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% 30.5% Social and ethical New Zealand 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 38 portfolio companies exposed opportunities for companies #7 to this theme unemployed minorities in 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 currently aged 15 will acquire HIV before high risk population. – 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 2.5m adult men are living with HIV in country1. Modelling by UNAIDS suggests that almost one in every 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. Theory of change It would be the US company’s first partnership of this kind. 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 waste, increase renewable energy resource efficiency. 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

Target 1.2 Progressively achieve Reduce by one third Target 4.4 and sustain income premature deaths from 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 Action: Youth aged 65 years or more leadership health insurance, paid 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 terms SDG 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 Expected <1

Glassdoor ratings: Fund aggregate score Carbon emissions: Fund v benchmark

Overall rating Career opportunities Hermes SDG Engagement Compensation/ beneﬁts Equity Fund Culture and values Recommend to MSCI All a friend Country World SMID Cap Index Senior leadership

Work/life balance 0 100 200 300 400 500

0 1 2 3 4 5 Tonnes CO2 (Scope 1, Scope 2 and Scope 3 emissions) per USD million invested Glassdoor employee review score Benchmark Fund aggregate Glassdoor score (normalised) Emissions Scope Scope 1 Scope 2 Scope 3

Source: Glassdoor as at 30 June 2018. Source: TruCost as at 30 June 2018.

Investment risks 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 Investing in smaller and medium-sized companies may carry higher risks than investing in larger companies Investments in emerging markets tend to be more volatile than those in mature markets and the value of an investment can move sharply down or up Any investments overseas may be affected by currency exchange rates HERMES 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

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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