EOS at Federated Hermes (“EOS”), a leading provider of stewardship services, is part of the international business of Federated Hermes.

Our  investment teams work closely with their colleagues in EOS in order that as a group we continue to strive to be at the forefront of integrated  responsible investing and stewardship.

We also recognise the benefits of working with like-minded peers to advocate for change at particular companies, as well as at a broader market level. We are  proud to be an active participant in, and indeed be a founding member of, many associations of investors; not least among these are the Principles for Responsible Investment, the International Corporate Governance Network and, in the UK, the Investor Forum.

The list of groups and associations in which we participate and promote responsible investment and stewardship are listed on our website. Where there are shared objectives - in particular the promotion of long-term sustainable value - we use both formal forums and other more informal links we have globally to work collaboratively with other investors on an ad hoc and on an ongoing basis.

Crucially, the primary concept of Federated Hermes' stewardship service is to provide a mechanism for like-minded asset owners to pool their resources and in so doing create a stronger and more effective stewardship voice. It has succeeded in becoming a leading vehicle globally for joint engagement and collaborative stewardship activity among institutional investors.

Our stewardship team, EOS, has clear and well-established protocols on how to identify engagement issues, to escalate an engagement and to measure an engagement's effectiveness. We develop corporate engagement objectives initially at the thematic and sector level based on a 'top-down' understanding of relevant thematic and sector risks. These are then reconsidered at the company level ('bottom up') for materiality and feasibility, together with our company-specific knowledge on how well the risks are being managed. We then plan our approach to engagement, including how best to develop existing and new relationships with corporate representatives, seeking always to develop our relationships with the most senior management and board members where possible.

Engagements with companies will normally relate to longer-term strategic, environmental, social or governance issues. Generally, our engagement activity becomes more active where we believe:

engagement will lead to an increase in the value of a company over the long term; and/or,
engagement will prevent or limit a decrease in the value of a company over the long term;
engagement will address an externality that the company produces and thereby enhance the company's social licence to operate.

In prioritising engagements and determining whether and how the engagement is taken forward, due regard is given to:

the level of the company's exposure to the issue at hand (materiality);
the likelihood of engagement success and potential to bring about positive change; and,
the value of our clients' ownership of the company (value at risk).

Such considerations are based around an assessment of the likely impact of the engagement and the ultimate benefit to the value of the underlying holding. Each engagement is subsequently given an appropriate intensity tiering.

Our rolling three-year engagement programme is developed annually in conjunction with our investment teams and EOS clients and reflects evolving changes in the market and regulatory environment in different countries and sectors.

In 2019, EOS engaged with 366 companies as part of its engagement plan and a further 677 companies where engagement opportunities were identified on ad hoc topics, typically around voting at the annual general meeting. 

Our engagement team is organised by a combination of thematic, sector and geographic responsibilities, as some environmental, social and strategic business issues share sector characteristics, whereas governance and stewardship principles often display country-specific differences.

We regularly engage companies collaboratively with other investors on material ESG issues. This usually happens through networks such as, for example, the PRI, IIGCC, Climate Action 100+, GIGN, ICGN amongst others.

For the purposes of this response, we are classifying “engagement activities” as those with companies where we have a specific objective for change at the company or particular issues we want the company to address. We will also see other companies to discuss issues of a strategic (including ESG) nature where it is not relevant to have specific engagement objectives. In 2019, our stewardship team, EOS engaged with 1,043 companies on 2,854 environmental, social, governance, strategy, risk and communication issues and objectives.

Our stewardship team conducts engagements using specific milestone-driven objectives for most companies in its engagement programme.

We annually review, develop and publish a rolling three-year engagement plan. There are many companies with which we will engage through the year that sit outside of our formal engagement plan; these will relate to issues around voting at general meetings, as well as in reaction to events that cannot be predicted in advance. With respect to the companies within the engagement plan, in line with clients' wishes, EOS' intensive engagement will focus on the largest aggregate holdings, the egregious issues and where there is a higher likelihood of results from more intensive engagement. There will be companies on the engagement plan that have no explicit engagement objectives but may instead be engaged on particular issues.

The reason for interacting with other companies may be to simply ensure that the largest aggregate client holdings are covered by stewardship activity and thus subject to regular monitoring.  It is a relevant and important stewardship activity as a responsible owner to engage with the company on relevant ESG and other issues.

Those companies with more material environmental, social and governance issues and/ or a greater potential for change are engaged with more intensively, using the following categorisation:

• Tier 1 - Companies that typically represent more material client holdings in terms of value, have significant environmental, social or governance issues and have the potential for change through engagement. We plan for a minimum 5 interactions per year.
• Tier 2 - Typically large companies with less serious risk profiles, which justify setting a number of engagement objectives where success may be achieved with less frequent interaction. We plan for three to five interactions per year.
• Tier 3 - Companies representing significant client holdings but with generally lower risks so that we focus on engagement issues, instead of setting specific engagement objectives. We plan for one to two interactions per year.

Measuring and monitoring progress on engagements is carried out by setting clear engagement objectives and systematically using the system we pioneered of measuring progress against four milestones. These are:

• the raising of the issue with the company or other relevant third party (Milestone 1);
• recognition by the company or relevant third party that the concern is valid (Milestone 2);
• a plan by the company to address the particular issue (Milestone 3) and;
• successful delivery of the objective (Milestone 4).

We consistently review the progress we are making against these objectives, and our proprietary engagement database allows us to maintain a clear record of our activities and progress consistent with our four-step milestone approach.

We escalate the intensity of an engagement activity over time, depending on the nature of the challenges each company faces and the attitude of the board towards our dialogue, and as a result a company's intensity tiering may change. Some engagements may involve just one or two meetings; others are more complex and will entail multiple meetings with management and board members over several years. Such activity often requires persistence and tenacity.

To maintain the quality of our engagements we have established a quality assurance programme through which three directors hold regular sessions with each engager to review and challenge the quality of their engagements.

We monitor the progress of our collaborative engagements in the same way we monitor our direct engagements, as described above in LEA 04.2.

EOS reports quarterly and annually on the number of engagements undertaken; these are broken down by themes and further still by sub-themes. EOS does not categorise each of its engagements into either collaborative or individual/staff engagements.

Measuring and monitoring progress of our engagements is achieved by setting clear engagement objectives and systematically assessing progress against four milestones. These are:

• Milestone 1: Concern raised with company
• Milestone 2: Acknowledgement of the issue
• Milestone 3: Development of a credible strategy to address the concern
• Milestone 4: Implementation of a strategy or measures to address the concern

EOS seeks to ensure that, so far as possible, our objectives are SMART - specific, measurable, achievable, relevant and time bound - with each objective taking on average three years to achieve. Where we engage on an issue that does not meet the 'SMART' criteria, then we set an engagement issue rather than objective and track our interactions against the issue accordingly.

Our stewardship team, EOS, continually reviews the progress of its engagements and considers whether to intensify efforts and escalate the engagement or discontinue the objectives as the situation demands. The team keeps us informed of the progress through extensive reporting as well as direct access to the client portal and the engagement management system.

We escalate the intensity of an engagement activity over time, depending on the nature of the challenges each company faces and the attitude of the board towards the  dialogue. Some engagements may involve just one or two meetings; others are more complex and will entail multiple meetings with management and board members over several years. Such activity often requires persistence. Our long-term perspective enables us to persist with these difficult and time-consuming engagements.

Our engagements with companies may involve at various junctures:

• meetings with executive and non-executive directors;
• meetings with other company representatives;
• discussions with other shareholders of the company;
• participation in collaborative investor initiatives;
• discussions with other relevant stakeholders such as industry representatives, the regulator, customer groups, etc; and,
• attendance at and/or submission of shareholder resolutions at shareholder meetings.

With all engagements, we seek to build a strong relationship with the company and are willing to be patient, remaining focused on the achievement of goals that are directed towards long-term success.

We integrate stewardship information into our investment decisions across all teams and at  all levels.

Our stewardship team works closely with our investment teams to ensure that our approach to stewardship is joined up with our active investment approach across asset classes, geographies and strategies. All of our investment teams have access to the EOS client portal and the engagement management system. Thus, all relevant information about ongoing and historic engagements can be accessed by the investment teams instantaneously. The Responsibility Office works with both the investment and stewardship teams to facilitate effective coordination and information sharing.

Notes from all relevant engagement meetings are available to our investment teams where they have a holding through the EOS reporting portal. Furthermore, members of our investment teams join engagement meetings with their stewardship colleagues from EOS, as we believe that the benefits of these joint meetings are substantial in terms of enhanced engagement focusing on the relevant and material ESG risks and a better appreciation of ESG risk in investment decisions.

In addition, our proprietary ESG Dashboard provides easy access to ESG research, with data from a range of external providers (including Sustainalytics, Trucost, CDP, FactSet, MSCI and Bloomberg) combined with proprietary engagement data from EOS. The Dashboard allows all our   investment teams to access the key ESG-related information on any stock in their investment universe. The Portfolio ESG Monitor similarly includes voting and engagement data from EOS.

Our carbon tool also provides insights into the engagement activities that specifically focus on environmental topics and climate change to provide our investment teams with valuable information where engagements are taking place, to help mitigate risks or enhance return opportunities.

Our 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 efficiency/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. 

All investment teams have access to the tools described above, as well as regularly interacting with the relevant sector or regional lead within EOS to better understand the ESG issues within their investment universe. The latter can be most useful as often the information gained through engagement is able to help the portfolio manager discern whether a particular ESG issue is material or not, something which cannot be gleaned from raw ESG research data. Therefore, to implement a credible and successful ESG integration approach, we believe that it is of utmost important that engagement information needs to be part of the ESG information universe.

Our stewardship team, EOS, reports quarterly and annually on the number of engagements undertaken; these are broken down by themes and further still by sub-themes. Given that our investment teams have instantaneous access to the stewardship team, the engagement reporting portal, and the engagement management system, they can follow the engagements in real time, see how engagement unfolds, how much progress is being made on the engagements and when an engagement has been successfully completed.