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

PRI reporting framework 2020

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Investment policy

SG 01. RI policy and coverage

New selection options have been added to this indicator. Please review your prefilled responses carefully.

01.1. Indicate if you have an investment policy that covers your responsible investment approach.

01.2. Indicate the components/types and coverage of your policy.

Select all that apply

Policy components/types

Coverage by AUM

01.3. Indicate if the investment policy covers any of the following

01.4. Describe your organisation’s investment principles and overall investment strategy, interpretation of fiduciary (or equivalent) duties,and how they consider ESG factors and real economy impact.

As responsible investors, our goals are to help individuals invest and retire better, to help clients achieve better risk-adjusted returns, and to contribute to positive outcomes in the wider world. We are guided by the conviction that responsible investing is the best way to create long-term wealth.

We have a diversified platform. We provide specialised capabilities across equity, fixed income and private markets, in addition to multi-asset strategies and proven liquidity-management solutions.

Our investment acumen is informed by rigorous fundamental research and a deep awareness of environmental, social and governance factors, enabling us to deliver strong long-term returns. In analysing companies, we endeavour to understand externalities, governance practices, environmental impacts, treatment of workers and their influence on local communities. We also use our influence to improve the behaviour of those companies in which we have invested, the operations of the assets we directly manage, and advocating for beneficial improvements to the financial system in which we participate.

01.5. Provide a brief description of the key elements, any variations or exceptions to your investment policy that covers your responsible investment approach. [Optional]

Our responsible investment approach covers four mutually reinforcing strands:

  1. We believe environmental, social, and governance integration and engagement are important for all asset classes and investment strategies. We actively incorporate material ESG factors into our investment decision-making processes and the management of our portfolios through a combination of fundamental research and proprietary data.
  2.  We act as a responsible steward of investments through dialogue, using our rights as investors and taking action where necessary. This objective is supported by our stewardship business, EOS at Federated Hermes (‘EOS’), which is one of the largest stewardship resources globally.
  3. We seek to be responsible participants in the financial system in which we operate and advocate for positive reform. In particular, we look to identify and intervene to correct environmental, social and other market failures that may prevent the financial system operating in the best holistic interests of its ultimate asset owners.
  4. We aim, as a firm, to meet the expectations that we have of the businesses we invest in. Behaving as a responsible business is critical to being able to fulfil our wider ambitions. Each of us individually has a responsibility to lead by example and act ethically and with integrity.

We have developed and implemented a comprehensive programme to ensure our responsibility approach and activities are integrated seamlessly across our funds, stewardship services, corporate citizenship activities, employee policies, client relationship management/reporting and business development. This includes:

  • Delivering sustainable performance within the terms of the mandate and within the clients' risk appetite
  • Taking into account all material investment factors, including ESG matters and insights from engagement, ensuring we are informed but not constrained by these considerations
  • Acting as a responsible, engaged, long-term steward of investments, encompassing constructive dialogue and taking action where necessary
  • Engaging with public policy makers and industry bodies to encourage a sustainable economy beyond the timeframe of a specific mandate

Specific initiatives and activities across the business in the last year include:

  • Publication of a detailed TCFD-aligned climate report
  • Chairing the Disclosures Working Group of the FCA-PRA Climate Financial Risk Forum to produce guidance for the industry which will be published in 2020
  • Publication of a 2020 vision for stewardship calling for seismic change in the way the investment management industry operates
  • Establishing a formal Climate Change Working Group with senior representation from across the business to develop a strengthened strategy for 2020, building on the work of the previous internal working group.
  • Regular internal seminars featuring leading thinkers on a range of relevant responsible investment topics open to everyone across the business. Topics and contributors have included ‘Big Oil and the Energy Transition’ by Deutsche Bank Research, ‘The Power of Insurance Analytics to Price Physical Climate Risks in Asset Valuation’ by Willis Tower Watson and ‘Crude Awakening’ by E3G.
  • Deep dive sessions on climate change for each of the investment teams across public and private markets

We take this approach as we believe it will enable us to deliver strong long-term holistic returns for our clients and ultimate beneficiaries. We recognise that the integration of ESG and stewardship necessitates different considerations at various stages in the investment process. We put great store in drawing on our strong stewardship capabilities, which help identify specific risks in our investments and engages to mitigate them. Each investment team has their own ESG and engagement integration approach that suits their investment philosophy. They supplement fundamental financial analysis with information provided through a range of proprietary ESG and engagement tools, qualitative analysis and the insights gleaned through company engagement. Of particular note are the firm's proprietary Carbon Tool, Governance Tool, ESG Dashboard, QESG Score and the Portfolio Snapshot, which are used to identify ESG risks and opportunities and to guide security selection and engagement.

The Responsibility Office works with all investment teams across all asset classes to support them in integrating ESG and engagement insights into their investment decisions.

We have a firm-wide exclusion policy for anti-personnel mines and cluster munitions; the precise composition of the list fluctuates, but it generally includes circa 250 companies worldwide. We have broader exclusion policies in place tailored to particular clients’ preferences.

01.6. Additional information [Optional].

          
        

SG 01 CC. Climate risk

01.6 CC. Indicate whether your organisation has identified transition and physical climate-related risks and opportunities and factored this into the investment strategies and products, within the organisation’s investment time horizon.

Describe the identified transition and physical climate-related risks and opportunities and how they have been factored into the investment strategies/products.

We recognise that climate change presents serious risk to the world at large and to our business but it is equally important to understand that climate risks do not exist in isolation. They interact with other changes that are happening at the same time, such as the impact of technological innovation, urbanisation, globalisation, demographic lifestyle changes, consumer behaviour shifts and the catch-up in emerging markets.

As a result, our assessments do not sit in a standalone box, they are part of our fundamental view of value creation. As part of our integration of ESG issues into our investment processes and business strategy, we assess and model future ESG policy and regulatory changes and their impact on our investment strategies. This is based on our internal expert knowledge and insights from third party studies and data providers.

As part of this process, we assess the transition, physical and regulatory risks from climate change across all our investment products through qualitative analysis of market and regulatory framework and future trends.

We analyse physical risks at asset level through use of open source data and detailed asset level exposure analysis. We have mitigation and emergency action plans for our real assets.

Transition risks are assessed on a qualitative and quantitative basis using a pragmatic approach that acknowledges that there are issues with the amount and quality of data that is available.

We assess climate risks on how they will affect us in the short (0-2 years), medium (2-5 years) and long term (5 years and beyond), as set out in the table below. In the near term, regulatory risks and mandatory legislation are the biggest risks. As time goes on, new markets and opportunities will open up, but the risk of stranded assets increases and the physical impacts of climate change are likely to affect all sorts of different assets.

See our answer to SG 01.7 CC for more detail on the risks and opportunities we have identified over the short, medium and long term.

01.7 CC. Indicate whether the organisation has assessed the likelihood and impact of these climate risks?

Describe the associated timescales linked to these risks and opportunities.

We analyse carbon and climate related risks across different timelines.

 

Short term - Risks that could cause impacts in 0-2 years from now; legal and regulatory risks. This includes regulatory changes and mandatory legislation affecting licence to operate or management practices in certain sectors or geographies.

Medium term - Risks that could cause impacts in 2-5 years from now; legal and market transformation risks. This includes regulatory changes and mandatory legislation affecting licence to operate in certain sectors or geographies; market-led changes, emerging new opportunities, obsolescence of certain products and services affecting certain sectors; and risk of stranded assets.

Long term - Risks that could cause impacts in 5 years and beyond; legal, market transformation risks and extreme weather events. In addition to the issues above, this include obsolescence and stranded assets across a range of assets, sectors and geographies due to regulatory changes, market transformation or extreme weather events; extreme weather events impacting defined geographical locations and whole regions and supply chain disruption affecting large number of sectors; impact to infrastructure and real assets, ranging from business discontinuity costs, refurbishments and rebuilding costs, to obsolescence and destruction; and impact to insurance premiums or ability to insure assets in certain locations at risk.

01.8 CC. Indicate whether the organisation publicly supports the TCFD?

01.9 CC. Indicate whether there is an organisation-wide strategy in place to identify and manage material climate-related risks and opportunities.

Describe

We have a formal approach to climate-related risk and opportunities management, which integrates assessing and managing our exposure to climate-related risks and accessing opportunities from the transition to a low-carbon economy. The integration of this approach is shared by the investment teams and across the firm with the support of the Responsibility Office and the dedicated Climate Change Working Group.

The climate-related risk and opportunities management activities we are implementing cover our public equities, credit, and private real estate assets. Our approach has four elements:

  • Awareness: Portfolio managers are aware of the climate-related risks in their portfolios, which investments are the largest contributors, and what are the associated risks and mitigation strategies.
  • Integration: Portfolio managers integrate climate-related risk considerations alongside other value and risk considerations, exploiting green investment opportunities or divesting where climate-related risk, alongside other factors, impacts value.
  • Engagement: We act as engaged stewards of the investments we manage or represent on behalf of our clients. Where we hold assets with significant climate-related risk exposure, we will manage directly owned assets, and engage with public and private companies, to mitigate the climate-related risk.
  • Advocacy: We engage with public policymakers and sector organisations, nationally and internationally, to encourage policy or best practice that facilitates the transition to a low-carbon economy.

Over the last four years, we have refined our approach based on our learnings and industry best practice and continued to implement it across our investment and stewardship activities, adapted to specific asset classes and investment strategies. We are now in the process of designing and implementing a strengthened climate strategy for 2020. As we deepen our understanding, we aim to further integrate climate change into our risk management systems, including through integrating scenario analysis into our existing processes and assessing Paris-alignment.

We have enhanced our proprietary ESG Dashboard, which allows our investment teams to access key ESG-related information on any company in their investment universe, to include more indicators on climate risks and opportunities in companies, using third-party data from Trucost and Sustainalytics as well as engagement insights from EOS at Federated Hermes’ (‘EOS’), our in-house stewardship provider. 

Currently, we use the 2 Degrees Investing Initiative’s PACTA tool for our scenario analysis, alongside the Transition Pathway Initiative Benchmarks, the Principles for Responsible Investment (PRI) scenario analysis tool, and the Science Based Targets (SBT) Assessments. Whilst each of these tools has limitations, including in their coverage, they help identify gaps and potential areas for greater engagement, and we supplement such tools with further work to examine both individual companies and how companies are responding to changing market dynamics.

Across public markets, EOS’ engagement programme has identified climate as a specific engagement focus and is informed by the outcomes of the Carbon Tool. EOS has also taken an active role on the Climate 100+ initiative. More information is available at https://www.hermes-investment.com/ukw/eos-insight/environment/taking-action-on-climate-change/

1.10 CC. Indicate the documents and/or communications the organisation uses to publish TCFD disclosures.

specify

          Climate-related financial disclosure report: https://www.hermes-investment.com/ukw/insight/corporate-news/climate-climate-related-financial-disclosures-report-2019/
        

SG 02. Publicly available RI policy or guidance documents

 

02.1. Indicate which of your investment policy documents (if any) are publicly available. Provide a URL and an attachment of the document.

02.2. Indicate if any of your investment policy components are publicly available. Provide URL and an attachment of the document.

02.3. Additional information [Optional].

We are proud of our strong culture of responsibility and we aspire to both maintain and further foster this positive approach in the way we behave as a firm and as individuals. In 2015 we created a Pledge of Responsibility and Transparency. This pledge is intended to express the commitment of each of us individually to act ethically and, crucially, to put the interests of our clients and their beneficiaries at the heart of what we do.

 


SG 03. Conflicts of interest

03.1. Indicate if your organisation has a policy on managing potential conflicts of interest in the investment process.

03.2. Describe your policy on managing potential conflicts of interest in the investment process.

​We have taken reasonable steps to identify and mitigate the types of conflicts of interest that exist, or may exist, between the international business of Federated Hermes (‘Federated Hermes’) and its clients, between one client and another, or between members of Federated Hermes. These include fair allocation, staff remuneration, and personal securities dealing.

​We have in place a number of policies and procedures to manage/avoid potential conflicts of interest, including Chinese walls/information barriers, disclosure, dealing, restricted lists, monitoring and a conflicts register. These are supplemented by a specific publicly disclosed stewardship conflicts of interest policy that covers those potential conflicts that arise through our engagement and voting activities. Additionally, we have internal procedures to regulate the processes and restrict the flow of information among, and within, business units so that activities are carried out with the appropriate level of independence.

We maintain a log of individual conflicts of interest and the measures taken to prevent or manage those conflicts, including assigning responsibility. The log is regularly updated and reviewed by senior management. The management of conflicts are discussed and recommendations for improvements are made if required.

 

03.3. Additional information. [Optional]

We are proud of our strong culture of responsibility and we aspire to both maintain and further foster this positive approach in the way we behave as a firm and as individuals. The Federated Hermes Pledge expresses the commitment of our staff to always put the interests of our clients and their beneficiaries first and in so doing manage conflicts of interest fairly between all affected parties.

In all of our activities, we seek to promote the long-term value and success of the companies in which our clients invest.

Our Conflicts of Interest policy is available online - https://www.hermes-investment.com/ukw/wp-content/uploads/2019/10/0007317_conflicts_of_interest_v2.pdf

Our stewardship conflicts of interest policy is available online: https://www.hermes-investment.com/ukw/wp-content/uploads/2019/04/stewardship_conflicts_of_interest_policy.pdf

Stewardship (see www.hermes-investment.com/stewardship/)

Federated Hermes provides fund management and stewardship services to institutional investors worldwide, including a number of pension funds sponsored by corporations, governments and other organisations, as well as fund managers. These services include voting and engagement with companies in which our clients are equity shareholders and/or bond investors. We are cognisant that a number of conflicts could arise, such as engaging or voting the shares of a company that is the sponsor of one of our pension fund clients or is a company within the same group as one of them. We therefore have a Stewardship Conflicts of Interest Policy

Across Federated Hermes we take all reasonable steps to identify conflicts of interest between: (1) Federated Hermes, including its managers, employees and appointed representatives or any person with a relevant direct or indirect link to them, Federated Hermes clients as a body; or (2) any one client of Federated Hermes and the client body.

In our voting and engagements with companies that are the sponsors of, or in the same group as, our clients, we are careful to protect and pursue the interests of all of our clients by seeking to enhance or protect the long-term value of the companies concerned. In the first instance, we make clear to all pension fund clients with corporate sponsors that we will treat their sponsoring companies in the same way as any other company. In addition, we ensure that in such situations the relevant Federated Hermes client relationship director or manager is not leading the engagement or making the voting recommendation to clients. This same approach would hold true with respect to any engagement with a company with whom Federated Hermes or our clients, have a strong commercial relationship. 

While we welcome client input and suggestions for engagement, all of our engagements are selected and pursued based on an objective assessment of the severity of the problems faced by or opportunities available to the companies engaged; the likely effect on them of public policy and regulation and the likelihood of success in achieving value enhancing or mitigating value-destroying change.

We have well established publicly disclosed voting principles and based upon these and the judgements reached through engagement with individual companies we provide voting recommendations to our stewardship voting clients. There may be occasions where one of our clients seeks to influence the voting advice we give to other institutional clients. In such circumstances there would be director level involvement and an objective judgement reached based upon what we believe to be in the best long-term interest of our clients as a body. All clients retain full discretion over their final voting decision.

In those limited circumstances where a conflict over our approach to voting (aside from that directed by client specific policies) or engagement arises which is not able to be resolved in the manner set out above – the matter will be escalated to an ‘escalation group’ which reports to an independent sub-committee of the Board.

More detail is available in our Stewardship Conflicts of Interest policy: https://www.hermes-investment.com/ukw/wp-content/uploads/2019/04/stewardship_conflicts_of_interest_policy.pdf

Real Estate

Our Real Estate business has formal procedures to deal with conflicts of interest. One potential area of conflict is in the allocation of real estate investments between client portfolios. However, it is important to note that each portfolio has its own geographical and structural bias, and specific investment objectives in terms of risk, income profiles, hold periods and target lot size. An additional element that compounds this separation is the difference in the timing of liquidity between the various client portfolios - not all are in the market for new products at any given time, so in practice this is rarely an issue.

An additional feature of the investment process that further reduces the risk of conflicts in investment allocations is that investments are allocated on a 'first past the post' basis, whereby the investment team that first receives the introduction has the first opportunity to acquire the investment; if the opportunity is not a fit within the particular fund then it is made available for other clients managed by Federated Hermes. In most cases it will be clear where a particular investment should be placed between client funds, but where there is any doubt the allocation decision will be approved by the CEO of our Real Estate business and the rationale for the allocation set out in the papers presented to the Investment Executive for formal approval.

Any other type of potential conflict of interest would be reported to, and dealt with by, our Real Estate Board, or the Appointments Committee for HPUT-related matters.

 


SG 04. Identifying incidents occurring within portfolios

04.1. Indicate if your organisation has a process for identifying and managing incidents that occur within investee entities.

04.2. Describe your process on managing incidents

We believe that the active monitoring of investee companies is integral to delivering positive investment performance for our clients; this requires us taking an active interest in a wide range of aspects of the companies and assets in which we are invested. Resources are allocated to those companies with the most material governance, social or environmental issues. In addition to taking advantage of various data, information and news services our monitoring is supplemented by regular dialogue between the investment teams and their stewardship colleagues who are able to provide further research on specific risks and alert portfolio managers of any corporate governance and sustainability issues affecting stocks in their portfolios. Our stewardship team proactively build relationships with our largest holdings so that if there are any incidents in these companies, we are able to effectively engage with them. Our private markets teams also engage with managers and tenants of assets they invest in both actively and reactively.

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, provides a comparison to the relevant benchmark. In addition, the tool provides insight into which companies in the portfolio are being engaged and the progress against objectives. 


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