Federated Hermes Credit's policy is to pursue engagements with companies that either score poorly from an ESG perspective but reflect good relative value, or score well but for whom they have a sizeable position and demonstrate a willingness to engage with us. In the case of Pemex, a 100% government-owned company, the team initiated an engagement because they believed that due to their debt balance of nearly $100bn, they are entirely dependent on public capital markets for survival. Therefore, they need to understand how improving ESG behaviours can improve their relationship with investors and lead to a lower costs of capital, whilst also doing the right thing by its employees and the environment. Generally, the EOS analyst will maintain and take the lead for the engagement relationship. That said, wherever possible the Credit analyst will attend joint meetings with issuers, which helps enhance the quality of the engagement and inform the analyst's view of a company. In both instances, credit analysts will sit with EOS analysts before and after meetings so as to benefit from the transfer of knowledge.
Post-engagement notes are written up by the engager and are shared across our investment teams and third-party stewardship clients. Portfolio managers have access to our engagement portal, where they can see the history of engagements with a particularly company, check live engagement objectives and the progress being made against these objectives through engagements.
We have clear and well-established protocols for how to identify engagement issues, to escalate an engagement and to measure an engagement's effectiveness. Engagements with companies will normally relate to longer-term strategic, environmental, social or governance issues.
In determining whether and how the engagement is taken forward, due regard is given to:
the level of the company's exposure to the issue at hand;
the likelihood of engagement success and potential to bring about positive change; and,
the value of our clients' ownership of the company.
Because our engagement team engages with companies globally, both for our internal holdings and for third-party clients, it is likely that we will be engaging with an issuer irrespective of whether we have, at any one point in time, an internal holding. This coverage allows our analysts to benefit from these engagement insights when looking at prospects, as well as in relation to ex-post monitoring.
Our Responsibility team meets with our Credit team formally each quarter to discuss the engagement coverage of the portfolio and new engagement candidates. The Responsibility team also meet with the Direct Lending and Asset Based Lending teams quarterly to discuss their approach to ESG integration.
We also regularly participate in collaborative cross-industry engagement initiatives, and involvement in these may come from either or both the engagement or fixed income teams.