Hi, I'm Katie Glass. I'm a Portfolio Manager and Senior Investment Analyst on the High Yield Team at Federated Hermes.
How are you integrating ESG factors into your investment process?
The two most important things are materiality and engagement. Our analysts are identifying the most material ESG factors specific to each company and each industry under review. So material E, S and G factors are going to vary widely from company to company and industry to industry. So for example, our energy analyst is perhaps going to be very focused on individual issuer's climate change policies while our technology analyst may be more steered towards cybersecurity and data privacy issues. However, one area that all analysts are going to be focused on, because it impacts all industries, is governance. Poor governance factors both at that C-suite level as well as the board level are as much a risk to bondholders as they are to shareholders, and this is very relevant to the high yield market where our analysts have to assess management's plans for addressing highly leveraged balance sheets, how they're going to allocate free cash flow and quite frankly, implement a business strategy successfully all while addressing their individual ESG risks.
So we need to understand how governance plays and is going to balance the needs of shareholders and bondholders, and this becomes a very important factor as we're evaluating that fourth pillar of debtholder stewardship Once this analysis has moved forward, our team assigns each individual company in the portfolio an ESG ratings risk and we're using a one to three scale with one being very strong ESG risk mitigation and three being below average. This rating is determined by our own proprietary ESG risk analysis, our own proprietary credit fundamental research. We will take a look at third-party ESG research where available but, we're also actively engaging with our portfolio companies on material ESG issues as well. So one thing that I would like to point out here as we do these engagement meetings with our portfolio companies, we do have a very key competitive advantage and that's our ability namely to work with our Federated Hermes EOS Engagement team. They have decades of experience engaging with companies. They've got industry experts, they've got specific topic experts. And so, we're able to leverage that expertise and learn what some of these long term structural ESG risks are as well as what some of the forward looking concerns are going to be. So, being able to partner with EOS has been a key differentiator in our high yield teams ESG integration efforts to date.
Disclosure: Views are as of April 21, 2020 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices. High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risk and may be more volatile than investment-grade securities. For example, their prices are more volatile, economic downturns and financial setbacks may affect their prices more negatively, and their trading market may be more limited. There is no guarantee that considering environmental, social and governance (ESG) factors will be a successful investment approach. Federated Investment Management Company 20-30191 (5/20)