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.

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.

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.

Our investments in our Impact Opportunities fund are aligned with nine investible themes that are aligned with the 169 targets underlying the 17 SDGs, from resource efficiency, financial inclusion and education to impact-enabling innovations. Our impact themes are the result of careful, continuous research into the global sustainability challenges we face and the unmet needs these create. We believe that these unmet needs provide tremendous growth opportunities for companies able to provide disruptive solutions through innovative and cost-effective products and services. The themes are regularly discussed within the team, but also take output from EOS, as well as experts on sustainability from our Real Estate, Infrastructure and Private Equity teams. These are supplemented by a wide network of relationships with external organizations focused on impact and research providers. We have therefore developed our own impact themes to address these unmet needs; Water, Food Security, Health & Wellbeing, Education, Financial Inclusion, Future Mobility, Impact Enablers, Energy Transition and Circular Economy. 

The Hermes SDG Engagement Equity Strategy aims to generate attractive investment returns and positive societal and environmental impacts through engagements with companies focused on the United Nations’ Sustainable Development Goals (SDGs). The SDGs are an ambitious, universal set of objectives agreed by UN member states. We believe that there are compelling opportunities to create such change and value among smaller companies whose operations and supply chains provide rich potential for improvement and the direct access to management required for successful engagement. To achieve this, Federated Hermes combines the proven stock-selection and engagement skills within its equity and stewardship teams. The investment opportunity that the strategy addresses is that engagement will enable positive change , and will encourage investee stocks to create more resilient businesses, as well as tackling pressing social or environmental needs. These companies should then begin to increase market share in their industries, improve business ecosystems, and strengthen market practices. This positive change should over the medium to long-term be reflected in the price of each company’s stock and will ultimately improve the net overall contribution of the industry to supporting delivery of the SDGs. In summary, we believe engagement has the potential to unlock value for all stakeholders – investors, companies, employees, local communities and the planet – and therefore help deliver the ambitious SDGs.

The Low Carbon Strategy is a Global Equity Strategy that seeks to outperform the representative benchmark while avoiding companies that have material exposure to fossil-fuels or are highly carbon intensive, as well as companies that are engaged in unethical or unsustainable activities. 

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Each investment team is ultimately responsible for understanding and incorporating relevant and material ESG information into their investment processes. This ESG awareness is achieved through a combination of in-house expertise, proprietary models, third parties and fundamental research, ensuring that relevant information is accessible and incorporated into investment processes.

EOS has a team of engagement specialists, organised by global sectors, themes and regions. This team engages on material ESG and strategic issues that may be limiting long-term sustainable value creation or increasing companies' risk and collaborates with Federated Hermes' investment teams pre- and post-engagement with companies.

We also have a Responsibility Office that is tasked with coordinating and supporting the ESG/engagement activities across all our investment strategies. Each of Federated Hermes' investment teams meet formally with the Responsibility Office on a quarterly basis to discuss their ESG and engagement integration activities and approaches as well as specific investee companies with respect to their ESG performance.

All investment teams have access to our proprietary ESG tools such as the ESG Dashboard, Portfolio Snapshot, Carbon Tool and the Corporate Governance Tool. These tools provide information both at the portfolio and stock level. Info on the tools can be found in 9.6. 

ESG tools:

ESG Dashboard:  Includes our proprietary QESG Score and identifies stocks with positive ESG characteristics and/or stocks demonstrating positive ESG change.

Portfolio Snapshot: The Portfolio Snapshot allows us to observe the aggregate ESG risks across our portfolios relative to their benchmarks. It also examines ESG ratings and controversies and identifies contingent risks. Our portfolio managers use this tool to evaluate a strategy’s ESG performance over time, by providing information on the carbon intensity of the portfolio and our voting choices relative to the benchmark. It also provides insights into engagement and the progress made.

Carbon tool: Our Carbon Tool enables fund managers and engagers to identify carbon risks in portfolios and companies that are or might become more exposed to carbon risks in the future. Importantly, the tool incorporates our stewardship activity and intelligence and is able to identify companies that are priorities for engagement and their progress against objectives.

Corporate Governance Tool – Our new governance tool provides a breakdown of corporate governance characteristics, such as information on board independence, diversity, audit tenure etc. This tool compares the company data and flags any companies that fall below the Federated Hermes expectations.

Our investment teams make use of ESG and engagement information in the fashion that is most appropriate for their investment strategy:

• For Hermes Global Equities, the ESG Dashboard and the team's proprietary stock sheet outline a company's ESG risk based on ESG data and engagement notes. Monitoring makes extensive use of the ESG Dashboard and Portfolio Monitor.
• Both the Hermes Asia ex Japan team and Global Emerging Markets strategy consider ESG in their initial screening process, and ESG factors and engagement progress are incorporated into assessments of the valuation, risks and catalysts of a stock or country.
• Hermes Small & Mid Cap teams utilise the ESG Dashboard and engagement notes as part of their valuation and risk monitoring processes.
• Hermes European Equities team uses ESG considerations to help identify changes that present investment opportunities. These changes often come as a result of government policy, environmental changes or technology shifts. ESG and engagement insights help to determine the risks that individual companies face.
• Our thematic Impact Opportunities Fund and SDG Engagement Fund are aligned with the UN SDGs. For more information, see:

https://www.hermes-investment.com/ukw/wp-content/uploads/2020/03/bd004867-sdg-engagement-equity-2019-annual-report-v2.pdfhttps://www.hermes-investment.com/ukw/wp-content/uploads/2020/02/hermes-impact-opportunities-fund-quarterly-report-q419-1.pdf

All of our investment teams have access to engagement information from EOS in addition to ESG data.