Meet the fund managers: ESG investing across the globe

In this new weekly series, investment reporter Elliot Gulliver-Needham sits down with a fund manager for a Q&A. This week, we’re hearing from Geir Lode, lead portfolio manager on the Federated Hermes Global Equity ESG fund.

How does your fund stand out from others in the same market?

As a firm and as a team we’ve long held the belief that investing responsibly leads to better outcomes, and when we launched the Global Equity ESG fund more than a decade ago we did so because of our conviction that companies with favourable ESG characteristics generate better returns for shareholders.

Favourable ESG does not mean best-in-class, nor does it restrict the portfolio to a limited set of industries. We’re trying to find the companies that will thrive as the world transitions to become more climate aware and socially conscious – the future leaders.

While many funds in this space only seek companies with the highest ESG ratings or obvious green energy plays, our fund seeks companies that are good or improving from an ESG perspective across the full breadth of the global market.

We are also active owners of our investments, and we believe that engagement with our investee companies has a crucial role to play in identifying those truly living up to the world’s ESG ambitions, in holding companies to account and in delivering positive impact and improvement.

But of course, none of this matters without a robust investment framework. The fund’s three portfolio managers have been working together for over fifteen years and combine a quantitative approach, using our proprietary Alpha Model and bespoke risk modelling system, with qualitative insights.

We recognise that a quantitative approach can only get you so far and we use our investment experience to challenge the results of the model to identify any weaknesses that it may have not picked up. This is an important risk control that has proven to add value over the years. We adopt a fundamental investment approach, applied using a smart quantitative toolset.

What has been the biggest change in the industry since you started?

The growth in the ESG space has been phenomenal. When we launched, ESG was an ill-defined, niche area of investing. It has since become mainstream, however it has achieved this without ever reaching a common definition or clarity of purpose, leading to a bubble in ESG-related assets in 2020.

Having a clear definition is crucial in an environment of increasing political polarisation. Our contention is that strong and improving ESG performance correlates with strong returns over the long term.

Better data and disclosures should make this correlation more obvious, and that in turn should draw some of the heat from the current clash over ESG – we are making progress, but there remains some way to go.

Which of your holdings are you most excited about?

Companies generating revenue from helping to deliver the green transition and a more socially equitable world demand a premium valuation, and yet right now these companies are available at a discount.

The shift from growth to value in 2022 and the backlash against ESG resulted in many companies with strong sustainability credentials selling off more sharply than peers, such that the most sustainable companies in the universe trade at a significant discount to their less sustainable peers. This represents a compelling opportunity for long-term investors willing to ride through the current environment.

What is the biggest mistake you’ve ever made in the fund?

In early 2023 we closed our position in Nvidia, reinvesting the proceeds into one of its semiconductor peers.

The peer looked more attractively valued, had stronger quality characteristics and – although it seems hard to believe this now – had a better growth outlook. At the time of the trade, we acknowledged that in an industry bull market Nvidia, with its strong retail following and history of innovation, tends to gather the most positive sentiment.

However, at that point in the cycle we did not see the catalyst for such a bull market. Of course, what we – and many others – had failed to foresee was the emergence of ChatGPT and the AI trade.

The peer we selected was a top performer in the portfolio and the broader market throughout the year, but nothing could rival the stellar performance of Nvidia. That single trading decision had a huge impact on our added value for 2023.

What’s one change you made in the fund recently? Why didn’t you make it sooner?

We have had exposure to companies developing treatments for diabetes and obesity since we launched the fund, but recently we’ve meaningfully increased this exposure.

GLP1-drugs represent an exciting area of health care that has taken off in 2024 following a succession of studies suggesting an increasing variety of health benefits.

Of course, as with any health treatment, there will be challenges to the pricing model to deliver these drugs as widely as needed, but it is clear that health providers and insurers are seeing the benefit of making an upfront investment to treat obesity rather than facing the long tail exposure to treating the health problems caused by the disease.

We have kept a close eye on the competitors throughout this space and consider the larger names – those with proven treatments and manufacturing facilities – to be highly attractive while demand outstrips supply.