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

PRI reporting framework 2020

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Outputs and outcomes

FI 17. Financial/ESG performance

17.1. Indicate whether your organisation measures how your incorporation of ESG analysis in fixed income has affected investment outcomes and/or performance.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
We measure whether incorporating ESG impacts portfolio risk.
We measure whether incorporating ESG impacts portfolio returns.
We measure the ESG performance/profile of portfolios (relative to the benchmark).
None of the above

17.2. Describe how your organisation measures how your incorporation of ESG analysis in fixed income has affected investment outcomes and/or ESG performance. [OPTIONAL]

In 2017, Federated Hermes published research by the Credit and stewardship teams demonstrating the impact of ESG factors on credit spreads, and developed a pricing model to capture the influence of these factors on credit instruments. The research examines the relationship between a company’s Quantitative ESG (QESG) Score and credit default swaps (CDS). It showed a convincing relationship between ESG risk and credit spreads, manifesting as an ESG-risk curve. 

In 2018, we expanded this research and found the relationship between ESG risk and credit spreads to be reinforced. The explanatory power of the model was strengthened with a broader time horizon.

In 2019, we conducted a study to see if there was a relationship between ESG and sovereign credit spreads. We found that countries with the lowest ESG scores have, on average, the widest CDS spreads, and countries with the highest ESG scores have the tightest spreads.

In 2020, we expanded on the 2019 study to see if the findings would hold up if we look at developed and emerging markets separately. We found that whilst the relationship between the ESG scores and credit spreads were statistically significant for both developed and emerging markets, it was stronger for developed markets.  

17.3. Additional information.[OPTIONAL]

https://www.hermes-investment.com/ukw/press-centre/fixed-income/new-research-shows-relationship-esg-factors-credit-spreads/

https://www.hermes-investment.com/ukw/insight/fixed-income/pricing-esg-risk-credit-markets-reinforcing-conviction/

https://www.hermes-investment.com/ukw/wp-content/uploads/2019/07/bd03720-credit-research-paper-pricing-esg-in-sovereign-credit-q3-2019.pdf

https://www.hermes-investment.com/ukw/wp-content/uploads/2020/03/bd004922-pricing-esg-risk-in-sovereign-credit-part-ii.pdf


FI 18. Examples - ESG incorporation or engagement

18.1. Provide examples of how your incorporation of ESG analysis and/or your engagement of issuers has affected your fixed income investment outcomes during the reporting year.

ESG issue and explanation

Governance (Management behavioural issues)

Impact on investment decision or performance

We had an opportunity to lend to a privately owned UK Hosting and Cloud service provider, benefitting from strong financial fundamentals, including stable cashflows and recurring revenues in excess of 95%. The company also benefitted from a conservative balance sheet and proposed capital structure. Team did not go through with the loan due to ESG issues but other lenders funded a loan based on the strong credit fundamentals of the business. In Oct 2019, the FT reported on a number of allegations of inappropriate behaviour by the company’s CEO, leading to his resignation and issues with the management. This led to erosion of the value of the company on which lenders were secured and loss of critical contracts as a result of bad publicity, had a significant negative impact on the company’s cashflow used to service the loan. 

ESG issue and explanation

Governance:  Concerns related to the Board and Accounting and financial reporting issues

Impact on investment decision or performance

A multinational company whose assets vastly outweighed its debt with good credit strength however, we chose not to invest due to issues related to lack of diversity on the Board and financial reporting issues. Controversy in 2019 related to the failure to declare taxable income in 2018. 

ESG issue and explanation

Governance and Social

Impact on investment decision or performance

Sold out of a sovereign issue due to concerns around governance structures. 

ESG issue and explanation

Governance 

Impact on investment decision or performance

Recently increased the holding size of an American clothing company due to good E and S practices. The company worked on developing technology that reduces the amount of chemicals they use and is also better positioned than its peers in managing supply chain risks. They have committed to sourcing its materials from the Better Cotton Initiative and organic cotton growers. 

18.2. Additional information.


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