1、Sustainability SPECIAL EDITIONAndrew Jackson Head of Fixed IncomeMitch Reznick, CFA Head of Research and Sustainable Fixed IncomeFixed Income Quarterly ReportQ1 2021360 A changing climate in fixed income www.hermes-For professional investors onlyFor professional investors only www.hermes-2Commentary

2、 Last year, the devastating and unrelenting coronavirus crisis turned the spotlight on sustainability. During that time, sustainable finance shifted from a niche corner of the market to a position of prominence and permanence because we believe there is no going back. A global, public health crisis;

3、 social inequality and unrest; record economic retraction and violent swings in financial markets. To say that 2020 was a very challenging year might be the mother of all understatements. The primary driver for the turbulence in fixed-income markets was, to state the obvious, the Covid-19 pandemic a

4、nd its associated effects onsociety and the economy. As credit investors, typically we would have some miserable, lugubrious take on such market events. Although there certainly will be a reversion to that base-case disposition sometime in the future, we actually seea silver lining in all ofthis.If

5、nothing else, the Covid-19 pandemic exposed the importance of addressing environmental and social challenges. Within investments, “sustainability” came under the spotlight, drawing attention from all corners of the capital markets. Indeed, 2020 was a record fundraising year for sustainable investmen

6、t funds, with global net assets reaching close to $1.6tn (see figure 1). It was also a record year for green and sustainability-themed bonds and loans with issuance of $700bn for an 80% jump year on year, with substantial growth coming out of the US. For these reasons, we decided to take a thematic

7、approach to this edition of 360, viewing each section through the lens of sustainable investing. In 2020, with secular winds behind it, sustainable finance shifted from a niche corner of the market to a position of prominence and permanence. As we have discussed in previous editions of 360 and other

8、 research papers, sustainable finance has gained momentum, scale and, for various reasons, there is no turning back. While the forces behind the growth of sustainable finance have been strengthening for years, the effects of Covid-19 on the market, governments, regulators, investors and companies ha

9、ve all proved to be the catalyst for its indelibility. In addition, we argue that in some ways, 2020 was a dress rehearsal for what the effects of climate change could wreak on society, the economy and financial markets.Figure 1. The rise of sustainable investing ($bn)Sustainable funds ($bn)Combined

10、 net assets45873788558520020Combined net sales02505007500161Source: Broadridge GMI, as at November 2020, includes equity, bond, mixed assets and money market funds globally.The value of investments and income from them may go down as well as up, and you ma

11、y not get back the original amount invested.Mitch Reznick, CFAHead of Research and Sustainable Fixed Income Andrew Jackson Head of Fixed IncomeAs Head of Fixed Income, Andrew leads the strategic development of the credit, asset-based lending and direct lending investment teams, and its multi-asset c

12、redit offering.In addition to his role of Head of Research and Sustainable Fixed Income, Mitch is co-manager of the Federated Hermes SDG Engagement High Yield Credit Strategy. For professional investors only www.hermes-3Defining Sustainable InvestingWhen we think of sustainable investing, we conside

13、r the ways in which companies and countries think about the future. Our guiding definition of sustainable investing is:Predicated on the principle of preserving the right of future generations to enjoy the economic, social and environmental benefits of today, sustainable investing is becoming a fina

14、ncial stakeholder in companies or assets that seek to substantially mitigate or reverse stress on society and the environment whilst also creating economic value and financial performance. Embedded in this definition is the notion of two simultaneous activities: delivering value and mitigating harm.

15、 As such, sustainable-themed investment strategies must be governed by both a financial objective and a sustainable objective. And, for those sustainable or impact investment offerings (for example, our SDG Engagement High Yield Credit Strategy). that sustainable investment objective must have a pat

16、h to influence investment decisions through screening (both in and out), security selection and position size. To that end, we have created a suite of scores to assess a companys willingness and ability to effect positive change on society and the environment while also creating value. As discussed

17、later in this report (see page 6), these are our Climate Change Impact, Sustainable Development Goal (SDG) and Sustainable Leaders scores. Importantly, we do not see these two investment drivers financial and sustainable as mutually exclusive; this is no zero-sum game. We believe that these two, co-

18、linear forces are self-reinforcing: sustainable companies or assets strengthen financial and operating profiles, which in turn support investment performance. Take, for example, figure 2 that speaks to the interdependence of decarbonisation and investment theses for a given investment. Figure 2. Int

19、erwoven and self-reinforcing decarbonisation and investment theses for our climate-focused solutionsInvestment thesisDecarbonisation thesisFinancial objectiveDecarbonisation objectiveReducing GHG emissions whilst creating economic valueImproving operating andfnancial risksUnderlying asset qualityGoo

20、d prospects for growth in implied equitySustainable priorities for capital allocationAttractive valuationAssessing materiality of impact of decarbonisa-tion plansManagement of physical and transition risksAllocation of capital to climate change technology and innovationCollateral benefts of engageme

21、nt serve credit analysisSource: Federated Hermes, as at January 2021. Finally, we also believe that there are financial performance opportunities to be harvested by investing in the future sustainability leaders. Given the secular trends noted already, there is elevated demand for climate-change lea

22、ders. It is not just sustainable-themed portfolio managers that are buying the leaders, money managers of “mainstream” funds are on the hunt for leaders to reinforce the sustainability credentials of their portfolios in response to their clients who now seek to better understand how “green” their in

23、vestments really are. Inother words, the investment community is pining for leaders. Not unlike investing in “cheap” securities, investing in credible transition stories makes financial sense as they become the “screened-in” leaders of the future. As documented throughout this report, in fixed incom

24、e, these principles of sustainable investing are universal and can be applied broadly across the asset class. And while there will be common activities across fixed income, such as engagement, because various idiosyncrasies characterise each sub-asset class, the way these principles manifest themsel

25、ves in investment strategies and processes can differ by sub-asset class. In other words, we must respect the uniqueness of each sub-asset class when integrating sustainability. For professional investors only www.hermes-4The future is bright (green)As we happily turn our backs on 2020 and look ahea

26、d to 2021, we see only rapid growth and wider development in the trajectory of sustainable fixed income. As much as 30% of thenew seven-year 1.1tn European Union (EU) budget and 750bn recovery plan will be spent on fighting climate change. That is by far the highest share of dedicated spending for “

27、green” purposes an EU budget has ever made. Financing that with some 225bn of green bonds will have a profound effect on the 650bn green-bond market and green-debt finance in general. And thats before we examine the so-called “blue” wave in the United States, where Democrats now have a slim majority

28、 government. Indeed, President Biden who moved to reinstate the US to the Paris climate agreement just hours after being sworn in as president has made financing a green recovery from the pandemic a central plank in his platform. He plans for nearly $7tn in his climate and environmental justice prop

29、osal.1 Then there is China, the worlds largest emitter of greenhouse gases at over 10 gigatonnes (GT) of CO2 (compared to the US, which holds the number two spot at 5.4GT).2 China now promises to hit peak emissions in 2030 and reach net zero by 2060. That is a pretty big “paper promise”, which will

30、need some concrete progress before its credulity can be assured; the same can be said for Biden in the US, we would add. And, of course, there is COP26, the UN Climate Change Conference, set to take place in the UK in November. There can be absolutely no doubt that all of these initiatives together

31、will have a major impact on every aspect of fixed-income markets. Figure 3. Comparing EU climate-related spending (bn)2014-2020Climate-related spending of Multiannual Financial Frame (MFF)2021-2027( bn)Just transition mechanism00500600700800Climate-related spending of Next Generation EU (

32、NG EU)Source: European Union, as at December 2020. 1 See https:/ for more information. 2 Source: https:/www.ucsusa.org/resources/each-countrys-share-co2-emissions. Contents5 Spotlight on sustainability trends: Sustainable assets are still underrepresented in portfolios. 6 A changing climate: a fixed

33、-income perspective It is possible to invest and create value while also working to prevent the climate crisis.12 Relative value between asset classes As liquid credit markets return to more normalised levels, we see a return of the illiquidity premium.18 Multi asset: There has been a reorientation

34、towards sustainability in the multi-asset space. 21 Economic outlook: The Covid-19 crisis may offer an opportunity to build back better.22 Fundamentals: Global yields for investment-grade and high-yield credit are at historic lows. 24 Valuations and technicals: The market for sustainability-related

35、debt instruments experienced exponential growth. 25 Public credit: The green bond index is now trading at pre-coronaviruslevels. 26 Leveraged loans: The sustainability revolution in leveraged loans has now begun in earnest. 27 Structured credit: The ABS market has much progress to make in responsibl

36、e investing. 30 Private credit: A rise in defaults is expected in 2021, but lenders will remain supportive of on-cyclical businesses.31 Asset-based lending: The real-estate market has a unique opportunity to assist the carbon transition of the wider economy.32 Sustainable finance: The EUs planned 22

37、5bn issuance of green bonds shows there is no going back on the green transition.For professional investors only www.hermes-5 Spotlight on sustainability trendsAs we discussed in our opening commentary, against the backdrop of the coronavirus pandemic, 2020 was a record fundraising year for sustaina

38、ble investment funds, with global net assets reaching close to $1.6tn. Of course, sustainable investment funds were already experiencing significant growth before the onset of the pandemic: between 2016 and 2019, sustainable assets almost doubled. This growth was driven by allocations from European

39、asset owners, as a wave of regulation that comes into force this year created a catalyst for institutional investors to invest sustainably. Meanwhile, in the wholesale market, private banks and wealth managers have also started to create sustainable investment propositions. Nevertheless, sustainable

40、 fund assets are still largely underrepresented inclients portfolios as demonstrated in figure 4. Figure 4. Sustainable assets are still underrepresented in portfoliosNet fund assets, $bnMainstream funds11,49013,65015,56017,2486638738551,1611,568200192020Sustainable funds05,00010,00015,00

41、020,00014,704Source: Broadridge GMI, as at November 2020, includes equity, bond, mixed assets and money market funds globally.Mind the gapAt present, equities represent the largest portion of sustainable fund assets, by a significant margin (see figure 5). This likely reflects the focus of environme

42、ntal, social and governance (ESG) data providers and screening services on the coverage of equity stocks historically. Meanwhile, for bond markets, there is an absence of ESG ratings related to sovereign debt securities as well as ongoing issues with the ESG assessment of derivatives in fixed-income

43、 portfolios. Herein lies challenges and opportunities for asset managers to develop internal frameworks to tackle these issues. At the international business of Federated Hermes, as part of our fixed-income approach, we integrate ESG through proprietary analytical tools and engage with issuers on su

44、stainability and strategic concerns. Figure 5. Sustainable investing: equities v fixed income Net fund assets, $bnSustainable bond funds2072794200192020Sustainable equity funds02004006008001,0002Source: Broadridge GMI, as at November 2020, includes equity and bond fu

45、nds globally.Within fixed income, we believe investment solutions need to be further developed so as to align with clients sustainable investment objectives and targets. Historically, much emphasis has been placed on “leaders” or “best-in-class” approaches as well as “negative screening” or “exclusi

46、on-based” approaches and we expect this trend to continue as these approaches are an efficient way of making progress towards sustainable investment targets. We also expect to see an increased focus on the development of engagement-led, thematic strategies, which generate non-financial outcomes over

47、 the long term (for example, strategies that contribute to decarbonisation and the low-carbon transition). Figure 6. Fixed-income sustainable investing is starting to catch up Net fund assets, $bnMainstream bond funds3,6614,3642200192020Sustainable bond funds01,0002,0003,0004,0

48、005,0003,8883,1561674,750Source: Broadridge GMI, as at November 2020, includes bond funds globally.For professional investors only www.hermes-6 A changing climate: a fixed-income perspectiveThe asset management industry is waking up to the urgent need for a coordinated effort to fight the climate cr

49、isis. We firmly believe that it is possible to invest and create value while also working to prevent the unfolding crisis.The industrialisation of the global economy over the last 200 years has pumped seemingly endless amounts of greenhouse gases into the atmosphere. Because these gases do not break

50、 down quickly or easily, they simply accumulate in the atmosphere decade after decade. This has been the principal driver of a steady rise in the earths temperature. Unbridled, this rise in temperatures will have disastrous effects on the global economy, and in turn, society. However, solving the cl

51、imate crisis requires collective action. Unless we all individuals, governments and enterprise take a step to the centre, we could very well fail. Current warming projections suggest society is missing the mark and solving the crisis urgently requires a public-private partnership. This year, COP26 w

52、ill take place in Glasgow. Since the Paris Agreement at COP21, many countries now have legally binding carbon targets. 2020 marked strong progress with theworlds two largest emitters: China, ranked first, has now committed to be carbon neutral by 2060, while Biden returnedthe US to Paris climate acc

53、ord hours after becoming president, having promised to put the country on a track tonet-zero emissions by 2050. Assuming this happens, according to Climate Action Tracker, 63% of global emissions will be covered by these targets, making the goals of the Paris Agreement seem more achievable with glob

54、al warming of 2Cnow likely by the end of the century compared to the 3.5C temperature pathway predicted in 2009. Whether as a reaction to expected policy change, or because of mounting pressure from the public or financial stakeholders, many companies are also following suit by setting their own sci

55、ence-based targets (SBTs) to reduce carbon emissions.The asset management industry is now waking up to the need for a coordinated effort to fight the climate crisis. It is possible to invest and create value while also working to prevent the unfolding emergency. However, as we have discussed with ou

56、rclients and prospects, we know and respect that there areanumber 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 allofthese.Figure 7.

57、 Three roads to Paris: different investment approaches to lower the carbon footprint of portfolio companies to achieve Paris AlignmentParis-AlignedSell high,buy low Buy high,transition tolow Buy low,stay low Source: Federated Hermes, as at December 2020. Defining your climate change goalsWhatever th

58、e climate-change investment objective is, it must also be tied to a financial objective. Together, these two co-linear and self-reinforcing investment objectives can be met through creative, solutions-based innovation. As such, most will define both their climate goals and financial objective and we

59、 seek to build solutions that deliver for both objectives. 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. How

60、ever, not all of these 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 ac

61、tion (for example, engaging for transition approach) (see figure 8). The former typically relies on excluding the worst offenders in order 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

62、 relies on using your rights as a financial stakeholder to engage with those companies to change. Thiswould 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 app

63、roach 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.For professional investors only www.hermes

64、-7Figure 8. Trade-off between avoiding and influencingHighLowValues-basedscreens Climate ImpactLow impactHigh impactExclusions heavyImpact change inclimate laggards Spectrum of themesExclusions, Leaders, Paris alignedInvest and engageclimate laggards tobenefit society Exclusion heavy reduce climatee

65、xposure today Greaterinvestmentflexibility Source: Federated Hermes, as at December 2020. Tackling climate goals within credit portfoliosOnce the decarbonisation objectives are set, there are a number of different investment approaches to consider when implementing these themes. In figure 9, we summ

66、arise the different strategy tools that we can apply to deliver a range of climate-change goals within our credit portfolios.Figure 9. Helping to deliver climate-change goals through our strategy toolsDecarbonisation objectivesStrategy toolsFossil fuels sector exclusionsExclude material emitter data

67、 basedmateriality thresholds Positively screen for Climate Changeleaders that provide climate changeinnovation Screen for companies that aretransition leaders companies alreadyaligned or have set science basedtargets for Paris alignment Invest in climate-focused projectsthrough green / transition /

68、sustainablebonds etc Impact investing to engage withcompanies to set Paris-aligned targetsand implement the transition Direct and strong alignmentNo link to objective Small positive infuenceReduce carbonfootprint / stopfunding “brown”companies Impact thetransition to alow carboneconomySupport climat

69、echange leadersor innovation Contribute to Paris-aligned or net zerotargetsBenefts objectiveSource: Federated Hermes, as at December 2020. For professional investors only www.hermes-8A range of solutions can be designed that offer the potential to deliver on multiple objectives by combining these st

70、rategy tools. As aforementioned, the one exception is that it is not possible to both exclude material emitters and engage with them to transition. Thats because it is very difficult to have any influence without a financial stakeholding and so, this is the one area where you may need to compromise

71、depending on your goals. There is a vast spectrum of solutions that can be created that sit on the values-impact axes introduced earlier. To illustrate the relative trade-offs associated with choosing different approaches, we present examples of three different, hypothetical solution profiles each o

72、f which we have scored based on its carbon exposure, climate impact and financial risk in figures 10 and 11. Figure 10. Trade-off: value v impact HighLowValues-basedScreens Climate ImpactLow impactHigh impactActive ESG IntegrationAssess, and engage on,climate change risksalongside other ESG andsusta

73、inability factors Climate Change ImpactInvest in climate impactleaders and engage thosewith transition potential.Exclude & divest from thosenot willing to change Broad Credit IndexClimate Change LeadersScreen for leaders andexclude the brownestcompanies Source: Federated Hermes, as at December 2020.

74、Figure 11. Examples of bespoke climate-focused solutionsActive ESG IntegrationClimate Change LeadersClimate Change Impact DescriptionAssess climate change risks within ESG integration including engaging companies to improve against climate change metricsFund climate change leaders and innovators, ex

75、clude brownest companies and engage any companies to be Paris alignedImpact positive climate change and support low carbon transition by investing and engaging with companies in transitionStrategy featuresManaged to a fnancial objective incorporating ESG integrationClimate change assessed alongside

76、broader ESG and sustainable factors all assessed and scored in credit selectionNo specifc climate change screens or direct infuence on sizingInvest in green/transition/sustainable securities used to fund climate change initiativesEngage portfolio companies to disclose emissions data and set targets

77、to be Paris-alignedBoth fnancial and sustainable objectives linked to climate change Exclude fossil fuels and most carbon intensive companiesPositive screen for sustainability and climate change leaders and innovators. Leaders scores impact sizing and divestmentInvest in green/transition/sustainable

78、 securities used to fund climate change initiativesEngage portfolio companies to disclose emissions and set Paris-aligned targetsFinancial and sustainable objective linked to climate change impactInvest in climate change leaders and climate change innovationInvest and engage climate change laggards

79、who show a willingness to transitionClimate Change Impact (CCI) scores impact sizing and divestmentEncourage companies to set Paris-aligned science-based targets and monitor progressInvest in Green/transition/sustainable securities used to fund climate change initiativesCarbon exposureIncludes “brow

80、n” sectors with the exception of the most controversial companiesExclude worst carbon offenders while also seeking companies with net zero or better emissionsInvest in material emitters who aim to transition and reduce their carbon footprint over timeClimate impactAbility to engage with the most mat

81、erial emitters to improve carbon footprint and aim for Paris alignmentSupports climate change innovation but unable to impact change in most material emitters because excludedWill invest and engage the largest emitters to set and deliver on Paris aligned emissions targetsFinancial riskBroad represen

82、tation across all sectorsTracking error and lower diversifcation by excluding signifcant part of credit universeMore diversifed but heavily sensitive to performance of green/transitioning companiesIncorporating climate change into the investment processAt the international business of Federated Herm

83、es, we apply best-in-class ESG integration across all of 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 o

84、ur 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 the metrics outlined in figure 12 at our credit committee to determine an overall

85、 score, which helps us meet our goal of delivering sustainable wealthcreation. For professional investors only www.hermes-9Figure 12. ESG integrated credit selection ESG Integrated Credit SelectionESG ScoreClimateChangeImpact(CCI) ScoreValue ScoreCredit ScoreSustainableLeadersScoreSDG ScoreA Assessm

86、ent of non-fundamental ESG factors on enterprise valueA Forward-looking assessment of progress and impact of decarbonisation from commitments and engagement insights (Climate Change Database, Carbon Tool) A Forward-looking assessmentof societal impact throughengagement (measured using UN SDG framewo

87、rk)A Asset currentrelative value vspeers and broadermarketA Modelling andassessment of issuercredit fundamentalsA Assesses broad “do no harm” sustainablefactors (usesproprietary QESG scores)Sustainable ObjectivesFinancial ObjectiveSource: Federated Hermes, as at December 2020. Note: the QESG Score i

88、s a quantitative assessment of a companys ESG metrics compared to its peers and how its ESG profile is changing.The processes and tools that we have established within the Fixed Income team have set a solid foundation for developing specific climate change-themed solutions tailored to the needs of o

89、urclients. 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

90、analytics and reporting tools. As climate data disclosure and availability have both 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-themedsolutions

91、.We have a climate change database that aggregates external climate change data metrics from several external providers for all issuers in our core investable universe. Thisallows us to better assess the climate-change risk and progress each company is making against Paris-aligned temperature pathwa

92、ys. This provides a current assessment ofthe companys carbon footprint and climate contribution. The data is used by the research analysts to assess climate-change risks in credit selection for all strategies and providesdata points for screening and scoring of issuers forclimate-themed strategies t

93、hat have specific decarbonisationobjectives.In addition to the historical data provided from the climate change database, we have also developed proprietary Climate Change Impact (CCI) scores, which provide a forward-looking assessment of a companys climate change impact. They assess its willingness

94、 to decarbonise and set targets, log progress made against those targets and rate the companys potential to contribute to the reduction in global emissions from its current footprint. These scores are managed by the dedicated Fixed Income engagement team, which evaluates metrics from the climate cha

95、nge database, insights and progress on climate change from our engagement relationships, as well as supplementary company informationfrom the research analysts. For climate-themed solutions, these scores can provide a framework for screening and sizing positions to ensure the strategies deliver on b

96、oth their financial and climate change-related sustainable objectives. In figure 13, we illustrate this process for a climate change impact strategy.For professional investors only www.hermes-10Figure 13. The pathway to decarbonisation: our proprietary Climate Change Impact score A SBTI, Trucost, TP

97、I,CDP, etcA Proprietary QESG1A Gross emissionsA IntensityA PathwayA Willingness andabilityA InnovationA Impact materialityA Beyond papercomplianceA Screening namesA Dynamic portfoliomanagementA Sizing overweight tono exposureA CCI 1 Impact leaderA CCI 2 Credible TransitionA CCI 3 AspirationalA CCI 4

98、 Paper promiseA CCI 5 Indifferent(N)(-)(+)Assessclimate dataEngagecompaniesAssign CCI scores2Build &manageportfolioSource: Federated Hermes, as at December 2020. In addition, we have a proprietary carbon tool that enables us to monitor and measure the carbon footprint, both by absolute emissions and

99、 carbon intensity, as well as climate-related engagement statistics at the overall portfolio level. This aggregated view is a simple way to monitor and report on the climate change metrics of the portfolio. Another useful lens to assess climate change is through risk systems, where itis possible to

100、evaluate both climate-related shocks and scenario analysis. Such tools provide an important feedback loop for credit selection andportfolio construction.Measuring progressThe final important element is monitoring and reporting progress against the climate-change goals or any specific decarbonisation

101、 objectives that have been set. The industry has reached a stage where the data providers have reasonable coverage of scope 1 and 2 emissions5 and carbon intensity, but scope 3 disclosures can be less reliable. For credit portfolios, there are some additional challenges. Firstly, data coverage can b

102、e 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

103、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 the climate data when evaluating the CCI scores. 3 The QESG Score is a quantitative assessment of a companys ESG metrics compared to its peers and how its ESG

104、 profile is changing.4 CCI denotes our proprietary Climate Change Impact Score.5 Greenhouse gas emissions are categorised into three groups by the Greenhouse Gas Protocol, a widely used international accounting tool. Scope 1 emissions: all direct GHG emissions by a company. It includes fuel combusti

105、on, company vehicles and fugitive emissions. Scope 2 emissions: indirect emissions from the generation of purchased electricity, heat and steam. Scope 3 emissions: all other indirect emissions that occur in a companys value chain (for example, purchased goods and services, business travel, employee

106、commuting, waste disposal etc).For professional investors only www.hermes-11Figure 14 outlines a myriad of metrics that can be used to monitor the progress of climate change portfolios. We have mapped these to the relevant decarbonisation objectives. Figure 14. Monitoring the progress of climate-foc

107、used portfolios Target increasing % of portfolio that has either set Paris-aligned SBTs or are being actively engaged to do so Decarbonisation objectivesReporting metricsReductions in carbon emissions or intensity relative to the marketReductions in absolute emissions or carbonintensity over time re

108、lative to defned temperature pathways Report exposure to brownest companies or sectorsIncreasing % of portfolio invested in leadersor climate change innovators over timeDemonstrate companies making climate change impact by a shift from lower to higher CCI scores over timeImproving % of companies tha

109、t have 1) set science-based targets (SBTs) for emissions reductions and 2) target increasing % of the portfolio over time that have set targets consistent with 2C and below temperature pathwaysReduce carbonfootprint / stopfunding “brown”companies Impact thetransition to alow-carboneconomySupport cli

110、matechange leadersor innovation Contribute toParis-aligned ornet zero targetsTarget increasing % of the portfolio that are being engaged on climate change issuesSource: Federated Hermes, as at December 2020. These are just some of the considerations that you need to take into account when either all

111、ocating to or building climate change portfolios. If you would like to discuss our tailored climate-focused solutions, please do not hesitate to contact us. For professional investors only www.hermes-12 Relative value between asset classesAs liquid credit markets return to more normalised levels, we

112、 see a return of the illiquiditypremium. After reaching close to the wides in the depth of the crisis atthe end of March, spreads on credit-default swap (CDS) indices normalised by year end, well below their five-year average levels, although still wider than the historic lows at the start of the ye

113、ar (see figures 15 and 16). The key drivers behind the recovery were central-bank support, the search for yield (in a world where negative yielding assets nowexceed $18tn) and the hope that vaccines will bring an end to economic restrictions. By the end of Q4, however, fundamentals were in a much wo

114、rse position than at the start of the year: valuations looked stretched and the potential size of any correction looked larger than the upside potential fromhere. Figure 15: 2020 spread moves in CDS indices, five-yearCDX high yieldiTraxx Crossover CDX investment grade iTraxx EuropeiTraxx senior fina

115、ncialsYear-end 2019 spread295220474554Covid-wide spread (3rd April)774638128114131Year-end 2020 spread2932425048592020 spread move, %-1%10%6%7%10%Year-end 2020 spread v Covid-wide, %-62%-62%-61%-58%-55%Five-year average spread378300666577Year-end 2020 spread v five-year average, %-22%-19%-25%-26%-23

116、%Source: Federated Hermes, Bloomberg, as of 31 December 2020.Figure 16: Historic spread move in CDS indices 00600500400300200100004/01/2107/11/2009/08/2011/05/2011/02/2013/11/1915/08/1917/05/1916/02/1918/11/1820/08/1822/05/1821/02/1823/11/1725/08/1727/05/1729/02/1728/11/1630/08/1601/06/16

117、03/03/1604/12/1505/09/1507/06/1509/03/1509/12/1410/09/1412/06/1414/03/1414/12/1315/09/1317/06/1319/03/1319/12/1220/09/1222/06/1224/03/1225/12/1126/09/11Spreads (bps)CDX high yield iTraxx crossoverCDX investment grade iTraxx Europe Senior financials Spreads on credit-default swap indices, five year:S

118、ource: Federated Hermes and Bloomberg, as of 31 December 2020.Expanding exposures to incorporate broader public and private markets, we observe that the majority of indices are now wider than at the beginning of the year. Figure 17 shows the current spread levels for a range of asset classes, relati

119、ve to the starting year levels and crisis wides in March, which are all ranked by their 2020 percentage spread move. This demonstrates a wide dispersion in spread moves over the year with some exposures over 100% wider on the right-hand side, while others on the left-hand side are at tighter levels.

120、 For professional investors only www.hermes-13Figure 17: Change in credit spreads -5000500200250RMBS UK prime 4-6 yearItaly government bondsGlobal CCC2nd Lien Leveraged LoanFirst loss 0-5 trancheEmerging market sovereign (hard currency)Unitranche European private loansEUR

121、O CLO 2.0, BBBEURO CLO 2.0, BGlobal BBBGlobal ASenior secured European private loansEmerging market sovereign (local currency)Global investment gradeGlobal senior financialsComposite leveraged loan Global AAAEURO CLO 2.0,AAEURO CLO 2.0, BBRMBS UK NC AAAEURO CLO 2.0,AGlobal AAGlobal high yieldEURO CL

122、O 2.0, AAAEmerging market corporate (hard)Global BRMBSUK NC BBBSenior European real estate debt (A)First-loss European asset risk transferGlobal subordinated financialsGlobal BBEuro CLO aarehouseRMBS UK NC BBEmerging market non-sovereign (local)Mezzanine European private loansEuro CLO EquityUK & cor

123、e Europe senior infrastructure debt (BBB)Junior mezzanine 5-10 trancheSpread (bps)2020 spread move, %2020 % spread more (LHS)Crisis spread 23 March 2020 (bps, RHS)Spread year-end 2019 (bps, RHS)Current spread year-end (bps, RHS)Spread levels v the start of the yearTighterWider359297785653

124、9886459525560425099400402000635434893320545024625250250025006948098504501300350Source: Federated Hermes, Bloomberg and Citi, as of 31 December 2020.Looking at those tha

125、t ended the year narrower, the UK prime residential-mortgage-back securities (RMBS) and Italian government bonds have benefitted from technical support, with central-bank purchases and the search for yield. While CCC-rated corporates and first loss tranches may appear lower, the current spread level

126、s reflect pricing revisions, which no longer capture the previously stressed or defaulted names that have dropped out and resulted in losses. Exposures that remain at the wider levels are those less liquid, lower in the capital structure and more sensitive to the economy, where the pricing reflects

127、both an illiquidity premium and compensates for potential defaults and losses such as mezzanine exposures, regulatory capital-first loss exposures, collateralised-loan obligations (CLOs) equity and warehouses. This contrasts with senior illiquid exposures which are back to start-of-year levels as il

128、lustrated by senior and unitranche direct lending. The exception is senior real estate debt which is wider over the year with pricing reflecting the uncertainty caused by the pandemic on rental income andfuture commercial property demand. On the more liquid side, central-bank support and improved se

129、ntiment over the year helped spreads snap back from their wides with investment grade close to the levels we saw at the start of the year while global high yield, especially BB- and B-rated bonds, were wider. Emerging-market credit, which tends to be more economically sensitive remains wider, withlo

130、cal currency wider than hard currency at 38% and 10%,respectively.Despite concerns for dislocation potential within the CLO market at the height of the crisis, improved sentiment, coupled with the structural benefit of zero LIBOR floors, has brought Euro CLOs close to the levels we saw at the start

131、of the year. The BBB and BB tranches are in fact narrower, while it is the senior, AAA tranche that is lagging other parts of the capital stack, sitting 10% wider than the start of 2020. For professional investors only www.hermes-14Figure 18 shows the latest rankings from our Multi Asset Credit rela

132、tive value framework. Figure 18. Multi Asset Credit relative value frameworkHistoric returnInterest-rate sensitivityLiquidityComplexityAlpha potentialLoss given default Credit fundamentalsValueWeighted score contributions by factorTechnicalsSpread volatility Correlation to markets Q4Q3111

133、302223627Developed government bondsRisk transferEM government bondsFirst loss trancheConvertiblesTrade fnanceMoney marketR.E. debtEurope ABS mezzanineEurope CLO equityMezzanine trancheHigh yieldSyndicated leveraged loansEurope ABS seniorInvestme

134、nt gradeSenior fnancialsSubordinated fnancialsEurope CLO seniorDirect SME lendingHybridsEM creditEurope CLO mezzanineSource Federated Hermes, as at 31 December 2020.For the first time since Q1 2019, Euro CLO mezzanine exposures dropped out of the top three rankings leaving EM credit in the top spot,

135、 with hybrids and direct SME lending joint second.Direct lending moved back into the top three for the first time since Q2 2019, owing to an increase in the value score and the return of an illiquidity premium as pricing remained resilient over the quarter while liquid credit exposures rallied. Simi

136、larly, real estate debt also moved up the rankings from 15 to 13 for valuation reasons but it continues to score lower than direct lending due to weaker fundamentals. Figure 19 demonstrates this illiquidity premium, by comparing spreads and US dollar yields for a range of BB-equivalent rated exposur

137、es where it shows higher spreads for senior secured and senior real estate debt private exposures with more liquid exposures. This contributed to increases in their value score in Q4 2020. For professional investors only www.hermes-15Figure 19. Relative value within selected BB-rated exposures USD y

138、ield (%)Spread (bps)8007006005004003002001000Q420 spread (RHS)2020 spread (RHS)Q420 yield2020 yieldEuro CLO 2.0, BB (Citi)Senior secured Czech loansSenior European real estate debt (BB)Senior secured European private loansEM corporate BB (Hard)European RMBS, UK NC, BB (Citi)Subordinated financials (

139、Cocos)European senior leverage loans (BB)EM non-sovereign BB (Local)Euro BB corporateGreece government bonds128401471.4%1.4%3.2%2.2%5.7%4.6%4.6%3.8%4.7%4.0%5.4%5.7%4.2%5.6%5.5%5.5%6.5%6.4%7.8%6.7%10.0%9.3%7334375444450507475600575758645575500450382380360354 Source: Federated Hermes, Bloom

140、berg and Citi as at 31 December 2020.The biggest move in Q4 was CLO mezzanine, falling from the top spot to fifth, following a reduction in the value scores after rallying over the quarter. Euro CLO senior spread moves have lagged the lower parts of the CLO stack, making it very attractive on a risk

141、-adjusted basis. This increase in the value score ranks senior above mezzanine and puts them both into the top five rankings a first since our frameworks inception. CLO equity edged higher from 13 to 10 as valuations compensated better for the associated risk.On the other side, developed government

142、bonds, first loss bespoke tranches and regulatory capital exposures claimed the bottom three positions in our framework. Low fundamental scores, where we continue to believe valuations do not fully compensate for potential losses, explain the rankings of first loss bespoke tranches and regulatory ca

143、pital exposures, whiledeveloped government bonds have very unattractive valuations and no expected upside going forward, owing tolow, and in many cases negative, rates. For professional investors only www.hermes-16Q4 2020 score card0-1+1+2+3+4+5-2-3-4-5Very positiveVery negative Economic outlook AMo

144、ved from -2 to -3Despite an approved vaccine, Covid-19 cases remain high, which is resulting in new, stricter lockdowns. Credit fundamentals AMoved from -2 to -3Leverage remains high and earnings will be impacted by the latest lockdown restrictions, but the vaccine rollout should mean earnings will

145、recover later in the year. Valuations and technicals AMoved to -1 from 0A rally in Q4 leaves valuations looking stretched despite continued supportive technicals from central-bank support. But the relative value of credit remains attractive with a large stock of negative-yielding assets. Tail risksM

146、oved to -1 from -2 Uncertainty from the US election and Brexit have now passed, and vaccine rollouts should signal an end to severe lockdown restrictions moving forward. But with richvaluations, some tail risks remain: ANew strains of the virus with higher infection rates make the lifting of lockdow

147、ns and other economic restrictions dependant on the successful roll out of vaccines. AVirus mutations may require further vaccine development, which would prolong economic restrictions. AUncertainty in the US around the Democrats abilities to implement their policies. ARising inflation could force c

148、entral banks to reverse policy support prematurely resulting in a re-pricing of assets. AThe difference in valuations and underlying fundamentals increases the probability of a correction.For professional investors only www.hermes-17Anna KarimInvestment Director Fixed IncomeAndrew LennoxSenior Portf

149、olio Manager Structured Credit Andrew JacksonHead of Fixed IncomeNeil Williams Senior Economic AdviserEmeric ChenebauxStructured Finance Analyst and JuniorPortfolio ManagerVincent NobelHead of Asset Based LendingCaroline MurphyPortfolio Manager, Multi AssetStephane MichelSenior Portfolio ManagerAndr

150、ey KuznetsovSenior Credit Portfolio ManagerPatrick MarshallExecutive Director Head of Private Debtand CLOsAuthorsMitch ReznickHead of Research and Sustainable Fixed IncomeMark BruenHead of Fixed Income SolutionsAdditional contributions from Audrey Noel, Assistant Manager Market IntelligenceFor profe

151、ssional investors only www.hermes-18 Multi asset Following a reorientation towards sustainability in the multi-asset space in 2020, we will focus our research effects on this theme in the months ahead. In 2020, equities, rates6 and credit posted positive returns. Despite enjoying the strongest perfo

152、rmance in Q4, commodities closed the year in double-digit negatives (see figure 20). Rates were flat in the three months to December-end, while equities and credit entered noteworthy positiveterritory.Figure 20. Asset class performance %Q40%6%8%7%EquityRatesCreditCommodity2020-45-35-25-15-55152512%-

153、24%14%13%Source: Bloomberg and Federated Hermes, as at December 2020. Looking at the positioning of active funds, the aggregate betato the MSCI world (measured across active investors like commodity-trading advisers, risk parity and mutual funds) is currently at 0.42, which indicates a neutral posit

154、ioning. The aggregate beta moved into aggressive positioning in August but soon returned to neutral positioning when the market had a minor correction in mid-September (see figure 21). Figure 21. Active investors aggregate beta to equity Commodity-trading advisers (CTA)Active investors aggregate bet

155、a to equity02000420052006200720082009200001920202021Contribution to aggregate betaRisk parityActive balanced0.0-0.10.10.20.30.40.50.60.70.8-0.2-0.3-0.40.42Neutral AggresiveConservativeSource: Bloomberg, Federated Hermes, as at December 2020.In Q

156、4 and H2 2020, we observed more assets experience outflows than inflows into exchange-traded funds (ETFs). BothUS and EU government bonds experienced sustained outflows, while fixed income, in the investment-grade and high-yield space, and developed-market equities consistently showed inflows over t

157、hree months, six months and 12 months (see figure 22). Figure 22. ETF flowsEquity developed marketsEquity emerging marketsFixed-income investment gradeFixed-income high yieldUS governmentEU governmentPrecious metalsEnergyCommodityThree months ETF fows, z scoreSix months12 months-101Source: Bloomberg

158、, Federated Hermes, as at December 2020. Over the medium-term, we use economic-scenario analysis todetermine the direction in which the global economy is expected to head, before identifying the best investments 6 Predominantly developed-market government bonds.For professional investors only www.he

159、rmes-19forthat scenario. Since the end of October, given the broad economic stimulus, the global economy has moved to quadrant seven, wherein both expected GDP and inflation are trending up moderately. The best assets to allocate to in this scenario are government bonds and commodities (see figure 2

160、3). On average, we remain in Q7 for three months and then pivot to Q4 where we see positive inflation but diminishing economic growth.Figure 23. Economic scenario quadrant 125648Infation*GDP*Trending upTrending downTrending upTrending down37Q7 Top 10Q7 bottom 101EM sovereign debtEU credit quality2Co

161、pperMSCI DM MSCI EM3Netherlands government bond, 7-10 yearLong USD, short AUD carry index4Belgium government bond, 7-10 yearS&P utilities spd5Industrial metalsS&P consumer stables spd6Italy government bond, 7-10 yearLong USD, short NOK carry index7US steepenerS&P energy spd8Commodity carryUS credit

162、quality9France government bond, 7-10 yearS&P healthcare spd10US government bond, 2-yearNatural gasSource: Bloomberg, Federated Hermes, as at December 2020. Based on Bloomberg pooled economists one-year forward forecasts for both GDP growth and inflation. These forecasts are then compared to their re

163、spective six-, nine- and 12-month averages to determine the current trend. These trends are then bucketed into eight quadrants: for example, GDP trend is the current GDP minus the average. The split between the inner and outer quadrants is determined by the mid-point between the average and the maxi

164、mum/minimum on each axis. The data period starts from 1956 while the expected asset returns are annualised and are estimated based on a conditional two-factor regression analysis.We also use our own multi-asset positioning tool to identify the best investment opportunities. This incorporates three s

165、ub-models: momentum (short-term price trends), excess money growth (excess liquidity) and value (forward-looking valuations). The model suggests that we should take a significant overweight in equities and commodities and a large underweight in government bonds (see figure 24). Credit continues to b

166、e expensive vis-vis equities, resulting in our value model contributing to an overall slight underweight in the asset. Figure 24. Multi-asset model positioning 0%20%40%60%80%100%RatesEquityCreditGoldCommodityAverageDec 20Source: Federated Hermes, as at December 2020. A reorientation towards sustaina

167、bility The international business of Federated Hermes has been atthe forefront of investment and sustainability since 1983. Indeed, last year, our heritage proved its worth as we moved to adapt to the EU Taxonomy: rather than reinvent the wheel, we only needed to tighten the gauge to achieve sustain

168、ablelabelling. A reorientation of investment in 2020 into the sustainability theme resulted from the marriage of more socially conscious investors joining the market as well as a wider issuance of sustainable products, not just limited to equities and corporate green bonds, but extending beyond, to

169、more countries committing to government-backed green bonds. Against this fertile backdrop, we feel the conditions are rightto focus our research on sustainability in the multi-asset space. In the months ahead, we will contribute to a holistic framework outlining acceptable requirements across the di

170、fferent asset classes with respect to sustainable leaders, aswell as exclusions. In addition to considering financial objectives, much time will be dedicated to non-financial objectives and the articulation and quantification of such to hold future multi-asset funds and portfolio managers truly acco

171、untable to sustainability. For professional investors only www.hermes-20Figure 25. Sustainability in the multi-asset space SustainabilityAsset allocationRisk managementGovernment bondsInvestment gradeHigh yieldLarge vsmallDMvEMUtilitiesCommunication servicesMaterialsITIndustrialsHealthcareFinancials

172、EnergyConsumer staplesConsumer discretionarySource: Federated Hermes, as at December 2020. For professional investors only www.hermes-21 Economic outlook The momentum and breadth of the recovery from the coronavirus pandemic will be determined by the policy mix authorities deploy, but the aftermath

173、of the crisis may offer an opportunity to build back better. Major economies are recouping their GDP and are generally expected to bounce back in 2021 (see figure 26). However, the big question concerns the shape of the recovery and whether it will be vigorous (W-shaped, given multiple Covid-19 wave

174、s), paltry (L-shaped) or uneven (K-shaped). Figure 26. Major economies are expected to bounce backThe IMFs real GDP-growth projections: world, advanced and EMdeveloping economies (%, year-on-year) World2008 09 10 11 12 13 14 15 16 17 18 19 20e21p22p23p24p25pProjectionsAdvanced economiesEM/developing

175、 economies-6-5-4-3-2-1012345678Source: IMF, as at October 2020. While a successful vaccine rollout is a pre-condition for a sustainable recovery, the momentum and breadth of it will eventually come down to the policy mix authorities deploy. Inparticular, the focus will be on fiscal stimulus, and whe

176、ther fiscal spending includes high-multiplier and structural measures. Meanwhile, monetary policy will remain extremely loose and increasingly coordinated with fiscal policy. Our macro outlook for 2021 is based on five core beliefs: 1 Vaccines will not, unfortunately, guarantee straight-line macro r

177、ecoveries. Confidence may lift, but distributional and other challenges suggest normality is unlikely before September. Labour scarring will also test how painlessly GDP levels can return to their pre-Covid-19 trends.2 Policy will stay abnormally loose. While central banks exhibit paradigm shifts, i

178、t is difficult to see how fiscal stimuli can be reversed without unintended consequences.3 The legacy will be a relaxed approach to debt build-up, akin to the UKs post-war experience. G7 default risk is next to zero, but vulnerabilities lie with those emerging markets with high external debt. 4 With

179、 inflation craved by central banks and governments, quantitative easing (QE) will be harder to kick reinforcing the dependence QE-governments have on their central banks. So, a challenge will be avoiding the impression (as in Japan) that central banks are effectively becoming the monetary department

180、s of government.5 Political distrust, beggar-thy-neighbour policies and de-globalisation (figure 27) continue to build, despite a more collaborative US President. Enjoying an extremely narrow majority in the Senate, Biden looks unlikely to unilaterally pull back restrictions on China until 2022. For

181、 markets, this may be more a crack-in-the-ice, than a cliff-edge, event. And, in Europe, investors need to see the German Chancellor Angela Merkels successor keep the glue around the euro, and dissuade electorates watching the UKas it opens the EU trapdoor.Figure 27. .on the assumption that world tr

182、ade growth is largely unabated World, US, & Chinas trade (exports plus imports)* as a share of their respective GDP (%)WorldUSChina200009007080Source: World Bank data (*goods & services), as at December 2020. Within this challenging context, the aftermath of the Covi

183、d-19 crisis may offer an opportunity to “build back better” by tackling existential crises such as the climate emergency. Sofar, fiscal stimulus has mainly focused on supporting employment and spending in the short term. Yet, green investment yielding on longer-term horizons has also gained relevanc

184、e. In the recently approved EU budget (1.8tn over seven years), 30% of funds were devoted to fighting climate change, the highest share ever (see Sustainable finance section for more information on the EU budget). Meanwhile, in the US, the Democratic control of the Senate albeit slim means that Bide

185、n (who as previously mentioned quickly moved to restate the US to the Paris accord after being sworn in as President) has a decent chance of implementing the green agenda, that is, net zero emissions by 2050 and a dedicated $2tn budget over 10 years.For professional investors only www.hermes-22 Fund

186、amentals Global yields for investment-grade and high-yield credit are at historic lows. Profits fell in Q4, while leverage and default rates remain elevated. December marked another month of strong returns for credit, despite an increase in government lockdowns owing to the continued spike in corona

187、virus cases. During that period, the global high-yield market rallied by 1.9% (and by 6.3% year-to-date), while the investment-grade market rose by 0.5% (and 7.7% year-to-date). Meanwhile, the iTraxx Crossover index ended the month at 242, having started the month trading at251. With all eyes now fi

188、rmly on 2021, consensus forecasts suggest that the average rate of global growth will be 5.2%7. China is expected to enjoy the highest rate of growth, at 8%, with all major economies forecast to grow their GDP meaningfully. Elsewhere, the flash Purchasing Managers Indices (PMIs) surprised on the ups

189、ide in December, painting a stronger picture of economic performance in Europe than had been anticipated. The eurozone composite PMI came in at 49.8 (ahead of an expected reading of 45.7), with both Germany and France recording better-than-expected readings of 52.5 and 49.6, respectively. However, w

190、e must be mindful to place this positive outlook for growth alongside the value that can be found in credit today. As demonstrated in figure 28, global yields for both investment-grade and high-yield credit are at historic lows. Itis a challenging time for global investment-grade fixed-income invest

191、ors because there is now a record $18tn of negative-yielding debt (as mentioned earlier in this report). The US investment-grade corporate bond market accounts for13% of the $63.4tn global investment-grade assets but pays 41% of all yield8.Figure 28. Global yields for high-yield and investment-grade

192、 credit are at historic lows Global high yieldGlobal investment gradeMinimum global high yieldMinimum global investment grade0200042005200620072008200920000192020Yield %0.02.55.07.510.012.515.017.520.022.525.0Source: ICE Bond Indices, as at Dece

193、mber 2020.Much of this decrease in yields has been driven by the rally wehave seen in government bonds since the aggressive central-bank purchase programmes launched in April last year.This means that there is still some value left in global credit spreads. There was a modest deleveraging of corpora

194、te balance sheets following the coronavirus-induced leverage spike in April. US high-yield leverage stood at 5.8x at the end of the fourth quarter in the 80th percentile of its historical range. Meanwhile, US high-yield companies borrowed an equivalent of 0.7x leverage to increase their cash balance

195、s. Some sectors are seeing a meaningful pickup in share buybacks, dividends, and M&A although this is not the norm across the market at present. Net leverage stands at 4.7x, having deteriorated by 0.8x from pre-coronavirus levels. 7 Source: Bloomberg, as at December 2020. 8 “Global Credit Strategy Y

196、ear Ahead How low can you go?,” published by Bank of America in November 2020.For professional investors only www.hermes-23Figure 29. US high-yield market fundamentals -20-00020Total debt, year-on-year percentage changeEBITDA, year-on-year percentage chang

197、e%3.03.54.04.55.05.56.06.52000020Gross leverageNet leveragexSource: Federated Hermes, Bank of America Merrill Lynch, as at 31 December 2020.Similar trends were observed for US investment-grade companies: a recovery in earnings buoyed their balance sheets. Gross lever

198、age for US investment-grade companies fell from an all-time peak of 2.90x in Q2 to 2.80x in Q3 (-0.10x), while remaining up 0.40x year-on-year. The drop in leverage was relatively widespread, with 57% of investment-grade companies enjoying an improvement in gross leverage quarter-on-quarter. However

199、, on a year-on-year basis, 67% ofinvestment-grade companies still have higher leverage.Turning to balance sheets, aggregated EBITDA for Q3 was down by just 4.7% compared to the previous year (the year-on-year fall in Q2 was 12.5%). However, there is a bright spot: investment-grade companies continue

200、 to generate free cash flow, even through the crisis. Free cash flow dropped modestly in Q1 ( down 1.9% year-on-year) but it has since bounced back to +10.6% year-on-year, thanks to an upside surprise in earnings and capital expenditure spend, which remains below 2019 levels. It is clear that credit

201、 markets have become riskier this year as corporate leverage surged. However, there is now a record 1.1tn of negative-yielding assets in the European investment-grade market (thats 42% of the entire investment-grade market). Whats more, spreads-per-turn of leverage for the European investment-grade

202、market are now at a nadir of just 29bps. 21% of European investment-grade firms are now classified as highly levered (with net debt/EBITDA in excess of 4x) thats up from 11% at the end of 2019 and has continued to rise in Q3. The share of zombie companies that is, those unable, in the long-term, to

203、cover their debt-servicing costs from profits rose meaningfully in Europe in the third quarter. At present, almost 16% of Stoxx 600 non-financial companies are zombies. European corporates, however, have been able tomanage their cash balances by reducing their capital expenditure aggressively and is

204、suing record levels of debt. Meanwhile, the capital expenditure of European investment grade firms has fallen by 17% year-on-year far greater thanthe drop recorded in the aftermath of the global financialcrisis. Undoubtedly, we have witnessed a disjointed default cycle across the globe in 2020. High

205、 levels of credit stress in the US leveraged finance market led to a double-digit default rate. Atthe same time, European high-yield bond defaults barely rose this year, while US high-yield default rates reached an annualised rate of 12.5% in the last six months. As outlined infigure 30, the sectors

206、 impacted the most by defaults were energy, telecoms and retail. There has also been record lowrecovery rates of about 27% on the senior unsecured levelearlier this year, whereas historically they stand at approximately 40%. In the three months to December-end, we have seen approximately $260bn in n

207、et downgrades within the US high-yield space and about $170bn in fallen angels issuers downgraded from investment-grade status. Figure 30. Default rates by sector 0%5%10%15%20%25%FinancialsCapital goodsReal estateMediaTravelMetalsTransportationHealthcareAutosRetailTelecomsEnergyBank of America 12-mo

208、nth par-weighted default rate by sectorSource: Federated Hermes, Bank of America Merrill Lynch, as at 31 December 2020.For professional investors only www.hermes-24 Valuations and technicals Sentiment normalised towards year-end. Meanwhile, as the Covid-19 crisis escalated, the market for sustainabi

209、lity-related debt instruments experienced exponential growth. Sentiment Sentiment improved materially after the US presidential election, as investors looked towards continued market normalisation in 2021 having cleared a significant hurdle in their path. However, sentiment soon normalised, moving t

210、owards its average as we approached year-end owing to theworsening coronavirus crisis across the world. Notwithstanding the reduction in sentiment, demand remained strong for spread products as the stock of negative-yielding assets reached an all-time high. Figure 31. Sentiment normalised towards ye

211、ar-end Morgan Stanley Global Risk Demand IndexGreater confdenceGreater fearNov 18Oct 18Sep 18Dec 18Sep 19Oct 19Nov 19Dec 19IndexJul 18Aug 18Jun 18Jul 19Aug 19Sep 20Oct 20Nov 20Jul 20Aug 20Jun 19Dec 20-6-5-4-3-2-10123May 18Jun 20May 19Apr 19Mar 19Jan 19Feb 19Jan 20Feb 20Apr 20May 20Mar 20Federated He

212、rmes, Morgan Stanley, as at December 2020. Asset flows During the pandemic, the market for sustainability-related debt instruments has experienced exponential growth as investors increasingly take a more holistic approach to capital allocation. More recently, this can be observed through the increas

213、ed issuance of sustainability-linked and SDG-linked bonds. We believe this trend will likely accelerate in 2021. Figure 32. The rise of green bonds Green bondsFace value, $m20000200100,000200,000300,000400,000500,000600,000Source: ICE Bond Indices, as at December 202

214、0. Valuation The strong recovery in low quality (CCC-rated) credits in the US following the favourable presidential election outcome has contributed to the material worsening of convexity in the US high-yield market in Q4. Whats more, the reach for spread has extended into emerging markets, where co

215、nvexity also worsened in the final three months of the year. The European market, however, continues to offer the most convexity. Figure 33. Spread differentials across the high-yield universeGlobal high yieldEmerging market high yieldEU high yieldUS high yieldJan 21May 10Yield to maturity yield to

216、worstSep 11May 12Jan 11May 14May 16Sep 15Sep 13Jan 13Jan 15Sep 17Jan 17May 18Sep 19Jan 19May 20-0.5-0.3-0.10.10.30.50.70.91.1Source: ICE Bond Indices, as at June 2020.For professional investors only www.hermes-25 Public creditThe green bond index is now trading at pre-coronavirus levels, reflecting

217、strong demand from investors. The US investment-grade market outperformed European investment-grade credit in the final three months of the year. Thats because the removal of election risk encouraged renewed demand for US investment-grade credit from foreign investors. However, in 2020, the US inves

218、tment-grade market underperformed, reflecting its higher exposure to cyclical sectors and energy, which was hurt by the oil-price collapse earlier this year. Figure 34. US v European investment-grade credit OAS Ratio-1 standard deviation US investment grade/European investment gradeJan-18Mar-18May-1

219、8Jul-18Sep-18Nov-18Jan-19Mar-19May-19Jul-19Sep-19Nov-19Jan-20Jan-21Mar-20May-20Jul-20Sep-20Nov-201 standard deviation2 standard deviations-2 standard deviationsUS investment grade/European investment grade average0.800.901.001.101.201.301.401.501.601.701.80Source: ICE Bond Indices, as at December 20

220、20.While green-bond issuance enjoyed a material uptick in 2020, the market has also bounced back well from the weakness it experienced during the height of the Covid-19 crisis earlier in the year. The green bond index is now trading through its pre-Covid-19 sell-off tights, demonstrating strong dema

221、nd for this segment of the market. Figure 35. The green bond index is now trading at pre-coronavirus levelsGreen bond indexJan-18BpMar-18May-18Jul-18Sep-18Nov-18Jan-19Mar-19May-19Jul-19Sep-19Nov-19Jan-20Mar-20May-20Jul-20Sep-20Nov-200204060800Source: ICE Bond Indices, as at December 2020.

222、As weve already mentioned, negative-yielding assets breached an all-time high of $18tn recently. The continued absence of positive returns in the safest parts of the market improves the relative value available within spread products, such as credit, and encourages more investors to examine flexible

223、 strategies which are able to deliver positive returns in periods of uncertainty. Figure 36. Negative-yielding assets hit a new record high Negative-yielding assetsJan-10Jan-15Nov-10Jan-20Nov-20Sep-11Jul-12May-13Mar-14Nov-15Sep-16Jul-17May-18Mar-19$m02,000,0004,000,0006,000,0008,000,00010,000,00012,

224、000,00014,000,00016,000,00018,000,00020,000,000Source: Bloomberg, as at December 2020. For professional investors only www.hermes-26 Leveraged loansAlthough the transition is slow, the sustainability revolution in leveraged loans has now begun in earnest. A succession of positive news on Covid-19 va

225、ccines favoured a market rally in the fourth quarter. As a result, the S&P European Leveraged Loan Index (ELLI) ended the year at 97.5 its highest level since February. This was mainly driven by secondary transactions as primary issuance is low. Margins onleveraged finance primary remain higher than

226、 a year ago, while the new-issue spread of B-rated loans was 404bps (for atotal yield of 4.44%) in December compared to 372bps (foratotal yield of 3.90%) in January 2020. In addition, the ELLI distress ratio the percentage of performing loans in the Index priced below 80 by par amount continued to d

227、ecline. It was 1.30% at December-end, in line with its February level of 1.33%. Investors will start 2021 with potential convexity as the share of names bid between 90 and99.99 is 80.05% compared to 35.55% in January 2020. Figure 37. S&P ELLI, breakdown by bid price Less than 7070-79.99Jan-20Feb-20M

228、ar-20Apr-20May-20Jun-20Jul-20Aug-20Sep-20Oct-20Nov-20Dec-2080-89.9990-99.99100 and above0%10%20%30%40%50%60%70%80%90%100%Source: S&P, as at December 2020. In Q4, the European leveraged-loan market continued tounderperform the high-yield market, returning 2.84% compared to 5.17% for junk bonds. Overa

229、ll, in 2020, leverage loans fell by -0.75%, while the high-yield market returned 2.63% in the same period. Among the leveraged-loan sub-groups, B-rated assets returned +2.91% in Q4, outperforming BB-rated loans (which gained 1.27%). Similarly, in 2020 B-rated assets outperformed BB-loans, falling by

230、 0.18% and 0.55%,respectively. Looking at ESG in the leveraged-loan market, it is clear that one of the biggest issues is that the credits are privately held. However, there is an increased demand for ESG disclosure driven by the rise of sustainability and funds dedicated to ESG; investors who need

231、to evidence ESG analysis in their investment process; and increasing regulatory requirements. Consequently, there has been a significant increase in green and sustainability-linked loans. These loans aim to facilitate and support environmentally and socially sustainable economic activity and growth,

232、 which extends to the improvement of buildings energy-efficiency ratings, reductions in greenhouse gas emissions, increases in renewable energy, and water savings. In addition, they are beneficial to borrowers by providing the ability to link the interest rate to pre-agreed sustainability performanc

233、e targets; assessing borrowers sustainability performance against key ESG measures; and giving a visible indicator of the borrowers commitment to ESG. Since 2018, $540.1bn of green and sustainability-linked loans have been issued globally. For professional investors only www.hermes-27Figure 38. The

234、issuance of sustainability-linked loans has risen in recent years Green loanPre2000020$bnSustainability-linked loan0500Source: Bloomberg, as at December 2020. Furthermore, borrowers need to fulfil a significant number of bespoke questionnaires, which somet

235、imes face the challenge of public/private information. To overcome this, the loan association has started to think of a way to standardise ESGdiligence. In the US, the Loan Syndication and TradingAssociation (LSTA) launched the ESG Diligence Questionnaire, which is designed to be completed by thebor

236、rower during the due diligence phase of the loan origination process. The questionnaire is applicable to borrowers in any industry and publicly available.Elsewhere, the European Leverage Finance Association (ELFA) has also now published a European-equivalent questionnaire. Indeed, in recent years, w

237、e have observed a change in mentality and an increased incorporation of ESG indocumentation: AIn May 2019, a Spanish telecommunications operator issued the first leveraged loan incorporating ESG. Both the revolving credit facility (RCF) and capital expenditure included a ratchet on the loans interes

238、t that either steps up if the ESG rating (given by a third-party provider) deteriorates or steps down if the rating improves. AIn June 2020, a Portuguese company that produces rigid plastic containers, amended its documentation. The Carlyle-backed firm integrated margin ratchets according to the amo

239、unt of CO2 the firm can save. Even though the transition is slow, ESG integration and the sustainability revolution in leveraged loans has started. To us, the future of sustainable lending should comprise an ESG pricing rachet as well as ESG questionnaires that are included in information memorandum

240、 and fully integrated in the creditanalysis.For professional investors only www.hermes-28 Structured credit2021 has the potential to bring investors many positives, not least the economic recovery set to follow the economic repression of the Covid-19 pandemic. We hope this year will be the turning p

241、oint when securitisation offers more for investors, like us, who focus on responsible investing and sustainability.Along with most risk assets, structured credit posted a strong finish to the year once the US presidential election result became clearer and news of the Covid-19 vaccines started to su

242、pport more positive sentiment. The final rally of the year left spreads almost in line with the start of 2020, which is a remarkable turnaround from the lows experienced in March and April.Markets have been keen to look ahead to the post-Covid-19 recovery, and in structured credit, low supply expect

243、ations coupled with this more positive sentiment across markets continue to drive the rally. For the time being, any signs of increasing credit weakness are receiving less attention as we remain well within expectations, and structures have enough buffers to withstand even further deterioration from

244、 here. Across the key European jurisdictions that are active in the securitisation market, unemployment rates have started to increase, although we remain a long way off the peaks seen following the global financial crisis.Figure 39. Unemployment rates have started to increase %FranceGermanyUKNether

245、landsIrelandSep-11Sep-10Sep-09Sep-08Sep-07Sep-12Sep-13Sep-14Sep-15Sep-16Sep-17Sep-18Sep-19Sep-20SpainItaly051015202530Source: US Department of Labor, UK Office for National Statistics, and Eurostat, as at September 2020.Unemployment is a key driver of the fundamental credit performance of the asset-

246、backed securities (ABS) market, which is predominantly backed by consumer assets mortgages and loans. A borrowers ability to pay their mortgage, credit cards, car loans and the like is supported bythe regular income stream derived from employment. However, unemployment numbers may not fully reflect

247、the true picture yet due to the existence of furlough and Kurzarbeit schemes. Also, the correlation between unemployment and delinquencies/ defaults may be lower thistime due to the prevalence of forbearance measures, although weighing up the financial motives against the social imperatives is becom

248、ing ever more intricate for lenders. 2021 will be a year of consumers coming under increasing pressure to remain current on their credit borrowings while lenders will remain under pressure from governments and central banks to provide all support possible to borrowers under the various guises of for

249、bearance. The year ahead has the potential to provide investors with many positives, not least the economic recovery set to follow the collapse in activity during the Covid-19 pandemic. However, as investors focused on responsible investing and considering ESG factors in all our investments, we beli

250、eve the ABS market has much progress to make. Building on the theme of sustainability, we can take residential mortgages as an example. Globally, residential properties are responsible for nearly 11% of all greenhouse gas emissions.9 The financing that goes towards buying and renting those propertie

251、s could have a significant, beneficial impact on the carbon footprint of the property stock and in reducing global greenhouse gas emissions overall. Some mortgage lenders are already taking the energy-efficiency ratings of properties into account in their origination and underwriting; however, this

252、remains a niche type of lending, far from the mainstream market. What is required is a change in lending practices overall. 9 Climate Watch, the World Resources Institute. See: https:/ourworldindata.org/ghg-emissions-by-sector.For professional investors only www.hermes-29A clear argument can be made

253、 that those borrowers with more energy-efficient properties are more able to afford the same mortgage loan because the energy costs on their property are lower than for a less energy-efficient property. Looking ahead as regulation changes are made, energy-efficient properties will require less capit

254、al expenditure than those homes requiring more extensive upgrades. Therefore, the valuation of energy-efficient properties should be supported by this secular shift (notwithstanding all the other variables that can affect house prices).In countries such as the UK where the housing stock is, on avera

255、ge, older than other developed western economies, much can be done. Incentives for borrowers to make energy-efficiency improvements to their property can be made through the rates at which mortgages are underwritten in other words, make the necessary improvements to your property and your rate will

256、reduce. As an investor in the market, we buy pools of mortgages that have been securitised into residential mortgage-backed securities (RMBS). We can push lenders to think more about their lending in the overall scheme of sustainable financing to bring about change, but we also need more data disclo

257、sure. Currently, very little information is available to RMBS investors on the energy-efficiency ratings of the properties within the securitised pools. Whether the originators already have this data is not always a given, but we would be keen to see this as standard amongst mortgage lenders. Also,

258、as the market for “green” mortgages remains so small, there is very little data on the performance of those mortgages compared to standard mortgages. Do these mortgages perform better with lower delinquencies and defaults over time? If this point could be definitively answered, lower rates from mort

259、gage lenders would be a natural development and any “green” premium for the RMBS transactions could be justified too. We would like to see this year as the turning point in securitisation offering more for investors, like us, who focus on responsible investing and sustainability. While these themes

260、are prevalent elsewhere in equities and credit, we at the international business of Federated Hermes believe they are just as pertinent to structured credit. Our active engagement with originators is an important part in ensuring we end up with suitable, investible products. For professional investo

261、rs only www.hermes-30 Private creditPressure on companies, due to the coronavirus and the withdrawal of government support, will most likely result in a rise in defaults in 2021. But lenders will remain supportive of non-cyclical businesses. Going forward, it is clear that impact lending will become

262、 an important strategy within the private-debt landscape.With continued lockdowns across Europe, deal flow will remain patchy with only non-cyclical business able to access loan funding at competitive rates. The focus for all lenders will remain on senior tranches, with very little transaction flow

263、in the more junior tranches, as lenders remain very focused on credit quality and senior loans currently offer the best risk-reward parameters. In the short term, pricing could go up as defaults rise during the early part of the year. A rise in defaults, which is expected in the first quarter of 202

264、1, will reflect continued pressure for many companies as a result of the coronavirus and reduced government support for businesses, coupled with tightening covenant structures, especially for loans undertaken in 2018 and onwards. Defaults will, however, remain focused on consumer-spending businesses

265、, as lenders will remain supportive of non-cyclical businesses. At the international business of Federated Hermes, it is our current view that Germany remains the most attractive market, due to the increasingly favourable legal environment coupled with the resilience of the economy; however, there c

266、ould be increased competition to lend to the best companies over the short term. Scandinavia will remain an attractive alternative. With many direct lenders emphasising the ESG credentials of their funds, it will become increasingly important in 2021 for investors to determine those that have cynica

267、lly embraced ESG for marketing purposes from those who truly believe that understanding and managing ESG issues will lead to better returns for their investors, as well as better outcomes for all other stakeholders. It will continue to be key that investors understand a managers ESG philosophy and h

268、ow ESG issues are managed. Our Private Debt team views ESG issues as a set of risks that need to be managed for the benefit of its investors and society as a whole. This management of ESG issues is achieved through a combination of exclusions and engagement. The international business of Federated H

269、ermes regularly makes it a requirement of a loan that certain negative ESG issues are rectified by borrowers, in order to protect its investors from these risks. Furthermore, by reducing the ESG risks associated with a borrower, the value of the borrower rises, which in turn benefits our investors w

270、ho are secured lenders to the borrower. Going forward, it is clear that impact lending will become an important strategy within the private-debt landscape, as lenders continue their path towards a model of sustainable finance. This will be about targeting loans made to borrowers in order to achieve

271、certain sustainable goals, rather than just lending to sustainable companies. Pricing is expected to be the main force for change thus rewarding borrowers for reaching certain sustainability targets by giving them reductions in interest margins. This approach can be viewed as a win-win, as the envir

272、onmental, governance or social risks are mitigated; this benefits lenders, as they face reduced ESG risks, and it benefits borrowers with reduced interest costs. The key challenge will continue to be measuring the impact a loan has in helping a borrower achieve greater sustainability critical in asc

273、ertaining whether the borrower would have achieved this goal with or without the particular loan. At the international business of Federated Hermes, we track all of our borrowers and the impact of their loans towards the Sustainable Development Goals (SDGs) and will continue to contribute towards mo

274、ving private debt into a truly sustainable lending model. There are very few true SME Impact Direct Lending funds in the market currently, even if a few banks have now slowly started to establish sustainable corporate lending platforms, the coming year will see some leading private debt funds enteri

275、ng this important market. For professional investors only www.hermes-31 Asset-based lendingClimate change has become a key issue for the real-estate market. Now that evidence is emerging that greener buildings achieve keener valuation yields and higher rents, the sector has a unique opportunity to a

276、ssist the carbon transition of the wider economy.With the persistence of the pandemic, and with the extension of restrictions and special measures (including the eviction moratorium in the UK), the market has split into one section for which financing is relatively easy to find, and another section

277、that may be almost entirely unfinanceable on normal economic terms. Certain core offices, logistics and purpose-built residential assets fall into the former category. Shopping centres and hospitality assets fall into the latter. Financing terms for prime assets in core markets are back at pre-Covid

278、-19 levels, whereas for other sub-sectors, margins may have moved anywhere between 150bps and 500bps on seniorloans.Climate change is a key issue for the real estate market. The sector has a unique opportunity to assist the carbon transition of the wider economy now that evidence is emerging that gr

279、eener buildings achieve keener valuation yields and higher rents. This allows lenders like the international business of Federated Hermes to shift the emphasis of our environmental due diligence from previously analysing only the risks of the environment on our assets (flood risk etc.) to now includ

280、e analysis of the risk of our asset to the environment (carbon emissions). This is a pivotal moment in our industry, and it will allow institutional investors to participate in the carbon transition of the real-estate market, while keeping a strong focus on risk-adjusted returns. ESG analysis is no

281、longer just a defensive due diligence exercise. Instead, it has matured to be a pro-active pillar of our loan underwriting and investment philosophy. What were once thought of as side-effects are now brought to the centre of the underwriting process. Lenders must be mindful not just of the changes i

282、n tenant demand, but also of their wider contribution to the built environment (both social and environmental). Choosing to invest in commercial real-estate loans brings with it a shared responsibility for the final product. Whether as a debt or equity investor, sustainable investment in real-estate

283、 assets requires not just that the assets meet market requirements today and likely tomorrow; it also requires that it does so without compromising the ability of future generations to make their own determinations on how to live their lives. This means that intergenerational issues such as climate

284、change cannot be ignored by investors today. It is therefore encouraging that the need for a strong moral compass is perhaps lessened by the evidence that a green premium exists, at least for core institutional quality assets. Analysis of academic studies suggests that enhanced sustainability creden

285、tials can increase the income and value ofinvestment properties (see figure 40)10:Figure 40. The impact of green certification and ESG enhancement0.0%0.9%-14.3%0.0%23.0%17.0%25.8%43.0%4.6%4.3%-4.9%14.1%-20.0%-10.0%0.0%10.0%20.0%30.0%40.0%50.0%Rental IncomeOccupancyOperating CostsSales PriceSource: “

286、A Review of the Impact of Green Building Certification on the Cash Flows and Values of Commercial Properties,” by Niina Leskinen, Jussi Vimpari and Seppo Junnila, as at February 2020.There is no doubt that reducing our carbon footprint is an ethical imperative, but even for those still unconvinced b

287、y the ethical argument, it is fast becoming clear that the potential economic damage of climate change now far outweighs the cost of fighting it, and that the “cost of fighting it” may actually be an opportunity for higher relative returns. 10 Despite the favourable conclusion regarding the impact,

288、the reviewed researchs key limitation is the inherent selection bias; certified properties seem to be larger, taller (indicating a central location), constructed later, and of better quality than non-certified properties.For professional investors only www.hermes-32 Sustainable finance The EUs budge

289、t (and planned 225bn issuance of green bonds), the principles of the Green Plan and the regulatory proposals of the EU Taxonomy show that there is no going back on the green transition. The green bond market is still at a nascent stage, but it has grown rapidly. At over $600bn market capitalisation,

290、 the green bond market is now larger than the European high-yield market by a wide margin; as large as the Sterling Bond Index; and just under the size of the High Yield Emerging Markets Corporate Plus Index. In December, the EU demonstrated its confidence in thestability and liquidity of the green

291、bond market by announcing that it will issue 225bn-worth of green bonds aspart of its Multiannual Financial Framework (its long-term budget). In moving to fulfil the obligations of the ambitious Green Deal and as signatories of the Paris Agreement, the EUsaid that “30% of the EU budget, under both M

292、ultiannual Financial Framework and Next Generation EU, will be spent tofight climate change, the highest share ever of the largest European budget ever.”11 In addition, the 225bn issuance assures the permanence of the green bond market and sustainability-themed finance in general. We can see the pro

293、 forma effect of the EUs green bond program on todays green bond market in figure 41. Thecurrent market capitalisation of the ICE BofA Green Bond Index is just over 500bn ($615bn) and with its planned 225bn ($273bn) issuance, the EU will become the worlds largest green bond issuer by a wide margin.

294、The European Investment Bank currently holds the top spot with nearly 45bn in outstanding green bonds. Figure 41. Green bond growth US$ bnICE Bank of America Green Bond Index GBs31/12/201031/12/201531/12/2020PF for EU GBsICE Bank of America Green Bond Index EU GBs00500600700800900Source:

295、Bloomberg, ICE BofA Indices, as at December 2020.We are, however, unlikely to see any green bond issuance bythe EU until, perhaps, as late as the second half of 2021. Thatsbecause, as part of a suite of EU regulation around sustainable finance, the Technical Expert Group has not yet codified a set o

296、f Green Bond Standards. But when they are issued, will there be good demand for such size in issuance atyields well below 50bps, if they are positive yielding at all? To tackle that question lets look at the EUs recent 17bn, dual-tranche social bond issuance under the “Support to mitigate Unemployme

297、nt Risk in an Emergency” (SURE) framework. The deal, priced in October, was for an orderbook of 223bn, or 13.7x. According to Nomura, one of the bookrunners, the transaction “marked a record both for the 233bn combined orderbook, the largest ever collected in the history of Sovereign, Supranational

298、and Agencies debt capital markets, and the size of 17bn, the highest issued amount in euro from a Supranational institution ever.”12 The 2040 tranche of that deal was issued at a yield of 10bps, or at a premium to the EU curve of about that same 10bps. Since its issuance, SURE has performed very wel

299、l, and now trades about 10bps inside of the same curve. Suffice to say, if the EUs treasury department is looking at the demand of the SURE issuance asan indication of future demand, they should feel pretty confident about its ability to issue 225bn over a four-year period (see figure 42). Figure 42

300、. SURE has performed well since its issuance %I-SpreadInterpolated swap rateSURE .10% due October 2040-25-20-15-10-5051015202520/10/202022/10/202024/10/202026/10/202028/10/202030/10/202001/11/202003/11/202005/11/202007/11/202009/11/202011/11/202013/11/202015/11/202017/11/202019/11/202021/11/202023/1

301、1/202025/11/202027/11/202029/11/202001/12/202003/12/202005/12/202007/12/202009/12/2020Source: Bloomberg, as at December 2020. 11 See https:/ec.europa.eu/commission/presscorner/detail/en/QANDA_20_2088 for more information.12 FN: European Union Dual Tranche Case Study (Nomura). For professional invest

302、ors only www.hermes-33The EUs substantial budget to finance the green recovery, together with the principles of the Green Plan and the regulatory proposals of the EU Taxonomy, shows that there isno going back on the green transition. The prospects of investing in a secular trend that is underwritten

303、 at least in part by government provides confidence that the trend willcontinue along its path, likely at an accelerated rate. Overtime, we expect the EU budget will likely trigger more supply of sustainability-themed debt issuance. In turn, this willcreate a deeper, more developed and more liquid s

304、ustainability-themed debt market and provide great opportunities to finance positive change. Green is not thenew black; it is here to stay.For professional investors only www.hermes-34The value of investments and income from them may go down as well as up, and you may not get back the original amoun

305、t invested. Any investments overseas may be affected by currency exchange rates. For professional investors only. This is a marketing communication. The enclosed material is confidential. This document does not constitute a solicitation or offer to any person to buy or sell any related securities, f

306、inancial instruments or financial products, and is not to be reproduced or redistributed without the prior written consent of Federated Hermes. The following companies are either a subsidiary of or affiliated with Hermes Fund Managers Limited, and all operate under the “Federated Hermes” brand. Herm

307、es Investment Management Limited (“HIML”); Hermes Fund Managers Ireland Limited (“HFMIL”); Hermes Alternative Investment Management Limited (“HAIML”); Hermes Stewardship North America Inc. (“HSNA”); Hermes GPE LLP (“Hermes GPE”); Hermes GPE (USA) Inc. (“Hermes GPE USA”) and Hermes GPE (Singapore) Pt

308、e. Limited (“HGPE Singapore”). HIML, HAIML, Hermes GPE and Hermes GPE USA are each a registered investment adviser with the United States Securities and Exchange Commission (“SEC”). HSNA is unregulated and does not engage in regulated activity. For a full list of all affiliated companies please see

309、the relevant Form ADV. Certain affiliates have cash solicitation arrangements under which they receive compensation for referring prospects for advisory services. Any statements of opinion constitute only current opinions which are subject to change and which we do not undertake to update. In Canada

310、: HIML is not registered in Canada as a dealer, adviser or investment fund manager under applicable Canadian securities laws. Except for the provinces of Alberta, British Colombia, Ontario, Quebec and Nova Scotia, HIML does not engage in the business of, and none of its activities should be construe

311、d as holding itself outas engaging in the business of, advising anyone in any Canadian jurisdiction with respect to investing in, buying or selling securities. In the provinces of Alberta, British Colombia, Ontario, Quebec and Nova Scotia, HIML relies on the international adviser registration exempt

312、ion pursuant to section 8.26 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Prior to carrying on any investment advisory or portfolio management services for a client located in a Canadian jurisdiction other than Alberta, British Colombia, Ont

313、ario, Quebec or Nova Scotia, HIML will first need to take certain steps to either obtain the appropriate registration or rely on an available exemption from registration. Some of the information provided in this document was obtained from a third party and has not been reviewed by Federated Hermes f

314、or accuracy. This document does not constitute, in whole or in part, an offering memorandum. Portfolio Holdings: To derive Ten Largest Holdings, Characteristics, Economic Sector Weightings, Country Weightings and Portfolio Holdings for presentation purposes, the portfolio manager uses the market val

315、ue weighted based on the total market value of the entire portfolio. For top/bottom contributing stocks total effect to the portfolio was used to rank the stocks. Holdings data and securities discussed should not be relied upon as a complete listing nor taken as representative of an accounts entire

316、portfolio. In the aggregate, securities may represent only a small percentage of an accounts portfolio holdings. The information on particular holdings may be withheld if it is in the clients best interest to do so. Portfolio holdings are subject to change without notice. It should not be assumed th

317、at any securities transactions, holdings discussed, nor any investment recommendations or decisions we make will be profitable or will equal the investment performance of the securities discussed herein. Allocations: The allocation distribution and actual percentages may vary from time-to-time. The

318、types of investments presented in the allocation chart will not always have the same comparable risks and returns. The actual performance of the portfolio will depend on the Portfolio Managers ability to identify and access appropriate investments, and balance assets to maximize return while minimiz

319、ing its risk. The actual investments in the portfolio may or may not be the same or in the same proportion as those shown in this document. Benchmark: These benchmarks are broad-based indices which are used for illustrative purposes only and have been selected as they are well known and are easily r

320、ecognizable by investors. Comparisons to benchmarks have limitations because benchmarks have volatility and other material characteristics that may differ from the portfolio. For example, investments made for the portfolio may differ significantly in terms of security holdings, industry weightings a

321、nd asset allocation from those of the benchmark. Accordingly, investment results and volatility of the portfolio may differ from those of the benchmark. Also, the indices noted in this presentation are unmanaged, are not available for direct investment, and are not subject to management fees, transa

322、ction costs or other types of expenses that the portfolio may incur. In addition, the performance of the indices reflects reinvestment of dividends and, where applicable, capital gain distributions. Therefore, investors should carefully consider these limitations and differences when evaluating the

323、comparative benchmark data performance. The information regarding the index is included merely to show the general trends in the periods indicated and is not intended to imply that the composite was similar to the index in composition or risk. Performance: Many factors affect performance including c

324、hanges in market conditions and interest rates and in response to other economic, political, or financial developments. Past performance is not a guide to or indicative of future results. Future returns are not guaranteed, and a loss of principal may occur. All performance includes reinvestment of d

325、ividends and other earnings. 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. Telephone calls may be recorded for training and monitoring purpose

326、s. BD007208 0010419 02/21Federated HermesFederated Hermes is a global leader in active, responsible investing.Guided by our conviction that responsible investing is the best way to create long-term wealth, we provide specialised capabilities across equity, fixed income and private markets, multi-ass

327、et and liquidity management strategies, and world-leading stewardship.Our goals are to help people invest and retire better, to help clients achieve better risk-adjusted returns, and to contribute to positive outcomes that benefit the wider world.All activities previously carried out by Hermes now f

328、orm the international business of Federated Hermes. Ourbrandhas evolved, but we still offer the same distinct investment propositions and pioneering responsible investment and stewardship services for which we are renowned in addition to important new strategies from theentire group.Our investment a

329、nd stewardship capabilities:A Active equities: global and regionalA Fixed income: across regions, sectors and the yieldcurveA Liquidity: solutions driven by four decades of experienceA Private markets: real estate, infrastructure, private equity anddebtA Stewardship: corporate engagement, proxy voting, policyadvocacy For more information, visit www.hermes- or connect with us on social media: