BEST IN CLASS ESG IN PRACTICE September Louise Dudley, Portfolio Manager, Hermes Global Equities

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1 BEST IN CLASS ESG IN PRACTICE September 2017 Louise Dudley, Portfolio Manager, Hermes Global Equities

2 Introduction 2 Introduction Integration approach ESG research Outlook and looking forward

3 Typology best in class The Believer 3 Management Research Application (Who?) (What?) (How?)

4 Management 4 Who? Whole company approach Having a vision on the benefits of integration Setting the tone from the top with a clear strategy to integrate ESG factors Integrated teams Responsibility with every individual To be the world's leading provider of long-term holistic returns for savers, thus creating value for all stakeholders in the financial system

5 Research Looking at ESG in detail beyond external ratings 5 Quantitative Proprietary rating integrating internal and external databases Scorecard for all companies in investable universe Portfolio analysis of all strategies Ongoing research on ESG factors performance Qualitative Fundamental company research on ESG using research providers and primary sources Engagement generating additional insights Ongoing research on material ESG issues

6 Performance from ESG factors Validating philosophy 6 Monthly decile spread (%) 0.4% 0.28 Consistent with philosophy Best of breed data sources Level and change Engagement insights 0.2% % Environmental Social Governance Source: Hermes Global Equities, 30 June Note: Monthly decile spread is the average difference in monthly return between companies ranked in the top 10% and companies ranked in the worst 10%. Figures calculated using constituents of the MSCI World index assuming monthly rebalancing.

7 Poorly governed companies underperform Performance by decile of governance ranking 7 Average monthly relative return (%) 0.2% 0.0% -0.2% -0.4% Good (or improving) governance Poor (or worsening) governance Source: Hermes, Factset as at 30 June 2017.

8 Integrating ESG in valuation 8 Information ratio Effectiveness over time Analysing a variety % 60.0% 40.0% 20.0% of fundamentals with a proven economic effect The blend of factors leads to better outcomes than individual factors - Corporate Behaviour Profitability Sentiment Overall Capital Structure Growth Valuation 0.0% Corporate Behaviour Profitability Sentiment Overall Capital Structure Growth Valuation Source: Hermes Global Equities. For the period September 2003 June 2017.

9 Application Unique perspectives on ESG risks 9 Capture each company s ESG characteristics and rank based on sector KPIs Analyse each company s ESG exposures, and whether risks are increasing or decreasing Aggregate ESG risks within portfolio, in absolute and relative terms For illustrative purposes only.

10 Generating insights and change from engagement 10 Using engagement to identify and to promote positive change in companies Successful engagement requires senior experienced practitioners Long term relationships with companies, often local language conversations Two-way collaboration between engagers and portfolio managers Focus both on material ESG issues and also on wider impact issues Voting, engagement and public policy advocacy

11 Issues Human Rights 11 Factors as examples Performance Controversies Policies & Programmes Industry collaboration Case studies Governance Supply chain Appropriate board oversight Regulation Robust processes

12 Issues Climate Change 12 Factors as examples Risk Controversies Time horizon Performance Policies & Programmes Company data Industry data Governance Industry collaboration Climate data Case studies

13 Keeping in mind the big picture Thinking about our wider responsibility, in the long run, as investors for beneficiaries, society, the environment and from ESG to impact 13 Setting the tone from the top with a clear strategy to integrate ESG factors Having clarity on materiality Application through use of tools Long term thinking Active ownership

14 Challenges 14 Learnings and takeaways Be consistent with philosophy Level and change Ongoing evolution of issues and data Progress and embedded culture

15 Disclaimer 15 This document is for Professional Investors only. 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 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 inves tment (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. In Australia: This document is directed at Wholesale Clients only. Any investment products referred to in this document are only availabl e to such clients. HIML, Hermes GPE, HGPE Singapore and HEEL are foreign service providers operating under the relevant class order relief and do not hold an Australian Financial Services Li cence ( AFSL ). These entities operate under the rules of the regulators mentioned above which may differ from Australian laws. The main entities operating under the name Hermes are: Hermes Investment Management Limited ( HIML ); Hermes Alternative Investment Management Limited ( HAIML ); Hermes European Equities Limited ( HEEL ); Hermes Real Estate Investment Management Limited ( HREIML ); Hermes Equity Ownership Limited ( HEOS ); Hermes GPE LLP ( Hermes GPE ); Hermes GPE (USA) Inc ( Hermes GPE USA ) and Hermes GPE (Singapore) Pte. Limited ( HGPE Singapore ). All are separately authorised and regulated by the Financial Conduct Authority except for HREIML, HEOS, Hermes GPE USA and HGPE Singapore. HIML currently carries on all regulated activities associated with HREIML. HIML, HEEL and Hermes GPE USA are all registered investment advisers with the United States Securities and Exchange Commission ( SEC ). HGPE Singapore is regulated by the Monetary Authority of Singapore. 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. Telephone calls may be recorded for training and monitoring purposes. Potential investors in the United Kingdom are advised thatcompensation will not be available under the United Kingdom Financial Services Compensation Scheme.