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

PRI reporting framework 2020

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You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes » (A) Implementation: Screening

(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

Our investment managers may exclude stocks based on specific client mandates and we operate a firm-wide exclusion policy with respect to cluster munitions and anti-personnel land mines.

In addition, the Hermes Global Equity Screened ESG portfolio does not invest in:

Companies identified by EOS as exclusion companies based on the manufacture and/or production of controversial weapons and/or tobacco products

Companies identified in EOS's Controversial Companies Report as having a High Severity rating for environmental and social risks and where engagement is deemed unfeasible

Companies generating 10% or more of their revenue from armaments, gambling or old growth logging

Companies that derive one-third or more of their revenues in high carbon-sensitive activities

High-risk nuclear power utilities

Other funds we manage have variants of this exclusion list. 

Screened by

Description

Some of Federated Hermes' strategies follow a best-in-class approach. The Hermes Global Equity ESG strategy is biased towards companies with favourable ESG attributes. The strategy embeds a proprietary ESG score within its investment process, ensuring a bias towards stocks with good ESG behaviours or positive change.

The strategy analyses companies on a large number of fundamental, economically-justified factors contained in the team's multi-factor Alpha Model and on ESG characteristics as measured by the team's proprietary QESG Score. The QESG Score captures how well a company manages its ESG exposure, as well as its trend in managing ESG risks. The QESG Score overly penalises badly-governed companies, thus helping the team to identify better behaving companies.

Federated Hermes also sub-advises a US-domiciled ESG-focused Global Emerging Markets mutual fund, which invests in companies that meet specified sustainability and corporate responsibility criteria. As well as excluding certain specified stocks, the strategy seeks to invest in companies whose products/services or industrial/business practices contribute towards addressing one or more global sustainability challenges in their local and/or international markets.

Screened by

Description

Hermes Global Equities uses the EOS Controversial Companies Report as a screen for their investible universe; this report pre-integrates the Global Compact and ILO conventions.

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

In the Hermes Global Equity Screened ESG strategy, the negative screening is client prescribed. The list is reviewed and confirmed on a quarterly basis with the client. The screening is an addition to the integration of ESG considerations, as informed by the ESG Dashboard and engagement knowledge, within the investment decision.

Any changes to the pooled funds would require prior communication with the investors, either in the form of a shareholder notification or approval and approval by the relevant regulator. 


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure ESG screening is based on robust analysis.

          Internal tools which are based on our internal expertise and a robust methodology
        

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]

Federated Hermes employs its research partner Sustainalytics to ensure the screening of issuers is based on robust analysis. In addition, EOS analysts provide an independent engagement perspective to complement Sustainalytics' rigorous approach to company research, which ensures that the screening services provided to us are not only based on thorough research, but also take into account company circumstances and engagement considerations.

At Sustainalytics, comprehensive research is undertaken or sourced to determine issuers' ESG performance. Issuers are given the opportunity by Sustainalytics to review ESG research on them and correct inaccuracies. External research and data used to identify issuers to be excluded or included is subject to internal audit by its staff. Information on ESG issues and/or ratings is updated regularly to ensure that portfolio holdings comply with fund policies. A periodic review of the quality of the research undertaken and provided is carried out at Sustainalytics. For all of its company ESG research, Sustainalytics contacts companies directly and asks them to provide feedback on their company ESG report. This process aims to give companies an opportunity to provide Sustainalytics with additional inputs to some of their ESG management systems and policies and correct any potential inaccuracies. Furthermore, companies may also provide further clarification about specific company involvement, in particular controversial issues, and how these are managed.

Sustainalytics considers quality management of key importance. Its analysts have clear and detailed research guidelines across indicators and industries to inform their analysis. Its Quality Management System (QMS) ensures continuous monitoring and improvement while its QMS team, whose responsibilities are described below, assists with particularly challenging issues requiring further consideration. In addition, all company profiles are peer reviewed before being uploaded to the database to ensure consistency and thoroughness.

The QMS includes:

Clear and detailed research guidelines for all products and services.
Detailed research procedures including sourcing requirements, archiving systems, process documentation and reporting.
Peer review of all company reports.
Assignment of clear responsibilities for conducting research and monitoring adherence to research guidelines and procedures.
Systematic tracking of incidents as raised by analysts, other company staff and external parties such as clients or the companies that it researches.
Requests for feedback from the companies we cover.
Periodic review of the QMS, including evaluation and identification of priorities for action.
Ongoing training for our analysts on quality standards and procedures.

Sustainalytics implements strict procedures to ensure the proper management of research data as part of all its deliverables. It regards the independence and objectivity of its analysis fundamental to the quality of its work. It ensures that its ratings and any other analytical assessments are only influenced by factors relevant to research and are not affected by actual or potential business relationships between Sustainalytics and the companies it researches.

EOS will review and supplement research provided by Sustainalytics and provide their independent, subjective insights based on their engagements with a company. Where they have a different opinion, they will inform clients of this and overlay their view onto the Sustainalytics research.


LEI 06. Processes to ensure fund criteria are not breached

06.1. Indicate which processes your organisation uses to ensure fund criteria are not breached.

          See 6.3 below.
        

06.2. If breaches of fund screening criteria are identified, describe the process followed to correct those breaches.

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.

06.3. Additional information. [Optional]

Our internal audit department does not routinely audit fund holdings, but if a fund is subject to external audit, these holdings will be covered annually by their year-end external audit. Instead, the internal audit department audits the Fund Accounting function approximately every two years and, as part of this, audits a sample of funds, their holdings and valuations.


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