressed confidence in the quality of its operations and ongoing security support for essential employees and assets in riskier locations.

Following the engagement, BG Group expects workers at all of its operations to abide a clear, zero-tolerance policy on bribery and corruption that is reinforced by regular audits. Before it appointed an experienced oil and gas industry executive as its next CEO, the company acknowledged the importance of establishing a talent management programme.



The intelligent voting service we offer covers 9,000 companies and 11,000 meetings worldwide. By providing or withholding support from corporate decisions, shareholder votes can be used as an engagement tool. Our stewardship team believes that shareholders should have the right to be sufficiently informed about and participate in:

�� Fundamental corporate changes

�� Constitutional amendments

�� Capital requirements

�� Major acquisitions or disposals

�� Nomination, election and removal of board members and external auditors

�� Remuneration policies for top managers and board members

Our approach to voting helps investors move beyond compliance-based methods and better manage long-term risks. Prior to voting, Hermes EOS analyses companies’ annual reports, the meeting agenda

and other relevant, publicly available information. Its extensive database of company contacts, which includes all communications with companies since 2004, is used where appropriate. Voting recommendations are made by and for experienced investors, aiming to support companies’ sustainability and long-term performance.

Clients can access ESG and engagement data about portfolio companies through EOS intelligence (EOSi), an interactive online portal. It provides assessments of company-specific and portfolio-wide ESG risks, summarises live engagements and allows investors to filter portfolios by theme, sub-theme, sector and country to identify which companies are exposed to specific strategic and ESG concerns. EOSi shows excerpts from key research, particularly our stewardship team’s Controversial Company Report, alongside voting activity and relevant public policy work. A discussion board and private Twitter account enable clients to directly discuss matters with the team.

400the average number of companies that Hermes engages with across sectors each year

671the number of engagement objectives enacted by Hermes at 417 companies in 2013

focused on the environment

focused on governance

focused on social and ethical

focused on strategy and risk management

16%

45%

22%

17%

Engagement in action

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2006

£33bn

2008

£50bn

2010

£65bn

2012

£100bn

2014

£108.6bn

institutional clients in34 9 countries

The impact of engagement Engagement on ESG risks provides “clear shareholder value-generation opportunities,” according to a research team led by Andreas Hoepner from the Centre for Responsible Banking and Finance at the University of St Andrews. On average, downside risk falls significantly during engagement and annual stock returns rise considerably. The impact is stronger in less efficient markets, such as those of emerging economies, and in specific industries with clear ESG risks, like oil and gas, consumer services and industrials. These preliminary findings were made by analysing records maintained by our stewardship team and we expect them to be substantiated by final results.

The governance premiumBetter-governed companies consistently outperform poorly governed peers, research from our global equities team shows1. Analysing global stock returns from 2009 to 2013, the team found that the worst-governed companies underperform by an average of 30bps each month. Investors that avoid these stocks are therefore likely to benefit from this persistent premium, the team concluded.

Companies with poor governance typically underperform

-0.30-0.25-0.20-0.15-0.10-0.050.000.050.100.15

%

1 2 3 4 5 6 7 8 9 10

1Hermes Global Equities research paper, “ESG investing: does it just make you feel good, or is it actually good for your portfolio?” published January 2014.

Hermes EOS: Growth of assets under advice



an independent reporting line to the chief executive, acts in clients’ interests by ensuring that investment teams stay true to their processes and by addressing any loss of alpha. It has overall responsibility for the consistency of performance across all teams.

As a business, we aim to minimise the direct environmental impact through an environmental management system designed in accordance with ISO14001 guidelines. Through this, we work to reduce energy consumption, waste and our use of raw materials and resources, and improve our usage of recoverable resources. We are an equal-opportunity employer and were part of the first wave of businesses to achieve the London Living Wage accreditation. We directly engage with community and charity projects in East London, close to our head office, which include work placement and reading mentorship programs, helping to convert neglected land into a vegetable garden to contribute to the education of local schoolchildren about food and environmental matters.

In 2012-13, RPI enabled us to achieve a £288,000 reduction in energy costs and saved £416,000 by avoiding direct landfill tax. Nearly all – 99.6% – of required risk and safety improvements were completed on time. A 4% reduction in CO2 emissions was achieved mainly by increasing the energy efficiency of individual properties, such as Wimbledon Bridge House, where sensors and the installation of light-emitting-diode bulbs in common areas drove a 24% fall in electricity usage. RPI also underpinned the transformation of King’s Cross in central London that we achieved as part of a development consortium (please see “The regeneration of King’s Cross” on page 7).

AdvocacyWe work with politicians, regulators and industry bodies on a range of subjects: fiduciary duty and pensions policy, responsibility in asset management, financial market regulation, and on improving the standard of corporate governance in the UK and abroad. In these discussions, we champion the rights of long-term investors and the need for a more sustainable global economy.

Our stewardship team participates in many investor associations focused on responsible investment, including the United Nations Principles for Responsible Investment (UNPRI), the International Corporate Governance Network, the Asian Corporate Governance Association and a range of national social innovation forums. As a founding signatory of the UNPRI in 2005, Hermes helped draft the principles in the previous year. Colin Melvin, CEO of Hermes EOS, was the founding chair of the UNPRI and currently sits on its advisory council.

Our governanceWe are committed to aligning our interests with those of clients. This means being transparent about our strategies to deliver sustainable, risk-adjusted alpha over the long term. To help ensure that we are focused on achieving this, senior investment managers are required to invest their own money alongside clients’ in the strategies they oversee, and their bonuses are linked to long-term performance targets and vest over three-year periods. Our Investment Office, which has

Reducing CO2 emissions from Hermes-owned properties, 2006-2013

38% less CO2 emissions across all properties, including industrial, warehouse, office, retail and residential, from 2006-13.

61% less CO2 emissions, relative to floor space, from offices.

12% less CO2 emissions, relative to floor space, from owner-controlled properties.

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Sustainable progress Hermes is an experienced, active and engaged investor seeking to deliver long-term, risk-adjusted outperformance – responsibly. We aim to lead debate and contribute to the transformation of the investment industry to benefit our clients, their stakeholders and, ultimately, society at large. Key to achieving this is the integration of ESG risks into our analysis of companies and management of investment portfolios.

Our early advocacy of strong corporate governance has evolved into a rich understanding, reinforced by evidence, about how ESG risks influence the long-term performance of companies. The expertise of our engagement team, developed over many years, now enables our investment managers to better mitigate ESG risks and identify those companies exploiting the benefits of astute governance, environmental preservation and skilful stakeholder management.

We have a rich heritage in ESG investing. A decade ago, these values were peripheral to the vast majority of investors. Today, ESG risks are increasingly core concerns for the investment industry. For the benefit of clients, we are committed to being at the forefront of this positive change.

www.hermes-investment.com

Excellence. Responsibility. Innovation.

Contact informationBusiness Development

United Kingdom +44 (0)20 7680 2121 Africa +44 (0)20 7680 2205 Asia Pacific +65 6808 5858

Australia +61 2 9924 6402 Canada +44 (0)20 7680 2136 Europe +44 (0)20 7680 2121

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This document is for Professional Investors only. In Australia this document is directed at ‘Wholesale Clients’ only. Any investment products referred to in this document are only available to such clients. Investing with Hermes may be restricted in other countries and as such, any person who receives this document is required to make themselves aware of their respective jurisdictions and observe any restrictions. This document does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments; nor does it constitute an offer to purchase securities to any person in the United States or to any US Person as such term is defined under the US Securities Exchange Act of 1933. It pays no regard to the investment objectives or financial needs of any recipient. 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. 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. All figures, unless otherwise indicated, are sourced from Hermes. For more information please read any relevant Offering Documents or contact Hermes.Issued and approved by Hermes Investment Management Limited which is authorised and regulated by the Financial Conduct Authority. Registered address: Lloyds Chambers, 1 Portsoken Street, London E1 8HZ. In Singapore, this document is distributed by HFM Singapore, which is a capital markets services holder for fund management under the Securities and Futures Act, Cap 289 (“SFA”), and an exempt financial adviser under Section 23(1)(d) of the Financial Advisers Act, Cap 110 (“FAA”). Accordingly, HFM Singapore is subject to the applicable rules under the SFA and the FAA, unless it is able to avail itself of any prescribed exemptions. HFM Singapore is regulated by the Monetary Authority of Singapore.

The activities of Hermes EOS referred to in this document are not regulated activities under the Financial Services and Markets Act.

The main entities operating under the name Hermes are: Hermes Investment Management Limited (“HIML”); Hermes Alternative Investment Management Limited (“HAIML”); Hermes BPK Limited (“HBPK”); Hermes Sourcecap Limited (“HSL”); Hermes Real Estate Investment Management Limited (“HREIML”); Hermes Equity Ownership Limited (“HEOS”); Hermes GPE (USA) Inc (“Hermes GPE USA”); and Hermes Fund Managers (Singapore) Pte. Limited (“HFM Singapore”). All are separately authorised and regulated by the Financial Conduct Authority except for HREIML, HEOS, HFMA, Hermes GPE USA and HFM Singapore. HIML currently carries on all regulated activities associated with HREIML. HIML, HBPK, HSL and Hermes GPE USA are all registered investment advisers with the United States Securities and Exchange Commission (“SEC”). Telephone calls may be recorded for training and monitoring purposes. Potential investors in the United Kingdom are advised that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

CM152882 T1575 01/15

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