Fast reading
- 2025 ranked among the three hottest years on record globally, despite the presence of La Niña conditions that have historically moderated temperatures.
- Under current policy trajectories, the world is no longer on a credible pathway to achieve the 1.5°C goal.
- Launched in 2021, The Federated Hermes Climate Change High Yield Credit Strategy aims to deliver against two strategic objectives: to outperform the global high yield market and to contribute towards the objectives of the Paris Agreement by investing in companies best-positioned to transition toward net-zero carbon emissions.
Understanding the resilience of a company’s balance sheet and its ability to meet repayment obligations is fundamental to corporate credit investing. In fulfilling our fiduciary duty, we seek to consider all factors that may materially affect a company’s cash flows, asset values, and long-term creditworthiness. This includes the risks and opportunities arising from climate change, which is increasingly shaping operating environments,1 regulatory frameworks,2 and capital allocation decisions3 across the global economy.
A pivotal year for climate change
2025 ranked among the three hottest years on record globally, despite the presence of La Niña conditions that have historically moderated temperatures. The significance of these temperatures goes beyond their influence on the elevated number of extreme weather events of the year, affecting the global outlook for the Paris Agreement’s4 headline goal of limiting warming to 1.5°C.
The International Energy Agency’s (IEA’s) World Energy Outlook 2025 concluded that, under current policy trajectories, the world is no longer on a credible pathway to achieve the 1.5°C goal. An overshoot is now considered inevitable even under the most optimistic assumptions.
As scientists and policymakers contemplate the latest scenarios and their consequences on societies and natural systems, they may be encouraged by signs of a plateau in the emissions of the world’s largest contributor. In 2025, multiple independent analyses5 indicated that China’s carbon dioxide emissions were flat or modestly declining through 2024–2025, with new electricity demand offset by rapidly expanding solar, wind and nuclear generation.
The expansion of clean energy supply and the uptake of climate-friendly technologies point to the possibility that global emissions are approaching their own inflection point.
The expansion of clean energy supply and the uptake of climate-friendly technologies point to the possibility that global emissions are approaching their own inflection point. Realising this potential, however, will require navigating a more complex phase of the transition. Fiscal pressures are narrowing the scope for public investment just as rising electricity demand and ageing grids intensify system level challenges. With a clear understanding of these headwinds, we have structured the Climate Change High Yield Strategy to remain resilient and well‑positioned to meet the transition’s evolving demands.
In this report we highlight the progress made by the Strategy in 2025 against its collinear objectives. To do so, quantitative data will be complemented by qualitative insights from our proprietary Climate Change Impact (CCI) score and our ongoing dialogue with investee companies through climate change-related engagement.6
We thank our investors for entrusting us with their capital. We strongly believe in the benefits of active management, both in the sense of actively choosing where to invest; and in the sense of engaging in mutually-beneficial dialogues with our investee companies.
Climate Change High Yield Credit Annual Report 2025
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1 WHO, WMO issue new report and guidance to protect workers from increasing heat stress
2 Carbon Border Adjustment Mechanism – Taxation and Customs Union
3 WMO confirms 2025 was one of warmest years on record
4 The Paris Agreement is a legally binding international treaty on climate change.
5 Analysis: China’s CO2 emissions have now been ‘flat or falling’ for 21 months – Carbon Brief
6 Where the laws and regulations in the relevant jurisdiction permit us to do so.
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