The International business of Federated Hermes Inc’s (“Federated Hermes”) mission is to help beneficiaries retire better and help create a better society. To achieve this, we aim to be the world's leading provider of long-term holistic returns for savers, thus creating value for all stakeholders in the financial system. We believe that long-term investment approach needs to encompass the consideration of longer-term risk factors alongside more traditional financial analysis. To us a responsible approach to investing means recognising the importance of the long-term health and stability of the markets in which we invest; analysing (and continuing to monitor) the ESG credentials of companies and assets in order to inform our investment decisions, and utilising our ownership rights in a considered and intelligent fashion to protect and enhance sustainable value. As such, ESG considerations and engagement are incorporated into the approaches of all of our investment teams.
Our ESG strategy is for all of Federated Hermes investment teams to incorporate relevant and material ESG information as well as relevant engagement insights directly in investment decision-making. It is incumbent on each investment team to ensure that appropriate engagement is being carried out either by the investment team or through our stewardship team EOS at Federated Hermes (“EOS”). Leading to a range of ESG performances in the portfolio but with a commitment through engagement to improve performance thereby reducing risk and exploiting value opportunities.
All investment teams incorporate ESG factors into their investment process by accessing in-house expertise, proprietary and third-party research and by undertaking their own fundamental research. Tools available include our proprietary ESG Dashboard, which provides a QESG Score per stock, the Portfolio Snapshot Tool, which provides a view of ESG performance at a portfolio level, the Carbon Tool, which provides the breakdown of the carbon emissions of the portfolio and the Corporate Governance tool, which highlights key governance characteristics at the company and portfolio level.
Our proprietary QESG Score captures how a company manages its ESG risks and whether it’s improving. This analysis is a valuable input to our investment decisions, as well as the ongoing monitoring of, and, if necessary, engagement with companies. We are cognisant, however, that quantitative ESG data has to be treated with care and necessitates thorough cleaning and reprocessing before being able to add value. We believe, therefore, that it must be complemented by a fundamental bottom-up review of ESG issues, leveraging our knowledge of and direct contact and engagement with companies.
Our proprietary Governance Tool provides our equity fund managers with incisive information with regards to the governance performance of current or future investee companies. The tool assesses a company along several significant governance characteristics, and flags those areas where the company falls short of our governance expectations for companies. Rather than providing yet another score, the tool helps our fund managers to focus their own, fundamental governance research on those areas where companies have a discrepancy compared to our governance expectations.
The Portfolio Snapshot Tool allows us to observe the aggregate ESG risks across our portfolios relative to their respective 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. In addition, it provides insights into engagement: the companies we are engaging with; the ESG themes we are engaging on; and the progress we have made on current engagements.
Our Carbon Tool uses greenhouse gas emissions data from TruCost to assess the carbon impact and associated climate risk of a portfolio, considering direct and indirect carbon emissions and its performance compared to industry peers. Combined with information on our stewardship activities with investee companies on mitigating their carbon exposure, this tool is cutting-edge in providing fund managers and engagers a direct assessment of a portfolio’s exposure to carbon risk and progress made in engagement to address the risk.
Both a quantitative and qualitative view
Engagement is an important part of our investment process because we believe that companies deserve a constructive relationship with committed shareholders. Our fundamental research benefits from the ongoing dialogue between our investment teams and our stewardship team. We invest time and resources to encourage companies to strengthen their governance, give our views on strategy, and encourage companies to take the long-term view, particularly on sustainability issues. The insights we glean from these interactions help us to better understand a company's complex strategic challenges. Our research shows that changes in ESG and effective engagement on ESG issues can deliver excess returns.
All of the above is supported and overseen by our Responsibility Office.
The Investment Office provides a robust and transparent risk framework. On a look back, real time, and forward-looking basis the team actively monitors fund risk and helps to deliver sustainable risk-adjusted alpha, while acting as an early warning system to identify potential problem areas. It has overall responsibility for the consistency of performance and thus ensures that investment teams stay true to their processes, this includes oversight of ESG and engagement integration. Our Responsibility Office is tasked with coordinating and supporting the development of our policies and their subsequent integration across our funds and stewardship services. Regular meetings are held between the team and portfolio managers at which ESG issues relevant to the specific strategies – whether specific or market level – are discussed.
The Investment Office works closely with the Responsibility Office, both of which have an independent reporting line to our Chief Executive.
A consistent approach tailored for individual strategies
Our investment teams, taking advantage of the in-house data and resources available, adopts their own approach to integrate ESG considerations and engagement that is consistent with their investment philosophy and investment markets. In some cases, ESG factors can be a component of a screen, a source of ideas, an input into fundamental analysis, an adjustment to valuation drivers and/or a portfolio construction factor.