The Article 9 fund aims to deliver a total return with a reduced environmental footprint compared to the benchmark, measured using carbon, water and waste footprint metrics.
London-based Federated Hermes has launched the Federated Hermes Sustainable Global Investment Grade Credit Fund with sustainable investment manager CCLA as the cornerstone investor.
As an Article 9 fund, the aim is to deliver a total return with a reduced environmental footprint when compared to the benchmark ICE BoAML Global Corporate Bond index.
The fund managers will report on the carbon, water and waste footprint of the fund at a portfolio level, as well as assess issuers on all three metrics, based on measures of total tonnes of carbon emissions, total m³ of water used (for cooling, processing and purchased) and total tonnes of waste produced (incinerated and landfill waste as well as nuclear waste) per $m invested.
In terms of portfolio selection, the fund managers said they would employ a bottom-up approach, selecting investment grade issuers from across the globe.
Speaking to Impact Investor, Nachu Chockalingam, co-portfolio manager of the fund, said that “with the advances we have seen in sustainability, primarily in Europe, we are going to run the fund with a moderate European bias, at least from inception”.
Nevertheless, Chockalingam said that she and co-portfolio manager Orla Garvey planned to invest beyond Europe and the US and would also include emerging market corporates to create more opportunities and diversified sources of return.
The fund will apply an exclusions framework and use a proprietary scoring model to make portfolio selections.
Although weighted towards companies recognised as leaders in sustainability, the managers said they would also look to identify and invest in issuers that were demonstrating “clear momentum in sustainability”.
Chockalingam said: “We will be open to investing in corporates that have a clear trajectory to becoming a sustainable leader and will use engagement where necessary to help the corporate progress.”
The fund is the fifth in the firm’s sustainable fund range and follows the launch of the Federated Hermes Sustainable Global Equity Fund in 2021.
SDG 9 and 12
The firm’s proprietary scoring model gives a sustainable leaders or ‘SL’ score to issuers to refine the initial investment universe, with a score of SL1 reflecting leaders with momentum and issuers receiving a score of SL4 or SL5 excluded from the investment universe.
Once an issue is screened using the SL process, its impact is then assessed by its revenue contribution to the SDGs.
Volvo, which is one of the issuers included in the portfolio, for example, has a score of SL2. Chockalingam explained that SDG 9 (industry, innovation and infrastructure) and 12 (responsible production and consumption) were judged to be most relevant for the company.
She said that for SDG 9, MSCI had identified that 24% of Volvo’s revenues from its products were helping to reduce energy consumption, which was related to the company’s manufacturing of electric and hybrid vehicles and that this percentage was expected to rise to 100% as Volvo planned to be a fully electric car maker by 2030.
“This directly contributes to target 9.4, upgrade infrastructure and retrofit industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean and environmentally sound technologies,” she said.
For SDG 12, she said that Volvo’s sustainability strategy included reducing the GHG emissions footprint of its operations and its value chain. This included targets to achieve carbon neutral manufacturing by 2025 and overall by 2040, inclusive of its supply chain, with suppliers expected to use 100% climate neutral energy by 2025.
“This is a significant reduction in GHG emissions, contributing to target 12.2, achieve the sustainable management and efficient use of natural resources, and indicator 12.2.1, material footprint, material footprint per capita, and material footprint per GDP,” she added.
Looking ahead, Chockalingam said the global investment grade market offered a vast array of attractive investment opportunities in quality issuers, allowing for diversification across sectors, regions and capital structures.
“When selecting sustainable leaders within this investment universe, we can target superior financial and environmental performance relative to the benchmark,” she added.