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

PRI reporting framework 2020

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Objectives and strategies

SG 05. RI goals and objectives

05.1. Indicate if and how frequently your organisation sets and reviews objectives for its responsible investment activities.

05.2. Additional information. [Optional]

All of our policies are regularly reviewed and accountabilities are included within different business areas. We have established a Responsibility Working Group, which meets on a quarterly basis and is constituted of senior representatives from across the business and is chaired by our Head of Responsibility. This group is charged with reviewing and making recommendations to Federated Hermes Executive Committee (ExCo) with respect to our policy and approach to all matters related to the delivery of holistic returns to the beneficiaries of our owners and clients and to share best practice across the organisation.

In addition, we have a dedicated Responsibility Office that is tasked with coordinating and supporting the development of our policies and their subsequent integration across our funds and stewardship services. The Responsibility Office’s objectives and progress are reviewed quarterly by the Responsibility Working Group. Leon Kamhi, our Head of Responsibility, reports directly to our CEO and helps the ExCo formulate and implement the long-term strategy of the firm. Each of our investment teams meet formally with the Responsibility Office on a quarterly basis to discuss their ESG and engagement integration activities.

The Responsibility Office works closely with our investment, product development, business development and other relevant teams to develop and implement 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. Responsibility for its implementation lies with all of our personnel. Bespoke "responsibility accountabilities" have been defined for each business area within the organisation and, as appropriate, relevant goals will be part of each colleague's technical performance objectives. These responsibility accountabilities are reviewed annually with each business areas and actions are identified where improvements can be made. Our overall approach to responsibility is updated annually and progress is reviewed on a quarterly basis. The same applies to our engagement plan and objectives.


SG 06. Main goals/objectives this year

06.1. List the main responsible investment objectives that your organisation set for the reporting year.

Responsible investment processes

Key performance indicator

          Quarterly meetings between each investment team and Responsibility Office take place

Provision and take up of seminars
        

Progress achieved

  • Quarterly meetings formally structured and include specific stock discussions
  • Internal and external ESG/ engagement seminars held with good take up across the front office

Key performance indicator

          Quarterly meetings between each investment team and Responsibility Office 

Increasing levels of interaction between investment and stewardship teams 

Provision and take up of seminars
        

Progress achieved

  • Quarterly meetings formally structured and include specific stock discussions
  • Increased levels of interaction between investment and stewardship teams this year
  • Internal and external ESG/ engagement seminars held with good take up across the front office

Key performance indicator

          Increased communication across the firm of ESG activities

Quarterly meetings of the Responsibility Working Group

Quarterly meetings of the Climate Change Working Group
        

Progress achieved

  • Integration awareness emails for investment teams and the wider business
  • Monthly Responsibility newsletter for all staff
  • Responsibility Office lunch and learn sessions held
  • Thought pieces written by investment, Responsibility, and stewardship teams
  • Responsibility Working Group which consists of senior personnel from across the business, met regularly to review and discuss all matters relating to ESG integration and stewardship across the business.
  • A formal internal Climate Change Working Group was established in Q1 2020, building on the previous informal working group, and consisting of senior representatives from across the business. The group will meet quarterly.

Key performance indicator

          Achievement against Engagement Plan and identified company objectives

Increased joint engagement/formal internal meetings between investment and stewardship teams
        

Progress achieved

  • Substantial progress was made against the rolling three-year Engagement Plan. Our stewardship team EOS made progress on 53% of all objectives contained within our engagement plan and engaged with 1,043 companies in 2019 covering 2,854 identified objectives or issues. All of these are an increase on 2018.
  • Increased level of joint engagement meetings and formal internal meetings between the investment and stewardship teams
  • Quarterly meetings between Responsibility Office and investment teams formally structured and include specific stock discussions for public markets
  • Private markets teams engage with managers and tenants of assets

Key performance indicator

          Increased engagement/internal meetings between investment/stewardship teams. Teach-ins for investment teams on best practice engagement. ESG factors embedded into valuation/stock discussions. Development/usage of proprietary ESG tools
        

Progress achieved

  • Proprietary corporate governance tool launched
  • Proprietary portfolio snapshot tool developed and launched
  • Increased level of joint engagement meetings and formal internal meetings between the investment and stewardship teams
  • Quarterly meetings formally structured and include specific stock discussions
  • ESG and engagement case studies developed
          Influence of legislation and policy in line with holistic returns for clients and beneficiaries
        

Key performance indicator

          Consultation responses

Interactions with regulators/policy makers

Influencing of regulatory reform
        

Progress achieved

  • Responded to a range of consultations
  • Advocacy strategy developed with key areas of focus where we can have impact
  • Extensive engagement with regulators, policy makers and other key stakeholders e.g. on FRC Stewardship Code revision, EU Sustainable Finance legislation and audit and accounting reform; chaired the Disclosures Working Group of the FCA-PRA Climate Financial Risk Forum

Financial performance of investments

Key performance indicator

          Provide evidence of the link between ESG factors and improved investment performance
        

Progress achieved

Publication of two research pieces examining the relationship between ESG scores and sovereign CDS spreads (globally and for different geographical areas):

https://www.hermes-investment.com/uki/wp-content/uploads/2019/07/bd03720-credit-research-paper-pricing-esg-in-sovereign-credit-q3-2019.pdf

other description (1)

          ESG strategies
        

Key performance indicator

          Development of ESG-specific strategies to meet client needs and complement existing products
        

Progress achieved

In September 2019, we launched SDG Engagement High Yield Credit, which aims to outperform the global high-yield market through high-conviction investment in companies with strong fundamentals that also demonstrate the potential, through engagement, to create positive change.

Our SDG Engagement Equity Fund and the Impact Fund have outperformed the benchmark over 2019 and since inception as at the end of February 2020.

ESG characteristics of investments

Key performance indicator

          Submit real estate funds to relevant sustainability benchmarks and deliver continuous improvements in ratings
        

Progress achieved

Under GRESB ratings, Federated Hermes Real Estate gained a five-star rating for two of its directly managed strategies, with our real-estate debt capability judged to be a regional leader. For all other strategies, we have seen improvements compared to historical scores.

Key performance indicator

          Absolute and relative carbon emissions targets for real estate portfolios
        

Progress achieved

  • In 2006 Federated Hermes set a target to reduce the absolute landlord-controlled Scope 1 and 2 carbon emissions from utilities from our Real Estate directly managed standard portfolio by 40% by 2020. By the end of 2018 we had achieved but also beaten this target by 2.59%, despite there being an expansion of the portfolio from 105 to 183 buildings
  • The emissions of Federated Hermes’ like-for-like Real Estate portfolio have fallen every year since the 2006 baseline, at an average of 9% a year. Emissions fell by 20% in 2018, in part due to the fall in electricity and natural-gas emissions.

Other description (1)

          Setting environmental targets for portfolios
        

Key performance indicator

          Set targets for ESG environmental and energy performance characteristics of real estate assets; water intensity consumption targets and waste management and disposal targets
        

Progress achieved

Targets achieved in a number of areas as set out in our Responsible Property Investment report, including achieving an 80% recycling rate across our directly managed portfolio of properties which measure waste by weight.

We are making progress in our 2020 targets, including reducing the landlord-controlled water consumption (adjusted for level of occupancy) of our directly managed standing portfolio by 20% in the years to 2020, compared to our 2006 baseline.

We are in the process of setting new targets for beyond 2020.

Other description (2)

          Improve ESG characteristics of investment through engagement
        

Key performance indicator

          Achievement against Engagement Plan and identified company objectives
        

Progress achieved

Substantial progress was made against the rolling three-year Engagement Plan. In 2019, our extensive engagement programme for all stewardship service clients included 2,453 interactions with 1,043 companies on a range of ESG issues where we made 53% progress on the objectives set. 470 of those companies were engaged on behalf of Federated Hermes investment teams with engagement on 1,368 objectives and issues. During the year, we also voted at 10,584 company meetings, with 60% having at least one recommendation against management. Voting recommendations on 6,749 resolutions at 630 meetings were made on behalf of Federated Hermes investment teams where at 310 of those meetings, we recommended opposing one or more resolutions.  

In our Real Estate portfolio, we have engaged with all occupiers during lease negotiations with the intention of including sustainability clauses in all lease agreements. We have engaged with the top-five occupiers in our retail and commercial sectors about RPI.

Other activities

Key performance indicator

          Membership and active participation in RI initiatives
        

Progress achieved

We have joined a number of new initiatives and continued to be active in key forums. See section S.09 for more detail.

Key performance indicator

          Promotion of responsible investing initiatives through our activities
        

Progress achieved

We have been active in encouraging participation in RI initiatives including the 300 Club and the UNEP FI, and a number of organisations through our engagement activities.

Key performance indicator

          Case study generation
        

Progress achieved

Stewardship case studies are regularly published on our website:

https://www.hermes-investment.com/ukw/stewardship/eos-insights/

Regular publication on our Insights page of ESG and case studies across asset classes:

https://www.hermes-investment.com/ukw/insights/

The annual Responsible Property Investment report contains a number of Real Estate case studies:

https://www.hermes-investment.com/ukw/wp-content/uploads/2019/09/bd004122-hermes-rpi-report-2019.pdf

We regularly publish podcasts including discussions of best practice on our website:

https://www.hermes-investment.com/ukw/insights/podcasts/

Key performance indicator

          Case study generation
        

Progress achieved

All client reporting includes commentary on our engagement activity, voting activity and, where appropriate, the consideration of ESG matters that influenced portfolio activity. 

06.2. Additional information.


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