HERMES SDG ENGAGEMENT EQUITY FUND - Biannual Report Hermes Investment Management H1 2018
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HERMES SDG ENGAGEMENT EQUITY FUND Biannual Report Hermes Investment Management H1 2018 For professional investors only www.hermes-investment.com
SDG ENGAGEMENT FUND HERMES INVESTMENT MANAGEMENT
BIANNUAL REPORT H1 2018
THE POWER OF ENGAGEMENT
Seeking constructive relationships with each portfolio company’s board and
management team, we encourage and enable them to develop strategies that
deliver outcomes which are firmly aligned with the UN SDGs and benefit all
stakeholders: the companies and their employees, the communities in which
they operate, the environment, and investors.
Engagement objectives, H1 2018 Engaged companies by region, H1 2018
4 1
Environmental 10 Australia &
27.1% New Zealand
30.5% Social and ethical
Governance Developed Asia
Strategy, risk and Emerging
communication & developing
16 markets
5 Europe
14.4% North America
28.0% United Kingdom
6
Source: Hermes as at 30 June 2018. Source: Hermes as at 30 June 2018.
Milestone progress of engagements, H1 2018 The Hermes EOS milestone framework for engagement
Milestone 1
Strategy, risk and 1 27 Raise SDG issue at the appropriate level
communication
Governance 2 2 Milestone 2
Company recognises the specific issue as valid
Social and ethical 7 16
Milestone 3
Develop and commit to a credible plan for change
Environmental 6 20
0 5 10 15 20 25 30
Milestone 4
No change Positive progress Successful implementation of the plan accompanied by disclosure of
relevant outcome or impact metrics
Source: Hermes as at 30 June 2018.
SDG ENGAGEMENT FUND HERMES INVESTMENT MANAGEMENT
BIANNUAL REPORT H1 2018
ENGAGEMENT INTENSITY, H1 2018
We currently engage with 52 companies on 104 objectives that are aligned with the UN Sustainable
Development Goals. How intensely we focus on each SDG is illustrated below: the larger the SDG icon,
the more concentrated our focus on the corresponding goal.
#1 46 portfolio companies exposed to this goal #8 #3 42 portfolio companies exposed to this theme
Current engagement: Dulux, to develop targets for more Current engagement: Alliant Energy, so that
49 portfolio companies
sustainable products with reduced environmental impacts its investments and projected energy mix are
exposed to this theme
over their total life cycle compatible with a world limited to a 2°C rise
in temperature
#2 38 portfolio companies exposed to this theme
Current engagement: Tullow Oil, to ensure that
climate-scenario planning is part of the oil and gas
company's strategy
=5 32 portfolio companies exposed
to this theme
Current engagement:
=9 Middleby, to use its resources
and purchasing power to
10 portfolio companies exposed to this support the growth and
theme development of local
Current engagement: Huhtamaki businesses
and AptarGroup, to ensure packaging
solutions are designed with a view to
reducing plastic pollution in the
world’s oceans
=12 =9 9 portfolio companies #4 48 portfolio companies exposed to this theme
exposed to this theme Current engagement: Credicorp, to
33 portfolio Current engagement: responsibly expand its microfinance
companies exposed Glanbia, on practices business and increase the level of financial
to this theme within its dairy-farming inclusion in Peru
supply chain and
supporting the
nutritional needs of #6 34 portfolio companies exposed
people globally to this theme
=12
11 portfolio
companies exposed
to this theme
=5
49 portfolio companies
exposed to this theme
Current engagement: SSP,
to target employment
#10 5 portfolio
opportunities for companies #7 38 portfolio companies exposed
unemployed minorities in to this theme
exposed to
the airports and railway this theme
stations in which they
operate
=11 =11 =11
22 portfolio companies 11 portfolio 25 portfolio
exposed to this theme companies companies
exposed to this exposed
theme to this theme
SDG ENGAGEMENT FUND HERMES INVESTMENT MANAGEMENT
BIANNUAL REPORT H1 2018
ENGAGEMENT IN FOCUS:
PETRA DIAMONDS
Investment case Engagement objectives
Petra Diamonds mines and distributes rough diamonds in South Good health and well-being: Petra Diamonds is raising awareness
Africa and Tanzania. It is emerging from a period of significant capital about HIV infection, but just one-third of employees volunteered
expenditure after it purchased, extended and refurbished mines, for testing in 2017. Therefore, expanding testing and ensuring health
and should soon begin to generate strong cash flow from increased services are available and appropriate to the needs of the company’s
production. In the longer term, as excess inventories run down and old adult, male employees is important. We are working with Petra
mines close, structural undersupply should support diamond prices. to find a partnering organisation to expand its outreach activities,
break down cultural barriers, provide resources for testing clinics,
support both ongoing treatment and adherence to anti-retroviral
programmes and promote Pre-Exposure Prophylaxis (PrEP) in order
In South Africa, one in every four boys to significantly reduce transmissions among – and through – this
high risk population.
currently aged 15 will acquire HIV before
– Aligned with the following SDGs:
they reach 60
Engagement opportunity
HIV prevalence is high in the areas in which Petra operates,
impacting the health and well-being of those in its communities and,
ultimately, the morale and productivity of the company’s workforce.
There are approximately 2.5m adult men living with HIV in South
Africa – adult men comprise 37% of all adults living with HIV in the
country1. Modelling by UNAIDS suggests that almost one in every
2.5m adult men are living with HIV in
four boys (23%) currently aged 15 will acquire HIV before they South Africa
reach 602. Moreover, men are less likely to use medical services and
to take an HIV test than women. As a result, more adult men than Engagement progress
women die of AIDS-related causes, despite there being many more In H1, we had multiple interactions with Petra, including a meeting
women – 1.7x – living with HIV3. South Africa’s National Strategic with the CEO, building on our previous meetings with the Chair.
Plan for HIV recognises that younger women in South Africa bear a
In May, we introduced Petra to a US pharmaceuticals company to
disproportionately high burden of new infections as a result of sexual
support promotion and availability of Pre-Exposure Prophylaxis to help
relationships with older men.
prevent HIV transmission among workers and the wider community.
It would be the US company’s first partnership of this kind.
Theory of change
The scale of the challenge in South Africa necessitates bold private Their collaboration can potentially deliver positive impacts:
sector initiatives alongside the State and NGOs. Through their – Reduced HIV prevalence among Petra workers and the
interactions with and support for employees and their communities, community, resulting in a more productive workforce and
we believe Petra can play a role in supporting SDG 3.3 – ending the improving health levels among the local population.
epidemic of AIDS – and support South Africa's own goal to reduce
new HIV infections to less than 100,000 by 2022. – The pharmaceutical company may consider similar partnerships
with larger miners, multiplying the impact.
Petra Diamonds' Finsch mine in South Africa.
1,2,3
“A snapshot of men and HIV in South Africa,” published by UNAIDS in 2017.SDG ENGAGEMENT FUND HERMES INVESTMENT MANAGEMENT
BIANNUAL REPORT H1 2018
ENGAGEMENT IN FOCUS:
TECHTRONIC
Investment case Engagement objectives
Techtronic is a Hong-Kong listed company focused on the US Ethical and inclusive supply chains: The shift to cordless power
consumer market, with predominantly Chinese manufacturing tools increases Techtronic’s need for certain commodities – cobalt in
operations for its power tools and floor-care products, principally particular – which are used in its lithium-ion batteries. The company
sold under its Milwaukee brand. Its exemplary innovation record has develops the batteries in close collaboration with large suppliers. Our
resulted in rapid market-share capture in the industry verticals it has initial objective is for it to improve the oversight of its total supply
targeted. This was evident to us in a recent visit to the global R&D chain, especially in relation to cobalt and other rare minerals.
centre of Milwaukee – one of the most impressive company visits that
Hamish Galpin, Lead Manager of the Fund, has undertaken in his 29 – Aligned with the following SDGs
years as a professional stock picker.
If the company delivers on its aims of releasing innovative products,
achieving further increases in market share and expanding into new
markets, it should sustain a strong growth profile for a number of
years to come. The stock has a similar margin and return profile to its
larger and better-known competitor, Stanley Black and Decker, and we Resource efficiency: The company is primarily vertically integrated
believe its slightly higher return on equity and price-to-earnings ratio and, in recent years, has delivered many product innovations.
are justified by the track record and quality of the business. Milwaukee now offers over 500 tools, all of which make use of the
same battery platform and therefore preventing older products from
falling into obsolescence. Multiple business lines have grown from
zero to several hundreds of million dollars in just a few years. Our
Through high-quality manufacturing objective is to encourage the company to further assess adjacent
operations, the company can minimise opportunities for developing cordless products, enabling greater
resource efficiency.
waste, increase renewable energy
usage, and its innovative product – Aligned with the following SDGs
designs can promote resource
efficiency and economic growth.
Theory of change
Techtronic’s global reach – it has 41 operations and 22,000 staff Engagement progress
worldwide – provides many touch points for SDG-aligned engagement. In addition to meeting with the company’s CEO and CFO and
By developing impactful relationships with suppliers and employees, speaking with its Vice-Chair, investor relations team and others,
Techtronic can help to raise living standards and therefore alleviate we visited the Milwaukee CFO at the company’s innovation centre,
poverty while also supporting good health, well-being and gender where we were able to see first-hand the breadth of its cutting-edge
equality. Through high-quality manufacturing operations, the company product development.
can minimise waste generation, significantly draw on renewable energy
sources and develop innovative products. Techtronic can also support We have provided recommendations to the company about how to
efforts to use resources efficiently and promote economic growth that improve its due diligence on its existing supply chain, based on our
is decoupled from natural-resource usage. knowledge and expertise as a leading investor expert on this theme.SDG ENGAGEMENT FUND HERMES INVESTMENT MANAGEMENT
BIANNUAL REPORT H1 2018
COMMON CAUSE:
HOW THE SDGS ARE INTERCONNECTED
Why decent work matters Fitter, happier, more productive
To achieve many SDG targets, the At work, engaged and healthy employees help increase profitability,
volume and quality of jobs must staff retention and brand value. At home, they focus more on family
improve to enable unemployed and social activities, and consume fewer public services.
people to join the labour force,
and enhance the lives of millions Companies providing decent employment opportunities – directly or
of workers worldwide. through their supply chains – and enabling growth do not only help
fulfil SDG eight, they support other SDGs. Here are some examples
Precarious, poor-quality and low-pay that demonstrate the interconnectedness of the SDGs:
work remains prevalent throughout
society: more than 300m workers in the developing world earn less
than $1.9 each day.1
Through their employment practices and procurement decisions,
companies are uniquely placed to support business growth, eliminate
dangerous working conditions and exploitation while helping prepare
employees for the changes brought by automation and the
decarbonisation of the economy, which have the potential to
displace workers, disrupt families and cause poverty.
Target 10.1 Target 3.4
Progressively achieve Reduce by one third
Target 1.2
and sustain income premature deaths from
Target 4.4
growth for the bottom Target 5.5 non-communicable
40% of the population diseases and promote At least halve the
at a rate higher than mental health and Substantially increase proportion of men,
the national average Ensure women’s full well-being skills training in the women and children
and effective youth and adult of all ages living in
Action: As the participation and equal Action: Workplace populations poverty, in all its
proportion of people opportunities for benefits – such as dimensions
aged 65 years or more health insurance, paid Action: Youth
leadership
increases, companies holiday and parental unemployment, which Action: A fair, living
need to be inclusive Action: Companies leave, pension plans – has increased as a result wage is the most direct
of older workers – can act on society’s support employees of the financial crisis and way for companies
and parts of the appetite for greater and their families, rapid population growth to help lift workers
workforce currently female participation in while initiatives in emerging economies, out of poverty. This
underemployed on the the labour market and targeting depression can be addressed by commitment can
basis of ethnicity or closing the persistent and stress prevent providing more cascade throughout
disability gender pay gap productivity losses opportunities for their supply chains
education and training
1 Per capita household income or consumption in purchasing-power parity termsSDG ENGAGEMENT FUND HERMES INVESTMENT MANAGEMENT
BIANNUAL REPORT H1 2018
HERMES SDG ENGAGEMENT EQUITY FUND
A rare strategy, investing actively in small – and mid-cap companies
worldwide based on their potential to deliver – through engagement
– sustainable development outcomes and robust financial performance.
Fund characteristics Investment philosophy
Skilful engagement and active management form a potent force
Lead Manager, Investment Hamish Galpin for positive change among smaller companies, reflected in earnings
Lead Manager, Engagement Will Pomroy growth and stock-price appreciation
Fund inception 29 December 2017 SDG-driven engagement provides opportunities to create
meaningful and lasting societal impacts – particularly in emerging
MSCI All Country markets
Benchmark
World SMID index
The performance benefits of positive change are best captured
Blend with a over a long time horizon, rewarding committed investors
Style
quality bias
Concentration 40-60 stocks
Beta ExpectedHERMES INVESTMENT MANAGEMENT We are an asset manager with a difference. We believe that, while our primary purpose is to help savers and beneficiaries by providing world class active investment management and stewardship services, our role goes further. We believe we have a duty to deliver holistic returns – outcomes for our clients that go far beyond the financial – and consider the impact our decisions have on society, the environment and the wider world. Our goal is to help people invest better, retire better and create a better society for all. Our investment solutions include: Private markets Infrastructure, private debt, private equity, commercial and residential real estate High active share equities Asia, global emerging markets, Europe, US, global, and small and mid-cap Credit Absolute return, global high yield, multi strategy, global investment grade, unconstrained, real estate debt and direct lending Multi asset Multi asset inflation Stewardship Active engagement, advocacy, intelligent voting and sustainable development Offices London | New York | Singapore For more information, visit www.hermes-investment.com or connect with us on social media: For professional investors only. Clients who fall outside of this criteria should not use the information provided in this document for investment decisions. This document does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments; nor does it constitute an offer to purchase securities to any person in the United States or to any US Person as such term is defined under the US Securities Exchange Act of 1933. It pays no regard to the investment objectives or financial needs of any recipient. No action should be taken or omitted to be taken based on this document. Tax treatment depends on personal circumstances and may change. This document is not advice on legal, taxation or investment matters so investors must rely on their own examination of such matters or seek advice. Before making any investment (new or continuous), please consult a professional and/or investment adviser as to its suitability. This document is not investment research and is available to any investment firm wishing to receive it. Any opinions expressed may change. The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Any investments overseas may be affected by currency exchange rates. Past performance is not a reliable indicator of future results and targets are not guaranteed. All figures, unless otherwise indicated, are sourced from Hermes. For more information please read any relevant Offering Documents or contact Hermes. UCITS funds: Further information on investment products and any associated risks can be found in the Fund’s Key Investor Information Document (“KIID”), the Prospectus, the articles of association and the annual and semi-annual reports. In the case of any inconsistency between the descriptions or terms in this document and the Prospectus, the Prospectus shall prevail. These documents are available free of charge at Hermes Investment Funds plc, Georges Court, 54-62 Townsend Street, Dublin 2, Ireland, www.hermes-investment.com; and at its representative in Switzerland (ACOLIN Fund Services AG, Affolternstrasse 56, CH-8050 Zurich, www.acolin.ch). The Paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, CH-8001 Zürich. HIML is the investment manager and promoter of Hermes Investment Funds plc (“HIF”) – an open-ended investment company with variable capital and with segregated liability between its sub-funds – incorporated in Ireland. Authorised by the Central Bank of Ireland and recognised by the Financial Conduct Authority. The main entities operating under the name Hermes are: Hermes Investment Management Limited (“HIML”); Hermes Alternative Investment Management Limited (“HAIML”); Hermes European Equities Limited (“HEEL”); Hermes Real Estate Investment Management Limited (“HREIML”); Hermes Equity Ownership Limited (“HEOS”); Hermes GPE LLP (“Hermes GPE”); Hermes GPE (USA) Inc (“Hermes GPE USA”) and Hermes GPE (Singapore) Pte. Limited (“HGPE Singapore”). All are separately authorised and regulated by the Financial Conduct Authority except for HREIML, HEOS, Hermes GPE USA and HGPE Singapore. HIML currently carries on all regulated activities associated with HREIML. HIML, HEEL and Hermes GPE USA are all registered investment advisers with the United States Securities and Exchange Commission (“SEC”). HGPE Singapore is regulated by the Monetary Authority of Singapore. Issued and approved by Hermes Investment Management Limited which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. Telephone calls will be recorded for training and monitoring purposes. Potential investors in the United Kingdom are advised that compensation will not be available under the United Kingdom Financial Services Compensation Scheme. BD02122 07/18 0003987
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