Sustainable, Responsible &/or ESG Policy:

The world is facing significant transitions in climate, technology, demographics, and geopolitics that could dramatically change the way we all live. There is a growing imperative to deliver more resilient and sustainable outcomes, and investors have an important role in successfully managing these transitions. 

The Global High Yield Credit Engagement strategy aims to generate attractive investment returns and positive societal and environmental impacts through engagements with companies focused on the United Nations’ Sustainable Development Goals (SDGs). The SDGs are an ambitious, universal set of objectives agreed by UN member states. The strategy therefore provides the opportunity for credit investors to action the objectives set out within the SDGs alongside their investment objectives.

Every company in our portfolio must have an attractive investment proposition and a compelling SDG engagement hypothesis. We contend that SDG-related impact, and indeed strong management of wider, material ESG issues, must also directly or indirectly support long-term value creation and preservation and the investment quality of each business.

The strategy positions the SDGs and their underlying targets as an ideal means by which all interested parties can orientate and prioritise efforts in respect of environmental and social objectives. Moreover, the underlying indicators for a substantial subset of the SDGs provide a practical and measurable basis that companies can use or approximate. For example, SDG 7 provides many indicators; one example is ‘renewable energy share in total consumption,’ to measure the desired, substantial increase in global share of renewables by 2030. This type of indicator can be easily applied at a corporate level to quantify outcomes, and similarly applicable indicators are apparent across a range of SDGs and targets.

The team encourages companies to be bold and imaginative in considering which of the SDGs are most material to their corporate purpose and commercial health, and in turn establishing what they can do to contribute towards their delivery.

Using our proprietary quantitative ESG scores, known as the QESG Score and developed collaboratively by the Global Equities team and EOS, the Credit Research team screens the investible universe to identify those companies with strong governance but lagging in environmental and/or social policies. The QESG Scores allows this by assigning each company a ranking of 1 to 100 across E, S, and G factors based on data from leading providers Sustainalytics, MSCI, CDP, ISS, Trucost, FactSet and Bloomberg, alongside information from EOS. The overall score is a measure of how well a company manages its ESG risks and highlights any changes to its ESG profile.

Analysts assign a Credit Score, an ESG Score, and a Value Score to all names within their coverage universe, which results in a Final Score for each name.

The Sustainable Fixed Income team, which sits within the Fixed Income team, also has its own sustainability scores: Sustainable Development Goals (SDG), Climate Change Impact (CCI) and Sustainable Leader scores. Each of these sustainability scores is factored into the ESG Score assigned for each issuer as part of our ESG-integrated approach.

All of these scores are discussed at the credit committee and contribute to the Final score. All scores range between one and five, with a Final score of one being assigned to the most attractive investments and five to the least attractive.

 Exclusions:

The team will exclude investment in the following companies:

• companies that generate over 0% of their revenues from the manufacture of Controversial Weapons or by providing either an essential and/or tailor-made product or service to the manufacturers of Controversial Weapons and companies that generate over 10% of their revenues from production of Conventional Weapons;
• companies that generate over 0% of their revenues from the production of tobacco products and companies that receive over 5% of their revenues from tobacco distribution;
• companies that generate over 10% of their revenues from gambling products; and
• companies that generate over 5% of their revenues from the extraction of unconventional oil sands.

In addition, the Investment Manager excludes companies that are in contravention of the principles of the UN Global Compact.

In addition, the team operates a minimum threshold for investment from an ESG and SDG perspective. The lowest scoring issuers from an ESG perspective, as well as companies with no potential or willingness to generate returns to society in line with the SDGs, are excluded from the portfolio (ESG or SDG 5).

Process:

Provided below is the investment process adopted by the team:

 Portfolio Management

The same principles and objectives that govern the construction of the portfolio also drive the day-to-day management of the strategy. The principal catalysts for changes to the sizing of positions and de facto stop-losses are the investment and SDG scores. For example, if a company’s credit score is upgraded whilst its potential to effect positive change remains the same, the portfolio managers will increase the size of the position. At the same time, if an engagement analyst upgrades the SDG score – a reflection of impact potential – assuming all other scores remain the same, the position can also be upgraded. In contrast, as scores are downgraded portfolio managers will reduce risk in the name. If a company’s credit quality declines to the extent that there is risk to performance or, worse, irrevocable capital loss, then regardless of how strong the engagement relationship fund managers are compelled to sell down the name. Ultimately, this is an investment strategy with the aim of delivering superior risk-adjusted returns. To that end, the team will not make performance obviously vulnerable to the SDG objectives.

Using our proprietary quantitative ESG scores, known as the QESG Score and developed collaboratively by the Global Equities team and EOS, the Credit Research team screens the investible universe to identify those companies with strong governance but lagging in environmental and/or social policies. The QESG Scores allows this by assigning each company a ranking of 1 to 100 across E, S, and G factors based on data from leading providers Sustainalytics, MSCI, CDP, ISS, Trucost, FactSet and Bloomberg, alongside information from EOS. The overall score is a measure of how well a company manages its ESG risks and highlights any changes to its ESG profile.

Analysts assign a Credit Score, an ESG Score, and a Value Score to all names within their coverage universe, which results in a Final Score for each name.

The Sustainable Fixed Income team, which sits within the Fixed Income team, also its own sustainability scores: Sustainable Development Goals (SDG), Climate Change Impact (CCI) and Sustainable Leader scores. Each of these sustainability scores is factored into the ESG Score assigned for each issuer as part of our ESG-integrated approach.

All of these scores are discussed at the credit committee and contribute to the Final score. All scores range between one and five, with a Final score of one being assigned to the most attractive investments and five to the least attractive. A change in credit quality or value leads to a change in scores. The team also assigns various scores for credit diagnostics. The collection of scores and diagnostics leads directly to investment recommendations and ideas and is an input into position sizes on a continuous basis.

It is these credit scores that are juxtaposed with the SDG scores assigned by “engagers” that measure a company’s ex-ante potential for change. The SDG score measures a company’s willingness and ability to effect positive change on society. If a company, for example, is assigned a high score that reflects high promise and delivers on that expectation over time, it is expected that the SDG score would come down and the position would be reduced as that “potentiality” is recycled into a new name. Engagement relationships—measuring change--will be critical to managing the SDG scores. The team believes these “high potential” companies will be qualified by long-term shareholdings; a recurring presence in capital markets; good reporting standards and be open to engagement relationships.

Given that change can take months of not years, a minimum level of credit strength is required for the fund. As such, only name with a credit score of three or higher-on a scale of one to five--can make it into the fund. (We will make some exceptions for rising “fours”, in consultation with the covering analyst.) Once the quantitative step is complete, the portfolio construction team works with the analysts to add or remove names to/from the reduced pool.

Because the investment process is governed by two co-linear objectives, it requires two interwoven self-reinforcing paths to follow, which lead to a final investment decision. One path serves the investment returns, and the other serves the objective of delivering returns to society. The convergence of these two processes results in a bottom-up, stock-picking process that considers a longer holding period than that of the original high yield strategy.

As such, the importance of credit quality in the selection process is twofold: 1) engaged companies must be strong enough to finance “change”, and 2) engaged companies must survive the duration of the engagement period so that society sees the benefits of the engagement efforts. This bottom-up credit selection is guided by a top-down analysis. The team believes that capturing superior relative value depends as much on finding attractive securities as identifying creditworthy companies. The team believes that this approach helps to deliver strong returns through the cycle.

From this point, the investment team, comprising the credit analysts, lead engager and portfolio managers, builds the portfolio along the two investment paths:

• Credit Investment Thesis: Attractive credit investments predicated on credit scores.
• Engagement Thesis: High potential for a company to effect positive change predicated on SDG scores.
• Investment and engagement criteria: interwoven and self-reinforcing theses.

 Credit Investment Thesis: To deliver the superior, risk-adjusted high-yield returns the SDG Engagement High Yield strategy will follow the investment process for issuer and security selection. The credit research team assigns a suite of scores that convey their level of conviction around several factors that affect credit: operating strength; liquidity and capital resources; amount of debt relative to cash-generative properties of the business and also relative to firm value; ESG factors; and relative value. These scores – as outlined in a separate Credit Research Manual – range from one to five, with one being strongest. Scores are dynamic in nature and change as the analysts sees changes in credit fundamentals, ESG factors and/or value. Depending on the urgency required for a response, those score changes lead to a discussion on the credit either at credit committee or on the desk. Changes in scores lead to changes in positioning: credit curve, capital structure, currency, whether to be in/out of the name. The research tends to weigh value more if credit quality is rising or already high, and credit risk more as credit quality declines or is low already.

 Thesis: The objective of the analysis for the engagement process is to determine the ex-ante potential for a company to effect positive change on society and the environment. To that end, under the guidance of the Fixed Income Lead Engager, engagement analysts for this fund will assess a company’s willingness and ability to manage its operating process and/or the products it produces in a purposeful way for the benefit of society and/or the environment. In line with the investment process, the engager will assign an SDG score to reflect his or her level of conviction that the company can convert potential to effect positive change to realised positive change over time through the engagement relationship. The scale of the score is one to five, with one being excellent potential and five being no potential.

Because the progress that a company makes along the trajectory of its investment thesis will vary and take months if not years, we do not need weekly SDG Committee meetings to discuss SDG scores. We will meet no less than quarterly with the SDG Committee to discuss proposed changes and names on an SDG Watchlist. The committee is comprised of the Lead Engager, relevant portfolio managers and credit analysts. It will be chaired by a senior member of the EOS team.

The final investment implementation is made by the portfolio manager, who draws upon the extensive resources and expertise of a variety of credit investment specialists, including the Credit Research team and risk management. Information and investment ideas are discussed at a series of regularly scheduled meetings.

Because investment technology and tools evolve, the team reviews the investment process on a semi-annual basis to consider if these new tools and methods can be used to improve their process. Therefore, while their core investment principles and process remain indelible, the team frequently evaluates ways in which they can increase the efficiency or augment the efficacy of the investment process.

Internal and External resources:

Because we believe that non-fundamental factors are inexorably linked to credit risk, we integrate ESG factors into our investment decisions and analysts assign ESG scores to all credits covered. Our ESG assessment focuses on the impact that issuers’ ESG policies and behaviours have on cash flows and, thus, on enterprise value. To generate the ESG scores of one to five, our analysis draws upon both internal and external sources. Our ability to assess and price ESG risks is enhanced by the significant resources within the broader business.

Engagement, which is led by our in-house stewardship team, EOS, and dedicated sustainable fixed income engagers, is a critical element of the team’s integration of ESG considerations into the research process. Credit analysts work closely with engagers, sharing views and opinions and attending company meetings together. This allows the analysts to develop a deeper, real-time understanding of management’s thinking, culture and processes around sustainable business practices and provides an opportunity to encourage further progress towards the pursuit of best practices. The Credit team believes that improved ESG behaviours ultimately lead to lower risks and volatility and thus better investment decisions.

The Credit team uses a number of proprietary tools in its analysis that allow for sophisticated comparison of companies against peers and sectors with respect to a range of ESG considerations. This includes our proprietary QESG Score (a quantitative ESG score), which combines internal analysis with external sources such as Sustainalytics, MSCI, and Trucost, among others, to score a company’s behaviours on a scale from one to 100. Our proprietary ESG Dashboard is also integrated into the Credit team’s ESG assessments. In addition, analysts have access to our Carbon Tool, which allows them to assess a company’s carbon footprint, as well as the Climate Change Database, which has been developed by the Sustainable Fixed Income team, allowing access to climate and sustainability-related information of the credit universe.

Moreover, credit analysts have access to external resources such as Sustainalytics and MSCI Research, ESG analytics from Bloomberg, credit rating agency reports, EOS reports, and company sustainability reports. Below is the Credit team’s approach to ESG integration and a graphical depiction of how ESG scores feature in the investment process.

Analysts assess and price operating, financial and ESG risks through the acquisition and analysis of primary and secondary information. The information-gathering stage typically includes meeting with the company/issuer, company/issuer financials, press releases, earnings calls, industry reports, news, rating agency reports, sell-side research reports, company ESG/sustainability reports, security trading levels, and trading technicals. Credit research analysts make company/site visits and attend industry conferences where they meet company management and attend company presentations. This is considered an essential part of the research process.

Resources, Affiliations & Corporate Strategies:

ESG Resources, EOS, Responsibility Office and ESG Specialists:

In terms of our ESG-dedicated personnel, Federated Hermes Limited has 75 staff members that are directly involved in ESG integration, as at 31 March 2025. We also have dedicated ESG personnel embedded within our investment teams. The teams are outlined below:

• Within the Responsibility Office, our dedicated Responsibility team is tasked with coordinating and supporting the development of our policies and their subsequent integration across our funds and stewardship services. Leon Kamhi, our Head of Responsibility, reports directly to our CEO. Each of our investment teams meet formally with Leon and his team on a quarterly basis to discuss their ESG integration activities.
• Our 37-person stewardship team, EOS, includes industry executives, senior strategists, corporate governance, sustainability consultants, climate change experts, accountants, ex-fund managers, former bankers and lawyers. The depth and breadth of this resource reflects our philosophy that stewardship activities require an integrated and skilled approach. Through EOS we engage with companies on strategic and material ESG concerns to promote investors long-term performance and fiduciary interests - this represents over $2.1 trillion in assets as at 31 March 2025.
• Within our Fixed Income team we have a Sustainable Fixed Income (SFI) team, led by Mitch Reznick, Head of Sustainable Fixed Income (and London managed Fixed Income strategies). The SFI team is responsible for the sustainability integration within our credit portfolios and has a dedicated engagement resource.
• We manage some focused responsible investing equity strategies: a Global Sustainable Equity strategy and an SDG Engagement Equity Engagement strategy.[1] The former is managed by Martin Todd (lead portfolio manager) and Henry Biddle (co-portfolio manager), and the latter is managed by Hamish Galpin. We also have a Head of Engagement - Equities, Will Pomroy, who oversees and leads the engagement programme for our sustainable equity strategies, which includes providing ESG analysis and formulating engagement strategies for the portfolios. Will Pomroy sits with the investment teams in London.
• The Global Equities team also has its own ESG specialist in portfolio manager Louise Dudley, who has been with the company since 2009, initially working in EOS. The team manage various ESG related strategies eg, the ESG Pathway Fund, a Low Carbon and an ESG Screened strategy.  
• The Global Emerging Markets team includes two dedicated Responsible Investing & Sustainability personnel, Olivia Lankester and Hayley McGuiness.  The investment team manage a Global Emerging Markets Equity ESG strategy.  The Asia ex Japan team includes Seyoung Serena Ko who is a dedicated ESG Analyst.

Membership Lists:

Federated Hermes is supportive of the development of codes and standards relating to responsible business conduct and responsible investment to aid transparency and accountability. We adhere to a number of responsible business conduct codes and internationally recognised standards for due diligence and reporting:

• We were founding signatories of the UN Principles of Responsible Investment (UN PRI) in 2006 and committed to embedding the six Principles as a responsible investor and owner. We report annually using the PRI Reporting Framework. We also work with the PRI through a number of its working groups and initiatives.
• We are a signatory of a number of stewardship codes, including the Financial Reporting Council’s UK Stewardship Code since 2010. As part of our signatory status to the UK Stewardship Code we produce an annual Stewardship Report. Our stewardship business unit, EOS is a signatory of the Best Practice Principles for Providers of Shareholder Voting Research & Analysis and reports annually on implementation of these principles.
• Signatories of the UN Global Compact (UNGC) since 2017 and report annually on our implementation of the UNGC Principles across the themes of Environment. Human Rights, Labour Rights and Anti-Corruption. We implement the Principles across our operations, and the themes are reflected in our ESG integration and engagement processes as described in our Sustainability Risks Policy. We engage with the UNGC UK Network to support the continued growth of the network and the impact of its engagement with businesses.
• We joined Climate Action 100+ in 2015 and play an active role in this investor-led initiative with the support of over 360 investors, representing more than $34 trillion of assets under management that aims to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.
• We were a founder of the 300 Club in 2011 and was the Chair until 2014.
• We have been members of the Net Zero Asset Managers Initiative since 2021 through which we have committed to support the goal of net zero greenhouse gas emissions by 2050, in line with global efforts to limit warming to 1.5°C as stated in the Paris Agreement. We publish an annual climate-related financial disclosures report in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). Furthermore, we are proud to have become an inaugural TNFD Early Adopter, which was announced at the World Economic Forum event at Davos in 2023. We have already begun trialling elements of the TNFD disclosure recommendations in our reporting.
• In 2020 we signed the Finance for Biodiversity Pledge and the Eliminating Commodity Driven Deforestation Commitment, through which we have committed to assess and disclose our exposure to deforestation and to protect and restore biodiversity through our investment and engagement activities.
• We have been a member of the International Integrated Reporting Council (IIRC) since 2011 and the Sustainability Accounting Standards Board (SASB) since 2019.
• In line with international treaties, we are currently excluding companies that are manufacturing and/or are providing either an essential and/or tailor-made product or service to the manufacturers of relevant controversial weapons.
• We ensure our sustainable investments are aligned with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.
• We comply with all relevant regulatory disclosures, including the requirements of the UK Modern Slavery Act (2015) as set out in our Modern Slavery Statement and the EU Shareholder Rights Directive II.  

We are also members of a wide range of industry initiatives through which we seek to advance industry best practice, collaborate with other investors to achieve shared engagement and advocacy outcomes and ensure we remain at the forefront of best practice. We provide an annual update of our external memberships in our Stewardship Report, available via the link: https://www.hermes-investment.com/uploads/2025/05/a4e349bde8a792ace67777de1b554221/federated-hermes-limited-stewardship-report-2025.pdf

[1] Note: The SDG Engagement Equity Strategy includes the Federated Hermes Global SMID Equity Engagement Fund.

Dialshifter

This fund is helping to ‘shift the dial from brown to green’ by…

The strategy aims to outperform the global high yield market by investing in and engaging with companies on the United Nations Sustainable Development Goals (SDGs) – an ambitious, universal set of objectives seeking global prosperity and environmental preservation by 2030.

The SDG score, assigned to the issuers, measures a company’s willingness and ability to effect positive change on society.

The team encourages companies to be bold and imaginative in considering which of the SDGs are most material to their corporate purpose and commercial health, and in turn establishing what they can do to contribute towards their delivery.

SDR Labelling:

Not eligible to use label