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.

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.

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.

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/

​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.