The United Nation’s (UN) Sustainable Development Goals (SDGs) are a collection of 17 objectives aimed at improving the overall quality of life in the world by 2030.

These laudable aims include some seemingly unachievable goals, such as: no poverty, zero hunger, good health and well-being, quality education, gender equality, clean water and sanitation, affordable and clean energy, decent work and economic growth, and reducing inequality.

Because of their lofty objectives, using these SDGs as an investment strategy appears pretty challenging, but Hamish Galpin, global small cap portfolio manager and head of small and mid cap of Hermes Investment Management, is attempting to do just this. Galpin is lead manager of the SDG Engagement Equity Fund with about 200 million euros (US$223 million) in AUM as of April 2019. This fund is not currently registered for sale in Hong Kong.

Put simply, Galpin is using the SDGs as the means for engaging with mid-cap and small-cap companies that the fund invests in and via their worthy objectives is pushing their respective managements to improve the shareholder value in what he calls the “SDG engagement” strategy.

“What’s different about this strategy is that first we engaged with companies in relation with the SDGs. Second, it is an impact fund to the extent that we’re bringing something to the table as well. So we’re intending to facilitate introductions to companies to help them where we agree on initiatives that we’re doing to contribute towards the goals,” Galpin says.

Galpin explains that the “SDG engagement” strategy uses active dialogue and a collaborative approach rather than an activist approach when seeking changes in the management, structure, or practices of company that it is investing in.

“We make it clear that we are not activist shareholders. We have a thesis when we go into a stock thinking about what can we do. We get into a discussion with several layers of management within the organization to work out what action points to have with the company. By and large, we’ve had agreement on these action points. We’ve got plans that we hope drive outcomes towards the SDGs but are sensible for the business too,’’ Galpin says.

For example, using this strategy, Hermes engaged with Techtronic - a Hong Kong-listed US-based power tools company - to exercise greater due diligence in the sourcing of cobalt which is required for the power packs for its batteries, Galpin cites. The primary source of cobalt is the Congo where there are significant issues with illegal mining and labour exploitation.

“Hermes owns shares in the business. We worked with them in terms of their cobalt supply chain. They have recognized the need for increased levels of due diligence through its supply chain, especially for their suppliers of cobalt used in lithium-ion battery manufacturing,” Galpin says.

Another example where Hermes has engaged with a company – this time on promoting “gender equality” - is AMN Healthcare, a small cap company which is a leading player in the US healthcare staffing sector.

“They’re leading industry efforts to reduce inequality through practical things such as doing gender neutral CVs so women are not cut out of the selection process, which is quite interesting. This is an example of how a relatively small company in the overall scheme of things can really help engineer change within their sector, where a huge number of people can get paid better,” Galpin says.

Galpin admits that it remains quite challenging to convert the SDGs directly into stock valuation, but operating an enterprise with these goals in mind obviously improves the quality of the business. Ultimately, this process then gets reflected in the earnings and rating of the business, which positively impacts the share price.