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The international business of Federated Hermes (formerly Hermes Investment Management)

PRI reporting framework 2020

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Fixed income - Engagement

FI 14. Engagement overview and coverage

14.1. Indicate the proportion of your fixed income assets on which you engage. Please exclude any engagements carried out solely in your capacity as a shareholder.

Category
Proportion of assets
SSA

14.2. Indicate your motivations for conducting engagement (SSA fixed income assets).

Corporate (financial)

14.2. Indicate your motivations for conducting engagement (Corporate, Financial fixed income assets)

Corporate (non-financial)

14.2. Indicate your motivations for conducting engagement (Corporate, non-financial fixed income assets)

Securitised

14.2. Indicate your motivations for conducting engagement (Securitised fixed income assets).

14.3. Additional information.[OPTIONAL]

We engage with companies, principally, for two reasons:  1) to assess the earnestness with which a company seeks change to its ESG behaviours and 2) to encourage them to change, whilst making sure they understand why we care.  Further, there are indirect benefits to engagement as well because the dialog itself offers information away from ESG factors and serves to reduce uncertainty about the company.  Also, we believe that there is a positive feedback loop to the company because they benefit from advice, our experience and an understanding of why investors care about these issues. 

Our Credit analysts engage with companies on their own or in collaboration with the stewardship team.  Our stewardship team, EOS, undertakes engagement activity for all of Federated Hermes' funds, including our credit portfolios. We review the holdings that are being engaged on a regular basis and identify issuers that may warrant further analysis and potential engagement. On at least a quarterly basis, in addition to ad hoc interactions, our credit analysts discuss the progress of a selection of engagements with the relevant engager in order to ensure that relevant insights are incorporated into their credit scores and to ensure that the engagement remains focused on those matters considered most material to the company's sustainable prospects. In addition, the ESG Portfolio Monitor, which is produced and shared with teams on a monthly basis, also highlights each security for which there is currently an engagement ongoing and indicates whether there are specific objectives attached to this engagement.

We believe that the combination of active management decisions and engagement provides for a positively reinforcing cycle that continually evolves our understanding of the positioning of a company. This enhances our ability to deliver sustainable outperformance for clients, responsibly.

Our Private Credit teams work to identify meaningful existing and potential ESG risks before investing, as the key to outperformance is to manage the downside ex ante. This involves a dialogue with management teams and borrowers on ESG issues pre-investment, as well as consideration of all information provided in the due diligence packs. 


FI 15. Engagement method

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

15.1. Indicate how you typically engage with issuers as a fixed income investor, or as both a fixed income and listed equity investor. (Please do not include engagements where you are both a bondholder and shareholder but engage as a listed equity investor only.)

Select all that apply
Type of engagement
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
Individual/Internal staff engagements
Collaborative engagements
Service provider engagements

15.2. Indicate how your organisation prioritises engagements with issuers.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
Size of holdings
Credit quality of the issuer
Duration of holdings
Quality of transparency on ESG
Specific markets and/or sectors
Specific ESG themes
Issuers in the lowest ranks of ESG benchmarks
Issuers in the highest ranks of ESG benchmarks
Specific issues considered priorities for the investor based on input from clients and beneficiaries
Other

15.3. Indicate when your organisation conducts engagements with issuers.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
We engage pre-investment.
We engage post-investment.
We engage proactively in anticipation of specific ESG risks and/or opportunities.
We engage in reaction to ESG issues that have already affected the issuer.
We engage prior to ESG-related divestments.
Other, describe

15.4. Indicate what your organisation conducts engagements with issuers on.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
We engage on ESG risks and opportunities affecting a specific bond issuer or its issuer.
We engage on ESG risks and opportunities affecting the entire industry or region that the issuer belongs to.
We engage on specific ESG themes across issuers and industries (e.g., human rights).
Other, describe

If ‘other’ has been selected, please give a description

SDG Themes

15.5. Indicate how your organisation ensures that information and insights collected through engagement can feed into the investment decision-making process.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
Ensuring regular cross-team meetings and presentations.
Sharing engagement data across platforms that is accessible to ESG and investment teams.
Encouraging ESG and investment teams to join engagement meetings and roadshows.
Delegating some engagement dialogue to portfolio managers/credit analysts.
Involving portfolio managers when defining an engagement programme and developing engagement decisions.
Establishing mechanisms to rebalance portfolio holdings based on levels of interaction and outcomes of engagements.
Considering active ownership as a mechanism to assess potential future investments.
Other, describe
We do not ensure that information and insights collected through engagement can feed into the investment decision-making process.

15.6. Additional information.[OPTIONAL]

It should be noted that, as discussed above, our engagement with sovereigns is still limited at this point. It will however follow the same principles of engagement as a path to understanding the earnestness with which country officials seek change and are thinking about how ESG factors can impact its financial strength and thus credit risk.  


FI 16. Engagement policy disclosure

16.1. Indicate if your publicly available policy documents explicitly refer to fixed income engagement separately from engagements in relation to other asset classes.

16.3. Additional information [OPTIONAL]

https://www.hermes-investment.com/uki/wp-content/uploads/2018/10/hermes-we-can-all-get-along-bond-and-shareholder-engagement-part-1-q3-2018.pdf

https://www.hermes-investment.com/ukw/wp-content/uploads/2019/05/hermes-we-can-all-get-along-part-ii-q2-2019.pdf

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.


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