Federated Hermes Biodiversity Equity Strategy

The Federated Hermes Biodiversity Equity Strategy is an Article 9 equity fund designed to achieve long-term, risk-adjusted returns by investing in a portfolio of corporates providing innovative solutions to averting the loss of and supporting the restoration of biodiversity globally. The Fund invests in a focused range of corporates which have strong fundamental characteristics and deliver positive impacts on biodiversity, the environment and society. These corporates are typically characterised by their quality operations, attractive valuations and sustainable competitive advantage driven by taking positive action toward biodiversity preservation.

What are its aims for natural capital/social impact?

Through identifying the major regional and global threats to biodiversity, Federated Hermes has identified six investable themes linked to biodiversity: land pollution, marine pollution and exploitation, unsustainable living, climate change, unsustainable farming and deforestation. The Strategy invests in corporates that are helping to protect and restore biodiversity, or are reducing the threat to biodiversity through their measurable contribution to reducing one or more of the investable themes. Investee corporates are identified using a company-by-company biodiversity assessment which evaluates whether any given name qualifies as a ‘biodiversity champion’.

Examples of underlying investments

Finnish forestry firm UPM, is a major global supplier of sustainable timber-based products for industries such as packaging, labelling, transportation, electrification, construction, communication, tissue, manufacturing, and bioplastics. All wood is sourced from legally logged and sustainably managed forests, and is not harvested from tropical rainforests or from plantations established on cleared natural woodlands. All UPM-owned forests have been certified, or are in process of becoming certified by independent bodies such as the Forest Stewardship Council (FSC) or the Programme for the Endorsement of Forest Certification (PEFC). Presently, 85% of total wood fibre sourced by the firm has been certified as sustainable, with a target of 100% by 2030. CDP, the global corporate disclosure watchdog, rated UPM as a ‘Forest A List’ company for its efforts on climate change and deforestation. Furthermore, UPM has signed up to the Science-Based Targets Network Corporate Engagement Programme where they support the SBTN on setting targets and developing guidance for corporates committed to improving their impact on Nature.

Federated Hermes has developed a proprietary Impact Database to quantify the impacts of corporates held within the portfolios, using metrics aligned to the UN SDGs. The database provides a clear framework for assessing corporates, with holdings required to pass a detailed biodiversity assessment and evaluation of long-term sustainability in order to be admitted into their portfolios. The team also considers any potential negative impacts of a corporate, identifying potential areas for improvement. If they choose to invest, they will engage with corporates on those action points.

Impact metrics are grouped into relevant themes. These metrics capture the impact provided by each corporate’s products and services and break down into the following two categories:

• Operations-based metrics that relate to a corporate’s operations. For example, scope 1 and scope 2 carbon emissions or waste produced in operations.
• Solutions-based metrics that relate to company-specific environmental outcomes that a corporate is looking to generate. Biodiversity metrics include land area preserved (hectares per year), biodiversity impact avoided (hectares per year) and number of species preserved.

Considerations for asset owners

Minimum investment for the Strategy is low at £25, and stocks are selected for the long term, with a holding period that is intended to be over 5 years. The Strategy is designed to focus on emerging growth opportunities, namely the innovative solutions to various causes of biodiversity loss. It will therefore likely have a structural bias to small to mid-capitalisation corporates.

The team believes that the liquidity of an open-ended vehicle is very important and therefore will only seek to invest in corporates where average daily volumes of liquidity are at least 1% of fund net asset value.

The portfolio is expected to exhibit the following characteristics:

• Invested listed equities, with a small exposure to cash.
• A time horizon of more than 5 years to fully capitalise on market inefficiencies in pricing long-term change, as well as the power of compounding.
• Low portfolio turnover (<20%), avoiding unnecessary costs and allowing successful businesses to grow. • Concentrated portfolio of 30-60 stocks, with high conviction across holdings. • High active share in comparison to a reference global equity market (MSCI ACWI IMI Index), with performance against this index driven by stock selection. • Use of factor modelling to help inform portfolio position sizing and construction – to best capture factor trades and minimise risk. This is completed using bespoke models built by the team in collaboration with the Investment Office><20%), avoiding unnecessary costs and allowing successful businesses to grow.
• Concentrated portfolio of 30-60 stocks, with high conviction across holdings.
• High active share in comparison to a reference global equity market (MSCI ACWI IMI Index), with performance against this index driven by stock selection
• Use of factor modelling to help inform portfolio position sizing and construction – to best capture factor trades and minimise risk. This is completed using bespoke models built by the team in collaboration with the Investment Office.

Sources

1. Interviews with Gemma Corrigan and Ingrid Kukuljan, Federated Hermes