In our view, it is imperative that all investee companies generate a positive impact that can be measured quantitatively, as well as qualitatively. As such, we invested considerable time and resource in the second half of 2020 to create our proprietary Impact Database, which enables us to quantify the impact of companies held within our portfolio. The Database also provides a clear framework for us to assess companies on our watchlist.
After looking at the tools available in the market to analyse impact data, we did not believe that any one provider had the depth of understanding and granularity we required at a company level. Indeed, the majority of pre-existing tools used aggregate modelling and artificial intelligence (AI) insights that, while impressive, at times yielded inaccurate and incomplete results for individual companies.
Building the Impact Database1
In building our database, we have used traditional equity research methods, in combination with impact modelling techniques. As well as leveraging our expertise as impact investors at the international business of Federated Hermes, we used an external consultant to help aggregate data from company, sector and impact industry reports.
Reporting our portfolio’s impact
We have carefully chosen 20 impact metrics, which have been grouped into 11 relevant themes. They are used to capture the impact of all the companies in which we invest. Some themes may include solutions and operations-based metrics, such as Climate Change which looks at both operations metrics for carbon emissions and solutions metrics for emissions avoided; whereas Gender Equality currently only contains operations based metrics. Nevertheless, all portfolio companies are assessed using at least one solutions-based metric and one operations-based metric.
Assessing the impact of companies at such a granular level with quantifiable outcomes allows us to achieve two important objectives. First, it allows us as investors to trace and account for each investment, providing a means through which we can monitor a company and ensure its impact intentionality as a business. Secondly, it provides our clients with a quantifiable indication of how their capital allocation is helping achieve positive impact, as aligned to the 17 UN Sustainable Development Goals. The end result means we are able to report to our clients on the overall impact of our portfolio, as well as the impact of individual holdings.
Total company level impact of stocks held, 2019 highlights2
Using our proprietary Federated Hermes Impact Database, we are able to present our impact data on an aggregated, cross company basis. Put simply, it depicts our estimation of the total impact that the companies in which we are invested have delivered in 2019.
Impact achieved by capital deployed
As well as producing company-level impact, our database allows us to report on the impact of our Fund’s assets under management. Put simply, we scale the metrics to demonstrate the impact accomplished through the capital we deploy – approximately $450m as at 31 December 2020 – on behalf of our clients, thereby reflecting our ownership of each company held in our Fund.
Source: Federated Hermes, as at 31 December 2019. Note: The Impact Opportunities portfolio has been harmonised for calendar year impact.
1 As it stands, the database calculates the impact our portfolio had in the calendar year 2019. We are in the process of rolling this analysis forward to calculate impact for the calendar year 2020, as each of our investee companies start to publish their annual earnings and sustainability reports. We expect to be able to report to clients on the 2020 impact of our portfolio by the end of June.