Fund Complex: Federated Hermes
Management Company: Federated Global Investment Management Corp.; Sub-Adviser: Hermes Investment Management Limited*.
Funds Affected: (1) Federated Hermes Global Equity Instl, (2) Federated Hermes Global Small Cap Instl and (3) Federated Hermes SDG Engagement Equity and (4) Federated Hermes SDG Engagement High Yield Credit Fund, (5) Federated Hermes Prime Cash Obligations Fund
Sustainable Investing Strategies: (1-2) ESG integration, (3) Impact investing, (4) ESG integration, Negative screening (exclusions), impact investing and investee engagement, (5) ESG Integration
Summary:
(1-2) As part of the investment strategy assessment of quality and its approach to risk management, risks associated with a company’s approach to environmental, social and governance (ESG) issues are actively assessed. Data on Hermes’ proprietary ESG Dashboard, which contains a wide range of ESG factors and ranks companies on their behaviors versus peers is considered.
The adviser assesses companies within its investment universe on their exposure to and management of ESG risks and assigns a weighted score for each. ESG represents governance, (being the way in which the company is run), environmental issues, (such as the impact on natural resources), and social issues (such as human rights). No sector or industry is excluded from the initial analysis. The ESG score favors companies with lower ESG risks than companies who are actively improving their focus on ESG issues. The ESG score is combined with the output of the manager’s quantitative model to determine the overall attractiveness of each company. The output from this quantitative model is analyzed by the adviser to ensure that all relevant information is accurately captured and that the portfolio is not exposed to risks not otherwise identified by this quantitative model. These ESG considerations are intended to provide guidance on achieving best practice standards of corporate governance and equity stewardship in order to make informed investment decisions.
(3) In managing the assets of the fund, the adviser will seek to invest in companies that, in its view, provide the potential for long-term capital appreciation while also contributing to positive societal impact aligned to the United Nations Sustainable Development Goals (the “UN Sustainable Development Goals”) (as outlined in further detail below).1 It will do so by performing bottom-up fundamental analysis of financial criteria such as balance sheet quality, franchise value (i.e., brand strength and sustainability of the business model) and quality of management. The review process may include analysis of financial statements, meetings with management, consideration of the general economic environment in which the company operates, structural growth potential of the relevant industry segment and other relevant factors which allow the adviser to assess the intrinsic value of a company, and a comparison to the market valuation, as reflected in the current share price. The adviser also will use standard accounting methodologies to assess the growth prospects of a company by estimating its future operating cash flow less capital expenditures (adjusted for the time value of money). The adviser believes this analysis may help determine whether the companies may provide the potential for long-term capital appreciation, notwithstanding that equities of such companies may, at the time of purchase, be undervalued.
In addition to fundamental financial indicator criteria, the adviser may consider engagement criteria such as assessment of company management competence, integrity, and vision, as well as exposure to one or multiple UN Sustainable Development Goals.
The adviser intends to invest in small- and mid-capitalization companies that it believes will implement best in class UN Sustainable Development Goals practices. The adviser will utilize bottom-up analysis of companies’ respective supply chains, direct operations, products and services to identify those businesses with the best opportunity for improvement in areas such as education, water, and energy conservation.
The fund will not be subject to any limitation on the types of companies in which it may invest (either in terms of industry or focus) so long as these companies are viewed by the adviser to provide the potential for long-term capital appreciation while also contributing to positive societal impact aligned to the UN Sustainable Development Goals. The fund may, from time to time, have larger allocations to certain broad market sectors in attempting to achieve its investment objective.
(4) In managing the assets of the fund, the adviser will seek to invest in securities that, in its view, provide the potential for current income and long-term capital appreciation while also contributing to positive societal impact aligned to the United Nations Sustainable Development Goals. It will do so by performing bottom-up fundamental analysis of financial criteria such as balance sheet quality, franchise value (i.e., brand strength and sustainability of the business model) and quality of management. This fundamental, bottom-up analysis of individual credit will be used to generate returns through anticipated price changes. At the same time, the adviser will analyze securities to seek to identify whether their market price is reflective of the value of the issuer of the securities (as determined by the fundamental analysis outlined above and when taking market news into account). In addition, the adviser intends to use a wider analysis of general economic conditions for portfolio risk management purposes. The adviser intends to diversify the Fund’s portfolio across different geographic regions and industries.
In addition to fundamental financial indicator criteria, engagement criteria that may be used to identify such companies will include, for example, assessment of company management competence, integrity, vision, potential and willingness to enact the changes suggested by the adviser, as well as alignment with at least one of the UN Sustainable Development Goals.
The adviser will use the UN SDG goals and targets as a framework for identifying, articulating and measuring positive impact opportunities within the companies it chooses to invest. In addition to quantitative financial indicators and metrics, qualitative criteria will include assessment of company management competence, integrity, vision, potential and willingness to enact the changes suggested by the adviser during company engagements.
The fund will not be subject to any limitation on the types of companies in which it may invest (either in terms of industry or focus) so long as these companies are viewed by the adviser to provide the potential for current income and long-term capital appreciation while also contributing to positive societal impact aligned to the UN Sustainable Development Goals. The fund will however, exclude companies that manufacture tobacco and/or controversial weapons. The fund may, from time to time, have larger allocations to certain broad market sectors in attempting to achieve its investment objective.
(5) Intensive credit review integrating ES factors in a non-exclusionary way.
*Federated holds a majority sixty percent interest in the Sub-Adviser and, upon the exercise in the future of certain put/call rights under a Put/Call Option Deed between Federated and another shareholder of the Sub-Adviser, Federated anticipates holding an 89.5% interest in the Sub-Adviser.
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