Andrew Jackson is head of fixed income at the international business of Federated Hermes, while Mitch Reznick CFA is head of research and sustainable fixed income
The asset management industry is now waking up to the need for a co-ordinated effort to fight the climate crisis. It is possible to invest and create value while also working to prevent the unfolding emergency. We know that there are a number of different approaches to do this from a credit-investing perspective, such as: investing in innovation; backing the leaders; engaging for transition; buying sustainability-themed securities; and a combination of all of these.
Defining your climate change goals
Whatever the climate-change investment objective is, it must also be tied to a financial objective. Together, these two colinear and self-reinforcing investment objectives can be met through creative, solutions-based innovation.
Credit solutions can be built around a spectrum of decarbonisation objectives: minimising emissions today; supporting climate leaders or innovators; influencing the energy transition; meeting Paris- aligned or net-zero targets, and so on. However, not all decarbonisation objectives can be delivered in parallel. There is a trade-off between reducing the level of greenhouse gas emissions in the portfolio today (for example, a leaders-only approach) and being able to directly influence portfolio companies to take climate change action (for example, engaging for transition approach).
The former typically relies on excluding the worst offenders to contribute to reducing portfolio emissions and to take a step closer to any temperature or emissions targets set in the short to medium term. While the latter relies on using your rights as a financial stakeholder to engage with those companies to change. This would result in higher emissions in the short term but potentially have a greater climate change impact in the longer term should the companies successfully transition. This ‘invest and influence’ approach may make a bigger contribution to achieving the Paris goals in the longer term but in the short term, it may result in less attractive temperature alignment paths than approaches focused on excluding ‘brown’ companies in favour of climate change leaders.
Incorporating climate change into the investment process
At the international business of Federated Hermes, we apply best-in-class ESG integration across all our strategies. As such, climate change forms a core part of the investment process. Climate change goals represent a significant portion of the engagement agenda managed by either our global stewardship business, EOS at Federated Hermes, or our dedicated fixed income engagement team. It has always been part of our bottom-up analysis alongside credit fundamentals and other broader ESG risks. For all strategies, during bottom-up credit selection, we evaluate numerous metrics at our credit committee to determine an overall score, which helps us meet our goal of delivering sustainable wealth creation.
For climate change solutions, the key elements in our investment process include access to company climate change data; stewardship expertise to engage companies; processes to assess and screen companies on climate change criteria and build portfolios; and portfolio-level climate change analytics and reporting tools. As climate data disclosure and availability have improved within credit, we have evolved our investment process to specifically assess and better incorporate the impacts of climate change, which has created a platform for delivery of climate change-themed solutions.
The final important element is monitoring and reporting progress against the climate-change goals or any specific decarbonisation objectives that have been set. For credit portfolios, there are some challenges. Firstly, data coverage can be lower than for equities especially with non-publicly listed high-yield issuers where emissions data disclosures can be limited. Also, in many cases where disclosures do exist, it is necessary to go through a complex exercise to map data from the credit-issuing entity to the relevant equity entity to source the data. This is one reason why we find real-time insights from both our engagers and credit analysts so valuable in complementing climate data. You can read more from the Federated Hermes Fixed Income Quarterly report – 360° A changing climate in fixed income – at https://sustainability.hermes-investment.com/uk/en/ intermediary/insights/a-changing-climate-in-fixed-income/
The value of investments and income from them may go down as well as up, and you may not get back the original amount invested.
Past performance is not a reliable indicator of future results. For professional investors only.
This is a marketing communication. The views and opinions contained herein are those of Andrew Jackson Head of Fixed Income and Mitch Reznick, CFA Head of Research and Sustainable Fixed Income, and may not necessarily represent views expressed or reflected in other communications, strategies or products. 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. The distribution of the information contained in this document in certain jurisdictions may be restricted and, accordingly, persons into whose possession this document comes are required to make themselves aware of and to observe such restrictions. Issued and approved by Hermes Investment Management Limited (“HIML”) which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. HIML is a registered investment adviser with the United States Securities and Exchange Commission (“SEC”).