Shortlisted for PRI Awards 2024: Recognition for Action – Climate
Organisation: Federated Hermes Limited
Signatory type: Investment manager
HQ country: United Kingdom
The approach, initiative, or process
Climate action at Federated Hermes
Since 1983, Federated Hermes Limited (FHL) has been dedicated to responsible wealth creation through ESG integration and stewardship. We strive for holistic returns, considering societal and environmental impacts. As long-term stewards of capital, we believe that climate change represents a systemic risk to financial markets, the global economy and our ability to create long-term wealth for our clients and their investors.
As founding signatories of the PRI in 2006, we helped draft its Six Principles and remain committed to them. We continually enhance our ESG integration and reporting, and actively promote responsible investing. We belong to nearly 100 organisations globally, sharing and advancing ESG practices. In 2021, we joined the Net Zero Asset Managers initiative and co-lead Climate Action 100+.
We published our Climate Action Plan in 2022, which sets out why and how we will seek to work with clients and investee companies on decarbonisation goals, consistent with an ambition to reach net-zero emissions by 2050 or sooner across all assets under management of FHL. We also outline interim targets.
Our commitment is based on the expectations that governments and policy makers will deliver on commitments to achieve the 1.5°C temperature goal of the Paris Agreement. In delivering our climate goals, we will continue to focus our advocacy and engagement on related issues such as halting and reversing deforestation, protecting nature and promoting social justice.
An engagement-driven approach
As outlined in our Climate Change Expectations of Investee Companies, we commit to engaging with companies showing inadequate climate action to challenge them to accelerate their climate ambition. This includes setting credible science-based targets, developing robust decarbonisation strategies, contributing to climate solutions and building resilience to climate change. This protects our clients’ financial interests and delivers long-term value for their stakeholders.
As outlined in our 2022 Climate Action Plan, we strive to reduce our portfolio emissions, so we have set the following interim milestones*:
- In public markets, we are aiming to align 50% of AUM and financed emissions to 1.5°C by 2027 and 80% by 2030.
- In real estate, we are working toward a 40% reduction in energy intensity by 2030 and 66% by 2035.
*While we hope to cover all asset classes over time, our interim target currently applies to all our assets under management except for private equity, direct lending, sovereign debt, FX, cash, indices and asset-backed securities (ABS), collateralised loan obligations (CLOs) and collateralised debt obligations (CDOs) issued by companies.
Across our assets, both in the public and private space, we pledge to engage with the most material emitters that are misaligned or exposed to significant transition risk to help them reach the 1.5°C target. FHL is currently engaging over 200 portfolio companies and will engage 80% of our financed emissions, which will grow to over 90% by 2025.
Map the route
We believe we can achieve these goals in three ways:
- Reducing our financed emissions by asking our investee companies to set credible targets and strategies validated by the latest climate science. We seek to increase engagement to 90% of financed emissions by 2025.
- Taking a proactive and industry-specific approach by prioritising the following sectors: forest, land and agriculture, banks, buildings, iron and steel, cement, chemicals, transport, oil and gas, and power generation.
- Increasing investment in solutions by raising the proportion of thematically managed assets with an explicit Paris-alignment goal.
The development of an in-house Paris-alignment methodology has allowed us to assess the extent to which a company’s climate change ambitions are credible and in line with the Paris-alignment goals. We will report progress on an annual basis.
Climate solutions
Investment in the shift to a low-carbon world is about six times lower than it needs to be. In parallel to our engagement efforts, we launched the Federated Hermes Climate Change High Yield Credit strategy in September 2021 and the Biodiversity Equity fund, which utilises insights from the Natural History Museum, in 2022. We will continue innovating client-led products as clients focus more on climate risk and opportunities.
We have selected the Climate Change High Yield Credit strategy to illustrate our commitment. The fund aims to generate a high level of income while supporting the transition to a low-carbon economy through the exclusion of fossil fuels.
Our proprietary Climate Change Impact (CCI) score uses a unique one-to-five scoring system to measure a company’s progress and impact on decarbonisation. This system, supported by insights from our dedicated team, informs our portfolio construction, targeting, measuring, and reporting on impact objectives. Our climate change strategy focuses on companies leading the decarbonisation transition and those with low baseline emissions enhancing sustainability through their products. Beginning in November 2023, the fund’s strategy has been to support the Paris Agreement’s goals by investing in companies transitioning to net-zero emissions. The global high yield market includes companies with potential positive environmental impacts, identified using our scoring framework. Companies scoring 1 are leaders in decarbonisation, while those scoring 5 are rated as harmful.
In 2023, we enhanced the CCI score to provide clearer insights into the factors influencing each score, focusing on sector-specific data. Companies rated as CCI 4 or 5, indicating harmful climate impact or negligible decarbonisation efforts, are excluded from our investment portfolio. Additionally, we avoid controversial sectors and issuers with significant greenhouse gas emissions and no intention to change.
Corporate engagement and advocacy
For the Climate Change High Yield Credit strategy, engagement is critical in encouraging companies to enact positive change. We have a dedicated engagement team, with a lead engager, which uses the resources of our in-house stewardship team, EOS, to deliver best-in-class engagement and advocacy. The climate change strategy selects securities progressing in decarbonisation and engages with those with potential. In 2023, EOS engaged with 1,041 companies on 4,272 issues and objectives. Of these engagements, 35.5% related to environmental topics, 25.6% were social and ethical, 27% were on governance and 11.9% were related to strategy, risk and communication.
The measures to ensure transparency
We pride ourselves on our clear and transparent approach with all stakeholders, current and future. Our website provides a list of our policies and disclosures.
On a firm-level, we publish our Climate Action Plan annually. We also report annually on progress in both our Climate Related Financial Disclosures Report and in our reporting to the Net Zero Asset Managers initiative, which has been undertaken via the PRI reporting cycle for the past few years. Our Deforestation Policy statement is also publicly available.
We also make several resources readily available to our investors via our website, including reports, snapshots of the product and any updates, insights, podcasts and thought pieces. Examples include:
- Climate Change High Yield annual report covering investment review, evolution of CCI score, case studies and fund factsheet.
- FHL Stewardship report covering governance, investment approach, engagement rights and responsibilities.
- EOS Stewardship report covering engagement, actions undertaken and case studies.
- EOS Engagement Plan 2024-2026, which outlines our current and future engagement approach.
- Quarterly Public Engagement Report, which offers a deep dive into current ESG themes and highlights individual EOS engagements.
PRI disclaimer: This case study aims to contribute to the debate around topical responsible investment issues. It should not be construed as advice, nor relied upon. It is written by a guest contributor. Authors write in their individual capacity – posts do not necessarily represent a PRI view. The inclusion of examples or case studies does not constitute an endorsement by PRI Association or PRI signatories.
Federated Hermes disclaimer: This case study is prepared based on content published in 2022/2023. The information herein is believed to be reliable, but Federated Hermes does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. This document has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This document is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Figures, unless otherwise indicated, are sourced from Federated Hermes. This document is not investment research and is available to any investment firm wishing to receive it. Whilst Federated Hermes has attempted to ensure the accuracy of the data it is reporting, it makes no representations or warranties, expressed or implied, as to the accuracy or completeness of the information reported. This document may include and is based on forward-looking information and statements that are subject to risks and uncertainties that could cause actual results to differ. Such forward-looking information and statements are based on current expectations, estimates and projections. Issued by Federated Hermes Limited, being Federated Hermes Limited and its subsidiaries (“Federated Hermes”).
