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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 - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes » (C) Implementation: Integration of ESG factors

(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the proportion of actively managed listed equity portfolios where E, S and G factors are systematically researched as part of your investment analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

Each investment team is ultimately responsible for understanding and incorporating relevant and material ESG information into their investment processes. This ESG awareness is achieved through a combination of in-house expertise, proprietary models, third parties and fundamental research, ensuring that relevant information is accessible and incorporated into investment processes.

EOS has a team of engagement specialists, organised by global sectors, themes and regions. This team engages on material ESG and strategic issues that may be limiting long-term sustainable value creation or increasing companies' risk and collaborates with Federated Hermes' investment teams pre- and post-engagement with companies.

We also have a Responsibility Office that is tasked with coordinating and supporting the ESG/engagement activities across all our investment strategies. Each of Federated Hermes' investment teams meet formally with the Responsibility Office on a quarterly basis to discuss their ESG and engagement integration activities and approaches as well as specific investee companies with respect to their ESG performance.

All investment teams have access to our proprietary ESG tools such as the ESG Dashboard, Portfolio Snapshot, Carbon Tool and the Corporate Governance Tool. These tools provide information both at the portfolio and stock level. Info on the tools can be found in 9.6. 


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on robust analysis.

          internal quantitative modelling takes place to ensure that tools are fit for purpose; quarterly meetings between investment teams and Responsibility Office
        

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

          (QESG Dashboard, Portfolio Snapshot, Carbon Tool and Corporate Governance Tool) – see 9.6, below
        

09.6. Additional information. [Optional]

 

ESG tools:

ESG Dashboard:  Includes our proprietary QESG Score and identifies stocks with positive ESG characteristics and/or stocks demonstrating positive ESG change.


Portfolio Snapshot: The Portfolio Snapshot allows us to observe the aggregate ESG risks across our portfolios relative to their 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 intensity of the portfolio and our voting choices relative to the benchmark. It also provides insights into engagement and the progress made.


Carbon tool: Our Carbon Tool enables fund managers and engagers to identify carbon risks in portfolios and companies that are or might become more exposed to carbon risks in the future. Importantly, the tool incorporates our stewardship activity and intelligence and is able to identify companies that are priorities for engagement and their progress against objectives.


Corporate Governance Tool – Our new governance tool provides a breakdown of corporate governance characteristics, such as information on board independence, diversity, audit tenure etc. This tool compares the company data and flags any companies that fall below the Federated Hermes expectations.


LEI 10. Aspects of analysis ESG information is integrated into

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

10.1. Indicate which aspects of investment analysis you integrate material ESG information into.

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

10.2. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis.

10.3. Describe how you integrate ESG information into portfolio weighting.

Through our Portfolio Snapshot Tool we are able to observe the aggregate ESG risk across our portfolios in both absolute and benchmark-relative terms. Investment teams are able to break these measures down into the constituent environmental, social or governance risks and view the ESG metrics for each portfolio company with the best and worst performers identified.

This portfolio level view enables portfolio managers to, for example, be aware of the level of carbon in their portfolios, including which investments are the largest contributors. In turn, an understanding of the exposure to carbon risks provides a good starting point to assess the best options to manage this risk in the context of a fund's particular strategy.

Our carbon analysis tool provides detailed real-time data about the level and intensity of carbon across their portfolios. Portfolio managers can see which companies are the greatest emitters and most at risk, and adjust weightings accordingly.

Our new governance tool provides a breakdown of corporate governance characteristics, such as information on board independence, diversity, audit tenure etc. This tool compares the company data and flags any companies to the investment managers that fall below the Federated Hermes governance expectations.

10.4. Describe the methods you have used to adjust the income forecast/valuation tool.

We do not adopt a one-size-fits-all approach to how ESG information is integrated into portfolio construction. Each investment team undertakes their own fundamental analysis and, where practical and material, uses the available ESG data in considering forecasts and valuations.

Our Global Emerging Markets team, to determine whether to invest in a certain stock and to assess any impact on discount rates, consider, elements such as shareholder structure, risk of abuse of minorities' rights, sustainability of the business model, carbon emissions, and exposure to workers' strikes and community protests. Information obtained from engagements with companies also contribute to the adjustments.

For our Global Equities team, our proprietary QESG scores are integral to their investment process. A range of investment factors, from traditional factors such as price/book multiples through to corporate governance behaviour, are included in their "Alpha Score", which is the forecasted return of the stock. Social, governance and environmental considerations are applied as part of the judgmental overlay applied in the investment process, with the exception of one of our sub-funds, which applies all three ESG considerations on a discretionary basis, but does not systemically incorporate social scores for US stocks on an ex ante basis.

10.5. Describe how you apply sensitivity and /or scenario analysis to security valuations.

Risk specialists within the Investment Office provide portfolio managers with a tailored deep-dive risk breakdown identifying areas of potential concern or deviations from risk guidelines, and recommend appropriate quantitative and modelling solutions. Their analysis includes stress testing and in-depth scenario analysis to identify potential sources of future risk in portfolios. The Investment Office uses industry-standard systems including Barra and Style Analytics. Barra is used to measure the tracking error and to control the contribution to active risk at stock, sector, country and factor levels, as well as stress testing. Style Analytics is used to monitor and control exposure to over 30 style factors.

10.6. Additional information. [OPTIONAL]

Our investment teams make use of ESG and engagement information in the fashion that is most appropriate for their investment strategy:

  • For Hermes Global Equities, the ESG Dashboard and the team's proprietary stock sheet outline a company's ESG risk based on ESG data and engagement notes. Monitoring makes extensive use of the ESG Dashboard and Portfolio Monitor.
  • Both the Hermes Asia ex Japan team and Global Emerging Markets strategy consider ESG in their initial screening process, and ESG factors and engagement progress are incorporated into assessments of the valuation, risks and catalysts of a stock or country.
  • Hermes Small & Mid Cap teams utilise the ESG Dashboard and engagement notes as part of their valuation and risk monitoring processes.
  • Hermes European Equities team uses ESG considerations to help identify changes that present investment opportunities. These changes often come as a result of government policy, environmental changes or technology shifts. ESG and engagement insights help to determine the risks that individual companies face.
  • Our thematic Impact Opportunities Fund and SDG Engagement Fund are aligned with the UN SDGs. For more information, see:

https://www.hermes-investment.com/ukw/wp-content/uploads/2020/03/bd004867-sdg-engagement-equity-2019-annual-report-v2.pdfhttps://www.hermes-investment.com/ukw/wp-content/uploads/2020/02/hermes-impact-opportunities-fund-quarterly-report-q419-1.pdf

All of our investment teams have access to engagement information from EOS in addition to ESG data.


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