Taking stock: Hermes Investment Management debuts new climate risk tool

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Late last year, Hermes Investment Management, one of the U.K.'s largest asset managers, declared that climate change presents a "game-changing opportunity" for the global investment community and promised to play a leading role in the low-carbon transition.

It looked to build on that promise last week, revealing a new carbon tool that will be rolled out to all its fund managers to help them assess their fund's carbon performance and carbon risk.

The tool, a year in development, uses greenhouse gas emissions data from TruCost to assess the carbon impact and associated climate risk of a portfolio, taking into account direct and indirect carbon emissions and its performance compared to industry peers.

It is also able to calculate the potential financial impact of climate impacts, such as the profit at risk in an investment fund under different carbon pricing and policy scenarios.

"The general purpose of this tool is to provide our fund managers and our engagement team really easy and accessible information on carbon risk in portfolios and in companies," explained Michael Viehs, associate director for ESG Integration at Hermes. "We would like to increase the visibility of potential carbon risks for fund managers, but also highlight to the engagement team where potential gaps in the engagement program arise with respect to engagement on carbon emissions."

The tool, which will appear on fund managers' computers this week as a part of a new ESG dashboard, has been developed with feedback from Hermes fund managers, and Viehs said it could soon start to shift investment behavior.

"The investment decision still remains with the particular fund managers," he told BusinessGreen. "But under certain circumstances if you have an investment case but the carbon performance or the ESG performance of the potential investment is really bad and might be contradicting to the positive view that a fund manager has obtained regarding the financials of the company, there might be instances where the fund manager shies away from investing in particular stocks."

"Overall, this will be at the discretion of course with the particular fund manager," he stressed.

Eoin Murray, head of investment at Hermes, underlined that the new application will be a "ground-breaking tool" for bringing climate transparency into the investment process. "It helps our fund managers to more effectively take into account information about specific carbon risk and thereby enhance their investment decisions," he said. "Assessing carbon risk helps identify investment opportunities and threats to value, and begin or intensify engagements that can reduce the risk of holding exposed companies."

Hermes also hopes the new tool will help point its 26-strong engagement team towards firms that are not adequately monitoring or addressing their climate impact.

Hermes is engaging with more than 500 companies on more than 1,400 Environmental, Social and Governance (ESG) objectives, but some are moving faster than others. The new tool will highlight the laggards in this engagement process, indicating where firms are failing to report greenhouse gas information, or actively addressing their emissions — and hence where the engagement team should focus its efforts.

Eventually, a public version of the tool will be made available to Hermes clients, who according to Viehs are increasingly asking for more information on the climate impact of their portfolios.

In the coming months more tools will be launched onto the ESG dashboard, including a tool covering governance issues, water management and social issues, Hermes revealed, as it attempts to bolster its analysis of factors across the ESG spectrum. Meanwhile, the carbon tool regularly will be reviewed by the ESG team and fund managers to ensure it becomes a key part of the fund manager's arsenal.

Half the battle of embedding climate risk into the finance industry is engaging the fund managers responsible for day-to-day investment decisions with senior executives' concerns about the financial threat climate change poses. Hermes' new internal tool well may go unnoticed by those outside of the finance industry, but it could very well spark a significant shift in investing patterns on the ground.

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