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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 - Fixed Income » ESG incorporation in actively managed fixed income » (B) Implementation: Thematic

(B) Implementation: Thematic

FI 07. Thematic investing - overview

07.1. Indicate what proportion of your thematic investments are (totalling up to 100%):

Specify

          investments that are engaged to deliver into at least one of the UN SDGs.
        
100 %

07.2. Describe your organisation’s approach to thematic fixed income investing

The Hermes SDG Engagement High Yield Credit Strategy aims to provide total return through a combination of income and capital growth, whilst delivering positive societal impact through engagements with companies focused on the United Nations’ Sustainable Development Goals (SDGs). This is a high conviction strategy that invests in high yield companies that demonstrate willingness and ability to create positive change in society and/or environment whilst improving their credit profiles.

The strategy uses the SDGs, an ambitious, universal set of objectives seeking global prosperity and environmental integrity by 2030, as a framework for engagement. Our engagements seek positive change that strengthens the long term performance of companies, sustaining both impact and corporate profitability. We believe that bondholder engagement supports the long-term viability and investment performance of businesses while also benefiting society and the environment. The global high-yield market offers great opportunities to identify companies with the willingness and ability to change their operations, products or services in order to generate additional benefits for society and the environment. Most high-yield issuers are yet to focus on creating positive change, enabling us to play an important role in their efforts to become impactful while also delivering attractive returns to investors. By investing and engaging to create change, we seek tomorrow’s impact leaders rather than focus on those of today.

The strategy aims to generate long-term, risk-adjusted outperformance by investing in attractive high-yield credit instruments and engaging with the underlying companies to generate positive impacts that support the SDGs. To achieve this, we combine the global, dynamic investment approach developed by our Credit team with the engagement skills of the Fund’s Lead Engager and EOS, our firm’s stewardship team. Portfolio companies must meet specific investment and engagement criteria. Each should have supportive fundamentals, cash-generative operations and be trading at attractive valuations. Their business lines, supply chains or product or service offerings must provide a foundation to create SDG-aligned impact, and their executive teams and boards must be willing to enter the long-term, transformative process of engagement. Each business must have a stable shareholder base and a long-term vision that shows a willingness to effect positive change. Our high conviction, bottom-up security-selection process results in a portfolio of

long-term holdings aligned with the duration of our engagements with the underlying businesses. By investing flexibly, we target opportunities to generate strong returns and income across geographies, instrument types and credit curves.

To gauge the opportunity for generating SDG-aligned impact, we use a one-to-five scoring system that assesses the credit fundamentals of a company and the scale of the opportunity to create change. Our scores are reviewed and changed in response to changes to the relevant investment and engagement theses, and portfolio holdings and position sizes are adjusted accordingly.

Believing that long-term bond and equity investors have a mutual interest in the sustainable growth of companies – which requires strong corporate governance and positive influence on society and the environment – we seek opportunities to collaborate with other financial stakeholders on objectives related to the SDGs.

07.3. Additional information [OPTIONAL]


FI 08. Thematic investing - themed bond processes

08.1. Indicate whether you encourage transparency and disclosure relating to the issuance of themed bonds as per the Green Bonds Principles, Social Bond Principles, or Sustainability Bond Guidelines..

          We encourage issuers to disclose in line with frameworks that help assess their progress against the UN SDGs. Such as SASB, GRI and TCFD.
        

08.2. Describe the actions you take when issuers do not disburse bond proceeds as described in the offering documents.

This is not applicable given we do not invest in the above mentioned bonds. More info on our thematic investment approach included in 08.3. 

08.3. Additional information. [Optional]

The Hermes SDG Engagement High Yield Credit Strategy aims to provide total return through a combination of income and capital growth, whilst delivering positive societal impact through engagements with companies focused on the United Nations’ Sustainable Development Goals (SDGs). This is a high conviction strategy that invests in high yield companies that demonstrate willingness and ability to create positive change in society and/or environment whilst improving their credit profiles.  

The strategy uses the SDGs, an ambitious, universal set of objectives seeking global prosperity and environmental integrity by 2030, as a framework for engagement. Our engagements seek positive change that strengthens the long term performance of companies, sustaining both impact and corporate profitability. We believe that bondholder engagement supports the long-term viability and investment performance of businesses while also benefiting society and the environment. The global high-yield market offers great opportunities to identify companies with the willingness and ability to change their operations, products or services in order to generate additional benefits for society and the environment. Most high-yield issuers are yet to focus on creating positive change, enabling us to play an important role in their efforts to become impactful while also delivering attractive returns to investors. By investing and engaging to create change, we seek tomorrow’s impact leaders rather than focus on those of today.  

The strategy aims to generate long-term, risk-adjusted outperformance by investing in attractive high-yield credit instruments and engaging with the underlying companies to generate positive impacts that support the SDGs. To achieve this, we combine the global, dynamic investment approach developed by our Credit team with the engagement skills of the Fund’s Lead Engager and EOS, our firm’s stewardship team. Portfolio companies must meet specific investment and engagement criteria. Each should have supportive fundamentals, cash-generative operations and be trading at attractive valuations. Their business lines, supply chains or product or service offerings must provide a foundation to create SDG-aligned impact, and their executive teams and boards must be willing to enter the long-term, transformative process of engagement. Each business must have a stable shareholder base and a long-term vision that shows a willingness to effect positive change. Our high conviction, bottom-up security-selection process results in a portfolio of long-term holdings aligned with the duration of our engagements with the underlying businesses. By investing flexibly, we target opportunities to generate strong returns and income across geographies, instrument types and credit curves.  

To gauge the opportunity for generating SDG-aligned impact, we use a one-to-five scoring system that assesses the credit fundamentals of a company and the scale of the opportunity to create change. Our scores are reviewed and changed in response to changes to the relevant investment and engagement theses, and portfolio holdings and position sizes are adjusted accordingly.  

Believing that long-term bond and equity investors have a mutual interest in the sustainable growth of companies – which requires strong corporate governance and positive influence on society and the environment – we seek opportunities to collaborate with other financial stakeholders on objectives related to the SDGs. 

 


FI 09. Thematic investing - assessing impact

09.1. Indicate how you assess the environmental or social impact of your thematic investments.

          We measure impact of our investments looking at how we deliver into the UN SDGs.
        

09.2. Additional information. [Optional]

We rely on disclosed information by the company where metrics vary on a company by company basis allowing for idiosyncratic impacts to be captured. Widely accepted and standardised metrics from IRIS, GRI and other relevant measurements organisations are also used to provide rigour.

One of the key aspects of this strategy is the engagement where specific objectives are set in conjunction with the company and ongoing conversations are held to help the issuer achieves its targets; the objectives are aligned to at least one of the UN SDGs.

We report on individual company case studies to highlight the engagement outcomes and also produce a six monthly and annual report that details the engagement activity and outcomes achieved. 


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