HERMES SDG ENGAGEMENT EQUITY FUND Biannual Report
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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% 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,