Elizabeth White

Federated Hermes, a global leader in active investment, today announced the launch of the Federated Hermes Global Equity Fund, a new Australian Unit Trust fund that seeks to deliver consistent, long-term returns by investing in global equity securities with fundamental and ESG considerations integrated into the investment approach. The Fund is now registered for sale to wholesale investors in Australia and those advised by their Financial Advisers.

The Federated Hermes Global Equity Fund is the firm’s second fund to be launched for Australia’s wholesale investors, further expanding Federated Hermes’ presence in the local wealth management market. This follows the successful launch of the Global Trade Finance Fund in February. In Australia, Federated Hermes has established itself as a leading provider of active investment strategies to institutional investors and as a trusted stewardship adviser to many of the country’s top ten superannuation funds through Federated Hermes’ dedicated stewardship arm EOS, which advises on US$2.3 trillion^[1] (AU$3.38 trillion)^[2] in assets globally.

The Fund benchmarks against the MSCI World ex Australia Index and holds a diversified portfolio of 250-500 stocks identified through a systematic, data driven process combined with disciplined fundamental oversight by an experienced team of investors. The team’s approach includes a proprietary ESG framework containing engagement insights from EOS, while portfolio construction is aided by the investment team’s proprietary multi factor risk model, MultiFRAME that helps the team dynamically manage and control portfolio risk. This approach enables a multi-dimensional assessment of each company, covering financial strength, competitive advantage, leadership quality, and ESG factors, alongside market sentiment and valuation resulting in a diversified, balanced portfolio.

Federated Hermes Global Equities has invested in the global developed markets since the inception of the Global Equity Strategy in 2007, with assets under management of US$5.8 billion^[3] (AU$8.5 billion)^[2] . The Fund is managed by a stable team of highly experienced portfolio managers, led by Geir Lode, Head of Global Equities, as Lead Portfolio Manager, with Lewis Grant (Senior Portfolio Manager), Louise Dudley (Portfolio Manager) and Andrew Hurley (Portfolio Manager) serving as Co‑Portfolio Managers.

Geir Lode, head of global equities at Federated Hermes Limited, said, “Macro driven volatility continues to create meaningful dispersion across markets. Our disciplined, risk aware approach aims to identify resilient businesses that look attractive across multiple dimensions and avoid material weaknesses, while controlling risk and maintaining balanced exposures to help navigate the ever-changing market conditions and seek to deliver attractive long-term returns.”

Liz White, associate director of business development, Australia, at Federated Hermes Limited, added, “Today’s announcement demonstrates our commitment to serving the local wholesale market by meeting investors’ needs. By bringing a global equity strategy to Australian wholesale investors, offering diversified global exposure and investing in companies selected for their fundamental characteristics, we provide an option for those seeking to broaden their portfolios beyond the domestic market.”

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Notes:
[1] As of March 31, 2026.
[2] Figures were announced in USD and converted to AUD for illustrative purposes only. 1 USD = 1.47 AUD based on the Reserve Bank of Australia (RBA) exchange rate on March 31 2026.
[3] As of March 31, 2026, including pooled and segregated mandates

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Although by the close Thursday the S&P 500 was down a mere 3% from its highs, let’s face it, things feel a lot worse. That is because the 3% loss is a combination of much bigger losses year-to-date in areas that had attracted the bulk of the assets — think Bitcoin (-49%), software giants (-25%) and the Mag 7 (-6%). Meanwhile, the stocks of the remaining, unloved 493 are up 1% and an even more comforting 6% from the market’s November lows.

The much-despised Russell 2000 small-cap index is up 5% year-to-date, despite pulling back a tad through Thursday, and 12% from the November lows. Many clients are asking, is now the time to buy back the AI stocks? Or is this just a precursor to a much bigger and deeper problem? Or should I keep leaning into the “broadening-out trade” and wait for a bigger correction in the tech names? Only time will tell, but at Federated Hermes, we are sticking with option three. We view the current tech correction as healthy but not complete. On the other hand, we expect the market’s shift toward smaller-cap and value stocks is likely to continue for some time.

Here are our reasons:

1. The “hyperscalers” are beginning to tilt away from the “asset light” model that made them so attractive. One of the defining characteristics that propelled mega-cap technology companies over the last decade was their asset-light business model: high incremental margins, modest capital intensity, and extraordinary free cash-flow generation and growth. That picture is changing quickly. The hyperscalers are now committing enormous capital to support the AI infrastructure buildout. In 2025, the Magnificent Seven spent $400 billion on AI, against combined cash flow of $825 — still net positive free cash flow, and “only” funded with $80 billion in new debt. Still, this was the first year that the hyperscalers’ capital expenditures (capex) nearly absorbed all of their free cash flow. So far, including Amazon’s blowout capex announcement on Thursday, capex guidance for 2026 has expanded to more than $600 billion and climbing. As a result, free cash flow is deteriorating across the cohort, and investors are shifting allocation toward emerging areas of AI bottlenecks, such as memory and semiconductor capital equipment companies.
2. The software names are caught between a rock and a very hard place. The software sector faces a powerful and underappreciated combination of headwinds. First, many firms are still digesting the excess seat licenses sold during the pandemic era surge in remote work demand. Renewal cycles remain marked by optimization and downsizing, not expansion. Second, AI is threatening the traditional license-based model itself. The recent Anthropic announcement may prove to be software’s “DeepSeek moment,” demonstrating that agentic AI tools can automate functions historically performed inside legacy enterprise applications. That raises real questions about long-term pricing power and total addressable market assumptions. Importantly, the largest Software-as-a-Service (SaaS) platforms retain significant advantages: massive installed bases, deeply embedded workflows and high switching costs. If history is any guide, these firms will adapt and integrate AI into their solutions to defend their moats. Still, the transition will be messy and investors are selling first and asking questions later. Value is starting to get created among these stocks, but with so many question marks about their futures, we are remaining cautious in this space pending some sign of stabilization.
3. The market is broadening because fundamentals are improving outside of the heretofore market-leading tech space. The rotation we have experienced over the first month of the year is not just being driven by concerns over the Mag 7. It also reflects genuine improvement across the broader economy. GDP growth has averaged 4% over the past three quarters, and forward growth expectations continue to rise on the back of the implementation of the One Big Beautiful Bill tax cuts, larger-than-expected tax returns, and continued Federal Reserve easing. Meanwhile, early earnings season results have shown broad-based beats, with revenue growing 8.5% and earnings-per-share growing 13% versus a year ago. Importantly, earnings expectations for the full year have risen as the season has progressed — always a good sign that on balance, the incoming earnings releases are raising analysts’ optimism for the full year.
4. Many of the previously unloved value stocks are not only experiencing improving fundamentals but also sport cheap valuations. A number of value-oriented sectors look compelling on both absolute and relative bases. At Federated Hermes, we long ago stopped viewing the “value index” as a single monolith; the widely accepted category encompasses two different asset classes: economically sensitive cyclicals and defense dividend payers. In the current environment, both look attractively valued and are benefiting from the macroeconomic environment. Cyclical parts of the market like banks, energy, industrials and materials are benefiting from above-trend GDP growth, additional stimulus and the AI infrastructure build-out. At the same time, the defensive dividend-paying parts of the market like utilities, consumer staples and pharmaceuticals are being lifted by a pick-up in volatility and lower policy rates, which make their lower beta and higher dividend yields look more attractive. With fundamentals improving and valuations still depressed, we believe these areas have multiple avenues for outperformance. And with investors tiring of all the drama in technology-land, the opportunity to invest in long-ignored but stable, well-diversified businesses with attractive valuations and dividend yields is proving a welcome relief.
5. “Goldilocks” is about to arrive. We appear to be entering an unusual macro regime where easing monetary policy intersects with accelerating earnings — historically a powerful combination for equities. AI-driven productivity gains are creating benign labor market softness, as evidenced by this week’s softer labor readings, reducing wage pressures without signaling economic weakness. With policy rates well above core inflation, monetary conditions are tighter than necessary, giving incoming Fed Chair Kevin Warsh ample room to ease. We think the Fed is likely to cut rates two or three times over the course of 2026. At the same time, earnings estimates for 2026, 2027 and 2028 continue to rise as economic growth accelerates. Put together, 2026 may deliver a rare “Goldilocks” alignment: Fed cuts alongside broadening corporate earnings growth. Historically, this combination has been especially supportive of small caps, cyclicals, emerging markets, and value — precisely where leadership is emerging now.

Given all of the above, the S&P is likely entering a period of choppiness, as investors continue to rotate capital out of the mega-cap names that make up 34% of the index and into the rest of the market, which is still broadly under-owned. We are keeping our portfolios tilted toward the latter and will wait for lower levels — if we get them — to add additional capital to stocks overall, and technology in particular.

A risk to our somewhat benign view of the present correction is the credit markets, especially within the tech sector. Bitcoin’s heavy losses, and the carnage among software names where fundamentals are eroding quickly, could lead to a credit event with macro-level implications.

For now, credit markets remain liquid. Despite rising measures of risk, no clear signs have surfaced that a major player is in significant distress. We are closely monitoring credit spreads and the credit default swaps markets for signs of elevated stress or contagion. Currently, the pressure is more concentrated than widespread, but we are watching for signs of credit stress spreading. Given the strong speculative run in 2025, this risk is nonzero. We are staying in close touch with our credit teams and will update our views accordingly.

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Chris McGinley

Federated Hermes, a global leader in active investment management, has announced its entry into Australia’s wholesale investor market with the launch of the Federated Hermes Global Trade Finance Fund, a distinctive uncorrelated income strategy offering the potential for low volatility of return, with negligible interest rate and short credit duration risks^[1].

The Federated Hermes Global Trade Finance Fund is a feeder that invests in an AUD-denominated share class of the Federated Hermes Project and Trade Finance Master Fund (the “Underlying Fund”). This new feeder fund offers Australian wholesale investors, especially those seeking diversification, access for the first time to the trade finance asset class which Federated Hermes has offered to global institutional investors for more than 15 years. Positioned between public and private markets, trade finance can serve as a diversifier in investors’ portfolios due to its limited reliance on traditional return drivers, while providing quarterly liquidity^[2].

The Fund is managed by Chris McGinley, Head of Trade Finance, supported by portfolio managers Maarten Offeringa and Kazaur Rahman. It is registered for sale in Australia, available only to wholesale investors and those advised by their Financial Advisers.

Chris McGinley, Head of Trade Finance at Federated Hermes, said: “The defensive power of trade finance during periods of public market turbulence is well recognized by our institutional clients, who value its diversification benefits. Federated Hermes Trade Finance strategy, now accessible to a wider range of investors in Australia, invests across a broad spectrum of loan types, sectors, and regions, aiming to deliver risk-adjusted returns for investors.”

Liz White, Associate Director of Business Development, Australia, at Federated Hermes commented: “This fund launch marks the first step in rolling out a broader investment strategy for wholesale investors in Australia. While Federated Hermes is best known in Australia as a strategic adviser and provider to institutional investors, we are now leaning on our rich wealth management heritage across the United States and Europe to expand into the wholesale segment with a tailored product that historically has been limited to institutional-grade investors. This move not only paves the way for future offerings, but also demonstrates our understanding of the specific needs of wholesale investors and commitment to building a stronger presence in the market.”

Trade finance has traditionally been the sole domain of large international banks. Federated Hermes gives investors access to this alternative asset class by co-investing with these banks to provide relatively short-term loans used to finance the physical flow of essential goods around the world. These goods are used as the primary source of collateral within the loan, and their essential nature underpins the continued demand for trade finance, even in times of market volatility.

Federated Hermes has established itself over the past several years as a leading provider of active investment strategies for local institutional investors and a trusted partner in delivering stewardship services to Australia’s major superannuation funds, including several of the top 10. Building on its global segment expertise and scale, the firm is now accelerating its expansion into the Australian wealth management market, positioning itself to become a major player in the segment.

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Notes:
[1]Returns are not guaranteed. Negligible interest rate risk through a floating rate structure and self liquidating transactions. All investments contain risk and may lose value.
[2]  Federated Hermes’ Trade Finance Strategy provides quarterly redemptions and daily mark-to- market information

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Jim Roland

Federated Hermes, a global leader in active investment management, has announced, at the Asian Financial Forum in Hong Kong, its plans to open an office in the city to capitalise on the region’s rapidly growing wealth market.

The announcement marks a strategic expansion as the firm deepens relationships with private banks, family offices, wealth intermediaries and institutional investors across the Asia-Pacific region.

Subject to regulatory and other necessary approvals, the planned Hong Kong office will further strengthen Federated Hermes’ established Asia‑Pacific footprint, which includes existing regional offices in Singapore, Tokyo and Sydney. The firm has maintained a presence in the region since 2010.

The Hong Kong expansion reflects Federated Hermes’ strategic focus on Asia’s wealth and retail distribution segments, where the firm sees significant opportunity as client portfolios grow more sophisticated and distribution models shift towards long-term partnerships. This builds on the firm’s established institutional presence across the region.

Federated Hermes’ Asia strategy centres on a consultative distribution model. The firm works to align its investment capabilities, research insights and global networks with the evolving needs of wealth clients navigating increasingly complex market environments.

“Asia continues to be one of the fastest-growing wealth markets globally, with clients increasingly seeking partners who can support more sophisticated investment strategies and portfolio construction,” said Jim Roland, Head of Distribution for Asia Pacific at Federated Hermes. “Establishing a presence in Hong Kong enables us to work even more closely with partners and clients on the ground, providing localised service and expertise.”

Hong Kong’s position as a premier international wealth and asset management hub makes it a natural location for Federated Hermes’ expansion. The office will enhance the firm’s on-the-ground client coverage and support its long-term regional growth strategy across both wealth and institutional channels.

The move underscores Federated Hermes’ commitment to the Asia-Pacific region, where demographic trends, wealth creation and evolving investor sophistication continue to create opportunities for active investment managers with differentiated capabilities.

Federated Hermes will focus its efforts this year on securing licensing approval from the Hong Kong Securities and Futures Commission (SFC) and completing the required registrations.

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The tech sector got off to a tricky start in 2025. Concerns around US technological dominance over China, uncertainties surrounding data centre capex growth and possible overspending by tech companies, and the potential impact of trade restrictions all contributed to a rocky beginning in Q1.

Despite this, we remain structurally bullish on AI over the longer term and are seeing signs of an improving outlook. Below we’ve outlined three key reasons we’re still excited about the sector.

Reason #1: Strong earnings for mega-cap tech

After a moderation in AI sentiment over the first few months of 2025, fundamentals somewhat reasserted over earnings.

Investors approached Q1 earnings season with caution, but mega-cap tech stocks delivered strong results, reinforcing previous excitement around AI.

Microsoft’s results in particular propelled enthusiasm (particularly on Azure) as it meaningfully beat expectations with growth reaccelerating.

We see an opportunity in this broader backdrop as many tech stocks are still trading at a material discount versus recent history, even in spite of their recovery following the recent sell-off.

Q1 earnings season – surprises and upside

• On March 31, the estimated earnings growth rate for the ‘Magnificent Seven’ companies for Q1 was 16%. Overall 86% (6 out of 7) of the ‘Magnificent Seven’ companies reported a positive earnings per share (EPS) surprise, compared to 78% for all S&P 500 companies.
• In aggregate, earnings reported by the ‘Magnificent Seven’ companies exceeded estimates by 14.9%, compared to 8.2% for all S&P 500 companies.
• ‘Magnificent Seven’ companies reported actual earnings growth of 27.7% for the first quarter.

Figure 1: ‘Mag 7’ Q1 earnings versus the rest 

Reason #2: The potential of agentic AI to accelerate AI monetisation and adoption

We recently attended the JPM TMT conference in Boston, one of the world’s largest tech conferences. The dominant theme of the event was agentic AI.

Agentic AI differs from previous AI advancements in that it can independently assess challenges and determine the best course of action without human input.

Specific use-cases include software engineering (code generation), customer support, and digital marketing/content generation.

At the conference, management teams spoke positively about:

• The productivity enhancements and value-added benefits of agentic AI for both enterprises and consumers.
• Their ability to monetise these advancements.
• Their expectations that adoption will occur sooner rather than later.

For software businesses: The focus is on exploring ways of integrating AI agents to replace or automate manual workflows.

For enterprise customers: We expect to see accelerated adoption of agentic AI since return on investment (ROI) is proving to be greater than expected, and the payback period significantly shorter.

For investors: There is a renewed structural optimism on AI, driven by hopes of greater adoption and effective monetisation of AI agents.

Reason #3: A more benign regulatory backdrop for AI and semiconductors

The Trump administration recently rescinded the AI Diffusion Rule, which had imposed strict export controls on AI semiconductors (see Figure 3). This rule was seen as a barrier to innovation and global competitiveness for American tech companies.

President Trump also announced a deal with the UAE and Saudi Arabia which includes significant investments in AI and semiconductor technology in the US. This incorporates a preliminary agreement to allow the UAE to import 500,000 of Nvidia’s most advanced AI chips per year.

Implications:

• The trade restriction’s removal could serve as a tailwind for semiconductors going forward (given it was previously a big overhang for semis, like Nvidia).
• The Saudi Arabia deal could help to relieve some of the previous concerns around US Tech’s global competitiveness and boost investor sentiment on AI more broadly.

Figure 2: The AI Diffusion Rule 

By Tej Sthankiya, Senior Investment Analyst

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Karen Manna

US Treasury yields increased sharply after falling leading up to and immediately after the April 2 tariffs announcement. The tariff reprieve on April 9 initially quelled the surge, but rates remain elevated. The surprise is that typically when global risks increase, the flight to quality trade ensues—UST yields go down, prices go up and the dollar gathers strength. The opposite has occurred on all accounts.

To add to the confusion, markets began to price in more Fed cuts for the year, as fear of the tariff-prompted slow down grew into increased expectations of a full-blown recession. But the trend up in rates, and the Federal Reserve’s current tone don’t quite match that budding expectation.

So, what might be causing the paradoxical upward pressure on yields? A number of issues are likely prompting the move, and predicting longer-term outcomes perhaps is more problematic than ever.

Foreign owners of UST could be selling. While this may serve as retaliation for US tariffs, there are also other attractive options (namely, German bunds). The largest foreign holders of UST among the top twenty are Japan at $1079 billion and China at $761 billion (although they have been reducing their positions since 2011). The source for this data is the Treasury International Capital (TIC) flow report that will be released mid-month, but has a two-month lag. We won’t really know for another couple of months what countries were reducing their positions since the tariff announcement on April 2nd. China is a primary target of the tariffs, but selling UST has negative implications for the value of its reserves. The fact that China does not disclose its trading activity adds to the mystery.

Hedge funds and other large investors may be forced sellers. UST are the day-to-day currency and collateral of sophisticated investors and traders. Market volatility has likely prompted the unwinding of leveraged basis trades that seek to profit from the price differences between UST and interest-rate swaps or futures. Again, in a typical risk-off scenario, large investors sell risk assets and buy UST, taking the opposite tack when conditions are improving.

Doubts and lack of confidence in American “economic” exceptionalism are exploding. Just like that, discord and mercurial policy making are forcing global market participants to rapidly reconsider their options. The current trading path of the USD, hitting a three-year low, supports this point.

Market expectations of how to price risk have shifted. Tariffs can produce two overlapping problems, at least for a time, with either extending: negative economic growth and growing inflation. The long end of the UST yield curve will attempt to price in all risks, including inflation and governance issues, as well as the federal deficit and funding costs. So even if the Fed is forced to cut overnight rates in an economic slowdown, given inflation and other issues, the longer end may not (and likely does not) shift down in a parallel fashion.

Markets now seem to be waiting for a rescue by the Fed. Options abound, notably excluding UST from the SLR (“Supplementary Leverage Ratio”) calculation, which would permit the largest US banks to buy more UST, improving market liquidity. The Fed could also step in and buy UST, but while that might cure the immediate problem, it sends a difficult signal. On the bright side, last week’s auctions were largely fine, with the 3-year on Tuesday a little bit weaker than expected while the 10-year and the 30-year bond sales were better than expected.

Overall, the only known is the uncertainty which begets volatility. The market is pushing for agreements and improved certainty across the board.

By Karen Manna, Vice President, Investment Director 

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Leon Kamhi

Celebrating its 20^th anniversary, EOS at Federated Hermes Limited (EOS) has passed US$2 trillion in assets on which it advises on behalf of its asset owner clients. Through its corporate engagement and proxy voting services, EOS enables its clients to be more active owners of their equity and fixed-income assets, with the aim of enhancing financial performance over the long-term including through better outcomes for society and the environment.

Year to date, EOS has welcomed six new asset owner-clients representing a collective portfolio of US$330bn. Clients come from the insurance sector, local government and private pension schemes in Australia, Denmark, Sweden and the United States, where EOS established its presence in 2018 and has since doubled its client base.

Leon Kamhi, Head of Responsibility and EOS at Federated Hermes Limited said: “We are privileged to serve over 70 institutional investor clients representing over US$2 trillion of assets, engaging with companies and policymakers on key business performance themes such as corporate governance, business purpose, climate change, human capital and human rights. Since EOS was established, our multi-disciplinary and internationally diverse team has grown to over 40 people in Europe and the US.

“The purpose of our service remains fundamentally about stewarding clients’ investments as an active, engaged owner as a way to add financial value. However, our approach has significantly developed both through the sophisticated techniques employed by our engagers and our introduction of systematic engagement and tracking tools to measure progress and outcomes. This evolution has come against the backdrop of a greater understanding and enthusiasm for active ownership which we have seen through the growing demand for EOS services.”

Mike Wills, Head of EOS Business Development & Client Management at EOS at Federated Hermes Limited said: “Looking ahead to the next 20 years, a survey of EOS clients revealed a clear consensus that our stewardship approach should continue to focus on enhancing financial performance of issuers and value of clients’ portfolios by achieving positive real-world outcomes. Examples include the strong recovery of the natural world, real decarbonisation, reduction in inequality within and between nations and significant progress on workforce conditions.

“Clients also emphasised the need for all stakeholders, including investors, businesses, and policymakers to give greater attention to how the new global economy will develop. They highlighted the importance of policymakers setting longer time horizons for policy to allow companies to better align their longer-term capital expenditure decisions and strategic planning with the transition.”

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Patrick Marshall

Federated Hermes, a global leader in active investment management, has announced the successful foundation close of its European Direct Lending III Fund (EDL III), the third vintage fund of its European direct lending platform.

This first phase of fundraising has attracted commitments of 50% of the total fund target size, from both existing investors in previous vintages, as well as new institutional investors, with further closes expected to be held in 2025.

Federated Hermes’ direct lending funds aim to provide investors attractive, stable and risk adjusted returns which focus on capital preservation and a stable income by lending to high-quality, non-cyclical small and mid-sized businesses domiciled in Northern Europe. Since launching its maiden fund in 2016, the Direct Lending team has maintained a zero-default rate which can be attributed to a focus on conservatively structured loans, non-cyclical end markets, and high levels of recurring revenue and cash flow conversion.

Federated Hermes has partnered with four major commercial banks in Europe and the UK, offering a differentiated origination approach in this market which, in conjunction with the capabilities of the investment team, provides a high-quality pipeline of investments. As a result of these origination capabilities, Federated Hermes’ experienced Direct Lending team reviews hundreds of potential investments a year, enabling them to invest in only the highest quality loans that meet stringent criteria and that afford traditional lender protections.

The structuring of loans takes into account ESG factors to encourage change in behaviours with the aim of providing superior outcomes and reducing downside risk. The investment team conduct ESG analysis on every loan in the portfolio, assigning each with a proprietary ESG rating, which is monitored quarterly for the life of each loan.

Patrick Marshall, Head of Private Credit, Federated Hermes comments: “Investors continue to see value in our direct, senior secured lending fund franchise due to its potential to generate attractive risk-adjusted returns through capital preservation and stable income above levels provided by comparable fixed income assets. Our clients have historically benefited from our highly risk-managed approach, which incorporates ESG and focuses on lending to high-quality businesses in non-cyclical sectors. Our distinct origination capabilities working in partnership with some of Europe’s leading banks, generates robust deal flow, allow us to access high quality credit opportunities and enable us to be credit-pickers rather than credit-takers in an increasingly competitive market.”

Jakob Nilsson, Head of Private Markets Sales ex North America, Federated Hermes further adds: ““We are extremely pleased by the strong investor support we have seen for EDL III to date. It has been especially pleasing to see existing clients commit to EDL III in larger sizes than previous vintages, a real testament to the track record of our experienced Private Credit investment team. We would like to thank our existing and new investors for their trust and look forward to working with them to achieve their investment objectives.”

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It is essential that the role of business and finance in addressing biodiversity loss remains on the agenda at COP16.

The Biodiversity COP16 Summit will take place in Cali, Colombia between 21^st October and 1^st November 2024. Sonya Likhtman, Associate Director – Engagement at Federated Hermes Limited, sets out her expectations of policymakers and highlight the key developments to watch out for.

With biodiversity under severe stress from pressures including habitat destruction, climate change and pollution, policy makers and the private sector will be challenged to come up with plans to prevent further loss of critical species later this month at COP16 – a key goal of the Kunming-Montreal Global Biodiversity Framework (also called the Biodiversity Plan) agreed at the Biodiversity COP15 in 2022.

Governments are expected to submit their National Biodiversity Strategies and Action Plans ahead of the COP16 meeting, to clearly articulate their plans for translating the goals and targets of the Biodiversity Plan into policy, regulation, and action by all stakeholders at the national level.

Private sector attendance is also expected to be high, as companies and financial institutions increasingly recognise their role in halting and reversing biodiversity loss this decade. The sector will require clear policy signals to streamline and accelerate action on nature.

The COP16 summit presents a critical opportunity for governments, financial institutions, and other stakeholders to collaborate on implementing the Kunming-Montreal Global Biodiversity Framework, the outcomes will be pivotal in shaping the future of both nature and the global economy.

The role of business and finance in addressing biodiversity must stay centre stage

It is essential that the role of business and finance in addressing biodiversity loss remains on the agenda at COP16. A decrease in financial flows that are currently harming nature and an increase in financing for nature – goes to the heart of the transition required across sectors of the real economy. The goal should be to mitigate the negative impacts on nature currently caused by companies’ operations and supply chains and increase companies’ contribution to biodiversity protection and restoration. Financial institutions will address their nature-related risks and impacts through underlying changes at the companies they invest in or lend to.

Governments should enable and accelerate action from the private sector through measures^[1] including nature-related disclosure requirements, combined climate and nature transition plans, action by central banks and reform of subsidies and incentive structures to encourage and support companies to reduce their nature-related risks and impacts.

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Notes:
[1] https://www.financeforbiodiversity.org/wp-content/uploads/FfB_Aligning-financial-Flows-with-the-Global-Biodiversity-Framework_April2024.pdf

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Jonathan Pines

Investors for a long time have not understood why China’s approach has been so “limp” and incremental response to its deep recession. The most likely reason for its incremental response is that it has bad memories of having stimulated too much during the global financial crisis, which caused excess capacity and a poor allocation of resources. But the incremental response over the last two years to revive sentiment among consumers has been largely ineffective – especially because it has been paired with a simultaneous anti-graft crackdown, which has scared many business leaders from making big investment decisions.

For at least a year, investors have been awaiting the “bazooka” that will revive confidence in both equities and property (two key assets held by Chinese households). This multifaceted, strong new approach at the very least underlines the government’s seriousness in tackling the problem. And may be what is required to finally result in asset values rising, which will help to revive consumer confidence.

Separately, a comment from him on Korea’s Value-Up programme (intended to boost depressed stock prices). Keen to continue pushing his Korea campaign, so if you can think of any journalists that would be interested in a discussion or follow-up please let me know.

We commend the seriousness with which Korean authorities are addressing this problem. A raft of measures have been announced that are under consideration.

However, the Value Up Index is in our view a red herring. 90%+ of companies in Korea are controlled by Families.  Most companies won’t care whether they are a part of the index because they don’t prioritize a higher stock price. Indeed, many prefer lower stock prices for inheritance tax reasons, or alternatively are indifferent to low stock prices because they value the benefit that controlling shareholders gain from poor governance more than they mind low stock prices.

So the presence of an index with seemingly arbitrary criteria for inclusion isn’t going to work because it  is not addressing the key cause of the Korea Discount, – the substantial benefit the controlling shareholders enjoy by controlling poorly governed companies, in particular their ability to benefit at the expense of minority shareholders. Many controlling shareholders  view the companies they control as belonging exclusively to them, with minorities being treated as a nuisance or resource to be used to benefit them.

Measures under consideration that would make a difference if implemented are (1) lowering inheritance tax to 40% or below (under consideration) – reducing the incentive for low stock prices (2) the introduction of a fiduciary duty (reducing the perception that the companies are the property of the controlling shareholders alone).

Other important measures that would make a difference would be to introduce tag along rights for minorities in the event of a takeover, end the practice of minorities being forced to sell their shares in terms of a restructuring, require minority approval for related party transactions, require annual board opinions on capital structure – particularly for companies with a low payout ratio.

By Jonathan Pines, Head of Asia ex Japan

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