Recorded at the Envestnet Advisors Summit 2022. Presented by:
Advisorpedia Interviewed Mary Green, the VP & Client Portfolio Manager at Federated Hermes, at the Envestnet Advisor Summit in May, 2022.
Resources: Federated Hermes
Right now active ESG management is alive and thriving. While there has been a slowdown in flows overall with the downdraft in the markets, the lead that passive ESG has really come into parity with active ESG as investors are seeing the benefit of active management, while we're in a market dislocation, there are so many misconceptions about ESG.
The first is that ESG is an investment approach or a strategy. . .
The second misconception is that ESG is somehow politically driven. And I'm here to tell you, there is no p and E S, G. So I think that people who are critics or even detractors of ESG, when they hear it or think about it, they're thinking about hard exclusions, like excluding fossil fuels, which may be a mainstay of their communities and their economies. And it's not that at all that is just one ESG approach. You can have ESG integration, as I said before, you can have impact for those clients that want to change the world. You can have thematic strategies for clients who care about a certain trend like clean water or decarbonisation, or gender equity.
So the exclusions are just one tiny slice. And there's another myth that goes along with that, that if you are excluding fossil fuel companies, you're somehow starving that sector of capital. That is not the case. If you divest a fossil fuel company, someone else is on the other side of that trade, and they're going to own that company, you're not really making progress towards decarbonisation. I say at federated Hermes, we are about engagement versus divestment.
We might own these brown industries, and then actively engage with them, to help them mitigate looming risks, whether it's regulatory or social, we will help them to decarbonize which of course, is a very, very long term prospect, but you've got to be in it in order to exercise your shareholder rights.
And the last myth is that ESG investing is dead because of the underperformance in the first quarter of 2022.
There was such crowded trade around over owning big cap tech stocks, because they have few hard assets and so they get better ESG ratings and then not owning the fossil fuel companies. So fossil fuel companies, of course, had been on fire as as as commodity prices have been bid up in the wake of the Russia, Ukraine conflict, and big cap tech that has just really taken a nosedive. And so those crowded trades, which are positive screening strategies, more of the the less active strategies will simply own those companies with the best ESG scores and disowned companies with the worst. They underperformed. So this is a short term phenomenon. Does ESG work every time? No. Does it work over time? Yes, it does.