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Federated Hermes, Inc. (formerly Federated Investors, Inc.)

PRI reporting framework 2020

You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities; and the breakdown of your actively managed listed equities by strategy or combination of strategies.

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
88 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
10 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
1 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
1 %
Total actively managed listed equities 100%

01.2. Describe your organisation’s approach to ESG incorporation and the reasons for choosing the particular strategy/strategies.

Federated Hermes (aka Federated) is committed to ESG integration across all asset classes on a firm-wide basis.  Our equity teams predominantly follow a bottom-up fundamental research process that integrates both quantitative and qualitative metrics.  We view the incorporation of ESG factors as a natural extension of our primary research providing unique insights into a company's long-term strategic direction and a more comprehensive view of the risks and opportunities inherent in a security.  To us a long-term responsible investment approach needs to assess material ESG issues to better inform investment decisions and enhance sustainable value.

When Federated acquired Hermes Investment Management, a globally recognized pioneer in ESG integration and advocacy, the partnership created an opportunity for Federated to accelerate its incorporation of ESG factors and engagement into the DNA of all of our investment strategies.  In collaboration with Hermes, Federated has advanced a more systematic and formal approach to ESG integration in our equity strategies which we believe strengthens our commitment to our clients to be stewards of their financial assets, seek superior, risk-adjusted returns and create sustainable wealth. 

Governance issues, because they affect all stakeholders and provide insights into management quality, have consistently been a factor which is part of Federated's fundamental research when evaluating and owning portfolio companies.  Empirical evidence from Hermes has shown that companies with strong corporate governance and improving social characteristics tend to relatively outperform their industry peers.  We believe the integration of ESG factors and active engagement into the investment framework, both during the research process, and as owners, provides an important lens to understand material risk and opportunity over the long-term.

Our proprietary ESG toolkit is three-pronged and focuses on data, materiality and engagement as the means by which ESG factors are integrated into our investment research and ownership processes. 

Data Analytics - Federated Hermes has developed a full suite of company-level and portfolio-level ESG analytical tools which serve as a cornerstone of ESG integration in our equity strategies.

For company-level research, our investment teams use proprietary ESG Dashboards and Governance tools to evaluate corporate issuer ESG exposure and momentum.  Our ESG Dashboard provides a concise digest of ESG data, incorporating research from 10 leading ESG providers such as MSCI, Sustainalytics, Trucost, Bloomberg, ISS and CDP, and it includes EOS at Federated Hermes ("EOS") voting and engagement information. A valuable component of the Dashboard is the QESG score, a proprietary ranking developed by the Hermes Global Equity Team over a decade ago covering over 12,000 global securities.  The score captures how well a company manages ESG risk versus its peers and monitors ESG rating momentum, showing the trajectory of progress in managing those risks.  The QESG score can act as an early indicator of improving or deteriorating ESG risks.  Investment teams can use the proprietary rating, both the overall composite QESG score as well as individual E, S, or G pillar scores, to go deeper into a particular E, S, or G risk which may be increasing or decreasing in its impact to the company.  Our Governance Tool is multidimensional, assessing a company across measurable governance metrics and flagging outliers and discrepancies.  Investment teams find these governance analytics as highly complementary to their company ESG diligence by allowing them to focus on areas where a firm falls short on governance expectations and industry best practices.

In addition to the ESG Dashboard which aids in company-specific due diligence, investment teams are equipped with multiple portfolio-level ESG analytics.  Our suite of proprietary portfolio tools includes a Portfolio Snapshot, Carbon Footprint, and Engagement measurement.  Collectively, these tools allow investment teams to quantify ESG momentum, identify and assess climate-related carbon risk and measure portfolio-level engagement coverage by EOS within portfolios.

Materiality - Research is focused on financially material ESG risks and opportunities in each industry.  An in-house materiality assessment is especially important for strategies with limited or low quality ESG data coverage such as small capitalization. Identifying financially material factors requires both primary fundamental research and external sources such as sell-side research and industry-specific sources.  In 2018 Federated joined the Sustainability Accounting Standards Board (SASB).  SASB has developed a complete set of standards for 77 industries, focusing on ESG and sustainability risks that are financially material to each industry sector.  All of our Investment teams have access to SASB materiality maps through a centralized ESG hub that houses SASB materiality matrices, proprietary ESG portfolio tools, ESG third party data and EOS corporate engagement database.

Engagement - Investment teams have access to unique ESG insights about a specific issuer through dedicated engagers within EOS.  These corporate engagement specialists have deep knowledge of industry sectors, the companies they cover, and material ESG priorities, providing meaningful insight into an issuer's willingness to managing their ESG risks within the context of an enterprise's long-term strategic plan. This perspective on long-term ESG risks can impact an investment team's assessment of company valuations.  Direct engagement with issuers is not only important to obtain additional insights into a company's ESG practices, it can also serve as a mechanism to improve issuer's ESG profiles and thereby reduce risks over the longer term.  Each of our equity investment teams adopts a customized approach to incorporating ESG factors and engagement into their individual workflow and framework. While all teams have full access to the proprietary data, resources and expertise highlighted above, Portfolio Managers tailor the various ESG tools to meet their security selection and portfolio construction frameworks.

Our integration strategy is combined with other approaches when responding to client mandates and in our themed investment product:

  • Negative screening or exclusionary strategies are used primarily within separate accounts for those clients whose values-based investment policies prohibit specific securities, industries or sectors. Federated  will exclude the securities expressly prohibited by the client and construct the balance of the portfolio using the firm's bottom-up fundamental research process.  
  • A thematic SDG Engagement Equity fund was introduced in 2019.  This fund uses the SDGs as a framework for engaging with companies to create more impactful and financially successful enterprises.  

 

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

For clients seeking to avoid certain industries based on specific moral values, we tailor existing strategies to meet clients' specific investment parameters by screening out prohibited securities and excluding them from the potential universe of companies.  The list of screened stocks for separate accounts is based on specific stocks excluded at the request of the client. 

The balance of holdings within a portfolio are subject to the same rigorous fundamental research process which incorporates ESG factors and engagement in its risk management process.  As noted above, all of our equity strategies are available  in a customized separate account option which can apply screening in its final portfolio construction.

In 2019 Federated Hermes launched our first UN SDG engagement fund in the U.S. market.  The Federated Hermes SDG Engagement Equity Fund is advised by Federated Investment Management Company and subadvised by Hermes Investment Management Limited. The fund aims for capital appreciation over the long term alongside achieving positive societal impact aligned to the SDGs. This strategy combines SDG alignment as a core framework while also leveraging engagement expertise from EOS, our engagement and stewardship division, to understand material ESG risk factors and advocate for positive change.  


LEI 02. Type of ESG information used in investment decision

02.1. Indicate what ESG information you use in your ESG incorporation strategies and who provides this information.

Type of ESG information

Indicate who provides this information  

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

02.2. Indicate whether you incentivise brokers to provide ESG research.

02.3. Describe how you incentivise brokers.

Our Responsible Investing Office meets regularly with Directors of Research from leading global brokers to advocate for greater inclusion of material ESG factors in their research products.

02.4. Additional information. [Optional]


LEI 03. Information from engagement and/or voting used in investment decision-making

03.1. Indicate whether your organisation has a process through which information derived from ESG engagement and/or (proxy) voting activities is made available for use in investment decision-making.

03.2. Additional information. [Optional]

Federated Hermes' investment teams have access to proprietary analytics from both engagement and proxy voting activities to better inform decision-making.

Engagement

All investment teams have access to the proprietary EOS engagement portal and portfolio-level engagement analytics.  EOS retains a 15 year old repository containing the history of any engagement with a company, any current engagement objectives, and the ESG progress being made against these live objectives.  Our ESG Engagement Analytics allow us to measure portfolio-level engagement coverage by EOS, specific E,S, and G themes of focus, and quantify ESG momentum being made by portfolio holdings in an aggregate manner.  

Portfolio Managers can attend corporate engagement meetings with the EOS active engagers.  Joint engagements including both fundamental Portfolio Managers and EOS engagers equips our investment teams with a more comprehensive view of relevant and material ESG risks.

Proxy Voting

Equity Portfolio Managers are informed in advance of upcoming shareholder resolutions and proxy votes and regularly provide valuable insight into the ultimate voting decision.  Our proxy voting committee uses research from Glass Lewis, ISS, SASB and EOS engagers to obtain a well-rounded perspective.


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

Negative screening is used primarily in separate accounts.  Institutional separate account clients provide to Federated a list of prohibited sectors, products, securities or moral concerns which are then excluded from the potential universe of investments.  For Separately Managed Accounts (SMA), clients may provide a list of prohibited securities or choose class restrictions.  Federated uses GIC sector and industry classifications to determine the list of prohibited securities in SMA class restriction lists. 

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

 Institutional separate account clients direct all changes to the list of prohibited securities within their accounts so all changes to screening criteria are client-mandated and account specific. Within separately managed accounts, if a security is added to a class restriction list at the end of any given quarter and it is held in any client account that has that particular class restriction, the financial advisor on the account will be contacted to determine whether the security should be immediately sold from the client account or held and no further securities purchased.

 


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure ESG screening is based on robust analysis.

          Quarterly, SMA Portfolio Management provides to Managed Account Operations a current list of securities falling under the class restriction list using GIC industry definitions.
        

05.5. Additional information. [Optional]


LEI 06. Processes to ensure fund criteria are not breached

06.1. Indicate which processes your organisation uses to ensure fund criteria are not breached.

06.2. If breaches of fund screening criteria are identified, describe the process followed to correct those breaches.

Institutional Separate Accounts -  Through our trade order management system, we track sector and securities weightings and monitor a portfolio's structure and individual holdings.  Federated's Compliance Department monitors post-trade reports from various investment and trading systems to identify exceptions and facilitate any necessary corrective action in order to adhere to the stated SRI/ESG investment limitations articulated in the institutional separate account accounts guidelines.  In addition, Federated's Audit Department conducts periodic audits to ensure investment management controls, including those related to guidance adherence are operating properly.

Separately Managed Accounts - On a quarterly basis, Portfolio Management will provide to Managed Account Operations a current list of securities that fall under the class restriction list.  Managed Account Operations updates the Portfolio Accounting System as necessary.  If a security is added to a class restriction list at the end of any given quarter and it is held in any client account that has a particular class restriction, the financial advisor on the account will be contacted to determine whether the security should be immediately sold from the client account or held and no further securities purchased.  

06.3. Additional information. [Optional]


(B) Implementation: Thematic

LEI 07. Types of sustainability thematic funds/mandates

07.1. Indicate the type of sustainability thematic funds or mandates your organisation manages.

07.2. Describe your organisation’s processes relating to sustainability themed funds. [Optional]

The SDG Engagement Equity Fund uses SDGs to provide a framework for engaging to create more impactful and financially successful companies.  The fund aims to increase the value of fund investments over the long term alongside achieving positive societal impact aligned to the UN SDGs.  We believe there are compelling opportunities to create such change and long term value among small and medium sized businesses, many of which are not typical engagement targets of either shareholders or NGOs, yet whose operations and supply chains provide rich potential for improvement and the direct access required for successful engagement.  Small and mid-cap companies are largely unaccustomed to being engaged on sustainability matters.  Yet these businesses, along with their supply chains, have significant potential to create positive societal impacts and strong investment returns.  Engagement has the potential to unlock value for all stakeholders -- investors, companies, employees, local communities and the planet -- and therefore help deliver the ambitious SDGs.


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the proportion of actively managed listed equity portfolios where E, S and G factors are systematically researched as part of your investment analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

Equity investment teams utilize proprietary data, in-house assessments, and EOS active engagements to incorporate relevant and material ESG factors in their due diligence process.  Federated Hermes has developed a full suite of company-specific and portfolio-level ESG analytical tools which serve as a cornerstone of ESG integration in our equity strategies.

  • ESG Dashboard gives all investment teams access to material E,S, and G information for covered companies through the lens of a proprietary QESG score.  The score uses 10 leading ESG data sources to identify stocks with positive ESG characteristics and flags ESG momentum.
  • Portfolio Snapshot tool allows Portfolio Managers to view portfolio Engagement analytics including percent of fund holdings engaged by EOS, ESG themes engaged on and progress made over time.
  • Carbon Tool measures the carbon footprint of an investment fund relative to its benchmark and flags portfolio holdings with an outsized Scope 1, 2, and 3 emissions profile.
  • Governance tool is multidimensional, assessing a company across measurable governance metrics and flagging outliers and discrepancies and is highly complementary to the company ESG due diligence.

All of the these ESG tools are housed in our ESG hub, a centralized database for all ESG resources and proprietary analytics for investment teams.

 


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on robust analysis.

          The Responsible Investing Office holds formal monthly thematic deep dive webinars broadcast firmwide with presentation by various EOS engagers and SASB lead analysts.
        

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

          Our Director of Responsible Investing, Director of ESG Integration and EOS Engagers meet regularly with investment teams to provide relevant data and integration updates.
        

09.6. Additional information. [Optional]

Federated assures that all of its investment teams have access to best-in-class ESG resources and analytics through a centralized ESG information hub.  Investment teams can access multiple sources of ESG ratings and research, both third-party as well as Federated Hermes' proprietary data, research and portfolio level tools. These  proprietary tools include our ESG Dashboard, QESG score, Portfolio Snapshot, Carbon Tool, Governance Tool and EOS Engagement Analytics.

The importance of materiality of ESG factors and identifying sector KPIs is a key focus of continuous education for all our investment teams across asset classes.  We hold formal monthly thematic deep dive webinars broadcast to investment teams firm-wide with presentations by various EOS engagers and SASB lead analysts.

Ultimately each investment team is responsible for understanding and incorporating relevant and material ESG information into their investment processes.  While some teams are more advanced than others in their application of the full suite of proprietary data, materiality and engagement resources, all active fundamental equity teams are incorporating at least one dimension of our ESG toolkit within their investment framework.


LEI 10. Aspects of analysis ESG information is integrated into

New selection options have been added to this indicator. Please review your prefilled responses carefully.

10.1. Indicate which aspects of investment analysis you integrate material ESG information into.

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

10.3. Describe how you integrate ESG information into portfolio weighting.

 Our investment teams are equipped with multiple portfolio-level ESG analytics which help our investment teams combine the best of fundamental and ESG research to help identify sectors and companies with the greatest exposure or ESG momentum.  

Our suite of proprietary portfolio tools includes a Portfolio Snapshot, Carbon Tool and Engagement Measurement, all of which help expose leaders and laggards on dimensions of engagement, carbon emission, and governance.  For example, our Carbon Tool measures the carbon risk of an investment fund relative to its benchmark and of listed companies relative to their peers, including Scope 1, 2, and 3 emissions.  By identifying outlier companies versus industry peers and benchmark, portfolio managers can identify sectors and individual companies that may not be responding to larger secular trends versus their peers, or conversely identify a company which is pivoting their business model to a more sustainable model. Investment teams can then take appropriate action such as changing the status of a holding, resulting in adjusted or altered portfolio level exposures.

 

10.6. Additional information. [OPTIONAL]

As part of its commitment to intensive, bottom-up fundamental research, Federated investment teams' comprehensive security analysis process considers macro factors as well as industry and company specific concerns.  Within that context, financially material ESG factors are used as an additional information set to help support the investment thesis for a specific security and sector allocation.  Each of our teams makes use of ESG information in a manner that is most appropriate for their investment strategy.

 


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