The exclusion list for the Hermes Global Equity Screened ESG strategy is updated in the team's stock selection tool and Axioma, their portfolio optimisation and portfolio construction tool. The list is also coded into thinkFolio, our order management and trading system. The Global Equities team also holds quarterly sessions with the Investment Office, Responsibility team and other investment teams at which they review output from the Portfolio ESG Monitor, which highlights companies that have breached or could potentially breach Sustainalytics' Global Compact Compliance Report Watchlist.
Our Compliance team monitors fund guidelines for all funds, including objectives and constraints; the exclusion list for all Federated Hermes equity strategies as applicable; and the firm-wide exclusion policy with respect to cluster munitions and anti-personnel land mines, through thinkFolio.
Pre- and post-trade compliance occurs for all active portfolios. Pre-trade portfolio parameters, counterparty limits and other guidelines are coded, where possible, into thinkFolio prior to investment. Coding is undertaken via a robust rule summary process and is always subject to further review by a senior member of the compliance team. Once client risk limits have been input into Thinkfolio, they cannot be altered by portfolio managers. Thinkfolio is coded to ensure that any trade in a prohibited counterparty or jurisdiction is prevented before execution.
The Compliance team also runs a daily post-trade breach report in Thinkfolio, which shows when investment guideline limits have been exceeded, irrespective of whether the 'breach' has occurred as result of market movements or a corporate action.
Once a breach is identified the Fund manager and Client services are notified of the breach with details of the clients Breach Correction/Notification policy (taken from the Client IMA)
The Operational Risk team are notified, who will then; log the breach, issue a breach reference number, send a breach form to the FM for completion and track the breach to closure.
The Compliance team also runs a daily post-trade breach report in each system, which shows when investment guideline limits have been exceeded, irrespective of whether the 'breach' has occurred as result of market movements or a corporate action.
We also run a stringent internal first line of defence to ensure that risk limits are not breached. This includes our Investment Office, which regularly monitors where portfolios may be approaching certain 'soft limits', providing an early warning system to ensure that a subsequent breach is avoided. Where soft limits are reached, this will immediately be flagged up with the investment team to enable them to adjust portfolio positions accordingly.