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

PRI reporting framework 2020

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Pre-investment (selection)

PR 04. Incorporating ESG issues when selecting investments

04.1. Indicate if your organisation typically incorporates ESG issues when selecting property investments.

04.2. Provide a description of your organisation`s approach to incorporating ESG issues in property investment selection.

RPI is an integrated part of the investment strategy and working practices for our Real Estate portfolios.

Consideration of ESG principles is embedded in our processes through the property selection and investment process, including initial screening, due diligence, and in the investment decision.

In our transaction process we use a number of procedures and tools developed internally and through our sector engagement programme:

  • Initial screening: Fund managers and surveyors are educated on the sustainability characteristics of buildings and the main market and regulatory risks associated with ESG. In particular, regulatory risk assessments of standing portfolios are made on a regular basis to help inform the fund managers' acquisition and disposal strategies. They use this knowledge as part of the initial screening, looking both at the risks and opportunities for value add from ESG characteristics.
  • Due diligence: A responsible investment due diligence for new acquisitions is carried out as part of the overall due diligence process. Building surveyors and environmental consultants collect relevant information on the buildings, which is then assessed to identify risks and opportunities and include findings in investment strategy and refurbishment and management plans.
  • Investment decision: Sustainability regulatory risk assessments have helped identify typical risks that should be incorporated when devising the parameters entered into the investment models (using discounted cash flow analysis). Typically, the managers integrate ESG information that can affect such investment fundamentals as refurbishment budgets, risks of voids, lease lengths, and obsolescence. ESG criteria and assessments are integrated into the investment decision papers submitted for approval to the Investment Executive Committee. The head of responsible property investment sits on the Investment Executive Committee to review and ensure ESG integration is appropriately covered.
  • For Federated Hermes Real Estate's indirect and international investments, we carry out active engagement on governance matters and on ESG policies and strategies. We include commitments to develop a joint RPI strategy on acquisition for jointly managed assets.

04.3. Indicate which E, S and/or G issues are typically considered by your organisation in the property investment selection process, and list up to three examples per issue.

Environmental example 1, description

          Since 2006, our baseline year, Federated Hermes has implemented a comprehensive climate and resource-efficiency programme throughout the lifecycles of our assets. It is driven by a detailed management plan and aims to achieve specific targets, with progress gauged according to metrics and qualitative assessments.
Our performance outputs for climate and energy efficiency include having, since the baseline year in 2006, achieved an average of 9% p.a. reduction in emissions every year on Federated Hermes’ like-for-like portfolio and having delivered improvement in energy efficiency by reducing offices carbon intensity by 70% since 2006.
As part of our active risk management, we monitor our exposure to energy performance certificate ratings. In the UK the minimum energy efficiency standards regulation (MMES) came into force on 1 April 2018 which we have prepared for by keeping risk logs of EPC ratings by funds. As part of our due diligence process we review the EPC ratings and the source of the ratings, we assess what will be required to improve these ratings in line with our minimum refurbishment standards and ensure the associated costs are included in planned and preventive maintenance and refurbishment budgets as part of the asset investment plan and DCF models.
        

Environmental example 2, description

          Natural hazards and adaptation: In the UK our main focus in climate adaptation is on flood risks. We carry out a yearly survey of our flood risks for each fund and strategy and develop dedicated flood action plans where necessary. Flood risk assessment is part of our due diligence process. We have had occasions where assets were not purchased due to high level of flood risks.
        

Environmental example 3, description

          We aim to positively impact the health and well-being of our occupiers and local communities through a range our activities taken during in the life cycles of real-estate assets: 
•	Development and refurbishment: land de-contamination, the use of safe and healthy materials, and enforcing risk management and safety standards in development, refurbishment and property management 
•	Asset management: actively managing well-being initiatives through our Collaborative Asset Performance Programme + (CAPP +) targeted greater occupier engagement, wellbeing and comfort 
•	Attaining wellbeing certification, in 2018 we earned the first RESET Core and Shell Certification designations in Europe. In 2019 we attained Fitwel certification for one of our assets and have a number of others in progress.
•	Participating or supporting initiatives that promote wellbeing among occupiers and communities by addressing the following concerns: the aging population, chronic illness and obesity; sustainable transport; healthy living among occupiers; community health; and implementing the UK Modern Slavery act through our activities and supply chain.
        

Social example 1, description [OPTIONAL]

          Building safety and materials in refurbishment and development: Improving the value and performance of legacy buildings has been a key part of the Federated Hermes RPI strategy. As a result, we have tailored guides and minimum sustainability requirements for refurbishments and developments to capture potential environmental and health improvement potentials at this crucial step of the building life cycle. Our guides include minimum requirements regarding the use of sustainable materials, re-use of waste materials and how to manage hazardous materials on site. During due diligence we ensure that any work programme associated with the new asset will be done in agreement with Federated Hermes guidelines. Investment teams must integrate this information in their analysis and ensure the associated costs are included in planned and preventive maintenance and refurbishment budgets as part of the asset investment plan and DCF models.
        

Social example 2, description [OPTIONAL]

          We have an extensive community and occupier engagement programme across our retail and offices assets focusing on governance, skills, safety, culture and wellbeing. Across our buildings we aim to establish a constructive dialogue with occupiers and have a number of engagement activities responding to their needs and strengthening the sustainability performance of our buildings. In addition, we have introduced ‘green’ clauses in our standard lease since 2008.  
As part of our due diligence process we inquire to understand the level of community and tenant engagement in the assets being considered; the findings from this inform the asset management plans and processes.
        

Social example 3, description [OPTIONAL]

          Federated Hermes is committed to providing safe working environments for those clients where we provide an asset management service. This commitment is for the benefit of all users, including our employees, our contractors, our tenants and their customers, visitors and members of the public. Risk and safety are an integral part of our asset due diligence to ensure we understand and mitigate the risks and introduce all appropriate safety measures required during the asset management phase.
        

Governance example 1, description

          Conflicts of interest: A conflicts of interest policy is in place to protect the interests of all our investors. The policy sets out a process which allocates investments on a ‘first past the post’ basis where the investment team that receives the introduction has the first opportunity to acquire the investment. If they do not proceed on the basis that the investment does not fit within the fund, then it is offered to other Federated Hermes managed clients. If there remains any doubt, then the allocation decision is approved by the CEO of Real Estate.
        

Governance example 2, description

          While we comply with all current legislation and demonstrate preparedness for forthcoming regulatory requirements, we continuously analyse and future-proof our operations against risks to investment performance. Such risks may arise from new regulatory frameworks and legal requirements, market shifts in occupier preferences and changing behaviour, and the long-term risks that climate change, energy security and resource scarcity pose to their real estate investment.  
At the portfolio level, the first step required within the integration process is the assessment and understanding of sustainability, regulatory and market risks, and then subsequently to ensure that the management of these risks becomes part of the standard investment processes. At Federated Hermes we use the outcome of the risk assessment process to inform the portfolio investment strategy. All risks are assessed as part of our due diligence for acquisition, and, if identified, mitigation strategies are set into place as part of the investment and asset management plan and processes.
        

Governance example 3, description

          We have a responsible supply chain policy and ensure that our responsible investment requirements are included in our service agreement with our service provides.
These include: Property Managers, projects, Refurbishment and Development teams, Energy Services and Sustainability consultancies.
We require all our suppliers to comply with the UK Modern Slavery Act requirements.
        

04.4. Additional information. [Optional]


PR 05. Types of ESG information considered in investment selection

05.1. Indicate what type of ESG information your organisation typically considers during your property investment selection process.

          Building surveyors reports, environmental assessment reports
        

05.2. Provide a brief description of how this ESG information was incorporated into your investment selection process.

Our investment managers refer to our in-house sustainability regulatory risk assessments to identify typical risks that should be incorporated when devising the parameters entered into the investment models (using discounted cash flow analysis).

Responsibility and sustainability assessments are integrated into investment analysis on the basis of the data provided by the asset vendor and our in-house surveys and assessments. We collect data from the seller and perform our own building and environmental surveys; both surveys include an RPI questionnaire. We compare building data that is available from the benchmark we use for our directly-managed properties.

The investment managers integrate ESG information in their investment analysis and discounted cash flows models, which typically can affect such investment fundamentals as the refurbishment budgets required to upgrade an asset to Federated Hermes' minimum responsible refurbishment and development requirements. We also assess the risks of voids, lease lengths and obsolescence for low and high spec sustainability assets in a particular location.

Material elements identified are included in the investment papers submitted to the investment committee. 


PR 06. ESG issues impact in selection process

06.1. Indicate if ESG issues impacted your property investment selection process during the reporting year.

06.2. Indicate how ESG issues impacted your property investment deal structuring processes during the reporting year.

06.3. Additional information.


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