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

PRI reporting framework 2020

You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income » Implementation processes

Implementation processes

FI 01. Incorporation strategies applied

Indicate (1) Which ESG incorporation strategy and/or combination of strategies you apply to your actively managed fixed income investments; and (2) The proportion (+/- 5%) of your total actively managed fixed income investments each strategy applies to.
SSA
0 Screening alone
0 Thematic alone
100 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
95.9 Integration alone
4 Screening + integration strategies
.1 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
95.9 Integration alone
4 Screening + integration strategies
.1 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Securitised
0 Screening alone
0 Thematic alone
100 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%

01.2. Describe your reasons for choosing a particular ESG incorporation strategy and how combinations of strategies are used.

All of Federated Hermes' (aka Federated) fixed income assets are subject to the firm's bottom-up, fundamental research process where both quantitative and qualitative factors are incorporated into our credit analyses.  We view the incorporation of ESG factors as a natural extension of our primary research providing unique insights into a corporate issuer'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.

Thematic investing is available in our SDG Engagement High Yield Credit Strategy.  This is a high conviction strategy that invests in global high yield corporate issuers who demonstrate the willingness and ability to create positive change in society and environment while improving their credit profiles.  Application of the  UN SDGs resides at the heart of the strategy as a framework for direct corporate engagement.

Screening, as an ESG incorporation strategy, is limited to separate account clients whose investment policies require the exclusion of specific securities.  For those separate accounts, Federated screens out the specific securities or sectors mandated by the client.  

 

 

 

01.3. Additional information [Optional].


FI 02. ESG issues and issuer research

02.1. Indicate which ESG factors you systematically research as part of your analysis on issuers.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
Environmental data
Social data
Governance data

02.2. Indicate what format your ESG information comes in and where you typically source it

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  

02.3. Provide a brief description of the ESG information used, highlighting any differences in sources of information across your ESG incorporation strategies.

 Across the spectrum of fixed income products offered by Federated Hermes, a variety of ESG sources are used that include both proprietary inputs and external third-party sources.  

Federated Hermes has developed a full suite of issuer and portfolio-level ESG analytical tools which serve as a cornerstone of ESG integration in our credit strategies.  Our investment teams use our proprietary ESG Dashboard which provides a concise digest of ESG data, incorporating data from 10 leading ESG data providers. The Dashboard also includes the unique insights from dedicated engagers at EOS at Federated Hermes (EOS), our firm's pioneering stewardship and engagement service, about an issuer's ESG engagement progress towards defined ESG objectives.

In addition to the ESG Dashboard which aids in company-specific due diligence, investment teams are equipped with our suite of proprietary portfolio tools which include Portfolio Snapshot tool, Carbon Footprint and Engagement Measurement tool which measures engagement coverage by EOS.

 For High Yield, Municipal and Emerging Market investment teams, where sector and issue coverage by data and ratings agencies is more limited, proprietary frameworks were developed and include direct engagement with the issuing entity to better assess an issuer's creditworthiness and management of potential ESG risks.

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02.4. Additional information. [Optional]

Our 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 - 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 leading ESG providers including MSCI, Sustainalytics, Trucost, Bloomberg, ISS and CDP, and includes EOS at Federated Hermes (EOS) voting and engagement information.  A valuable component of the ESG Dashboard is the QESG score, a proprietary ranking developed by Hermes 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 momentum, showing the trajectory of progress in managing those 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, E, 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 our 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 include a Portfolio Snapshot, Carbon Tool, and Engagement Measurement.  The Portfolio Snapshot tool analyses all holdings using our proprietary QESG score which can be viewed in a historical time series on an absolute level and relative to a fund's benchmark.  Our highly differentiated ESG Engagement Analytics allow us to measure portfolio-level engagement coverage by EOS, specific E, S, and G themes of engagement focus, and quantify ESG momentum being made by portfolio holdings.

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 and low quality ESG data coverage, i.e.. High Yield, Municipals, and Emerging Market segments.  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 Account 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.  Federated Hermes has multiple representatives on the SASB boards and working groups including our Director of Responsible Investingand  Director of ESG Integration.  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 EOS dedicated engagers.  EOS is a pioneer in active engagement and stewardship with over a 15 year track record.  Our team of active engagers are ESG subject-matter experts with direct access to corporate boards and executives providing a unique vantage point to evaluate and monitor the ESG progress and momentum of a corporate issuer.  They possess deep knowledge of ESG themes and materiality in the industries and companies they cover, providing meaningful insight into an issuer's willingness to managing their ESG risks within the context of an enterprise's long-term strategic plan.

Each corporate engagement has specific objectives based on material ESG issues and every interaction with the company is documented in the EOS database.  In order to measure progress, every key environmental, social, governance  and strategic engagement theme is traced using our proprietary milestone system.  As a company makes a deeper commitment to positive change during their collaborative dialogue with our active engagers, their ESG momentum becomes measurable in the EOS database.  Advanced Engagement Analytics measure engagement progress based on quantifiable milestones providing a proof statement of forward-looking and intentional ESG integration.


FI 03. Processes to ensure analysis is robust

03.1. Indicate how you ensure that your ESG research process is robust:

03.2. Describe how your ESG information or analysis is shared among your investment team.

03.3. Additional information. [Optional]

Federated Hermes assures that all 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.

In addition to the creation of an-house ESG hub, Federated has partnered with leading financial data platforms, including FactSet and Bloomberg to build customized ESG dashboards and reports inside their workstations.  These solutions not only incorporate proprietary ESG ratings and research efficiently into a credit analyst's daily workflow, but also assist in ESG performance attribution and risk management. 

ESG documentation is key.  Many credit teams, including U.S. High Yield, Municipal, Investment Grade Corporate and Structured Product created their own in-house ESG assessment frameworks.  Material ESG risks were curated by each sector analyst to generate an E, S, G and Debtholder Stewardship (DESG) rating for every corporate issuer in their industry coverage universe.  When a security is presented for inclusion, the proprietary DESG score and material ESG issues are standard points of consideration in the investment thesis.

 


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