New Federated fund to use its power to push U.N. goals

code, leading to the creation of so-called ethical mutual funds or sustainable mutual funds that cast a light on corporate practices.

What is new, Mr. Galpin said, is the glare of the spotlight.

As a measuring stick, the Federated fund will look at how closely aligned companies are to the United Nations’ Sustainable Development Goals. Those 17 goals, further developed into 169 specific targets, were established in 2015 to tackle global issues like poverty, hunger and climate change by 2030.

The UN — estimating that achieving the goals will require $5 trillion to $7 trillion each year until 2030 — is leaning on institutional investors like mutual funds, hedge funds and retirement funds to bankroll the changes. The U.S. mutual fund industry carries major financial weight — controlling nearly $19 trillion in assets at the end of 2018, according to the Investment Company Institute.

“Never before has the global community set out such an ambitious agenda,” read a 2017 report from a group of institutional investors convened by the United Nations. “In order to unlock this opportunity, it will be critical for investors to reorient their investment flows toward the new innovative products and services focused on finding solutions to achieve the SDGs.”

According to Morningstar Research Services, 235 sustainable funds were available to U.S. fund investors at the beginning of 2018.

Returns of more than half of the sustainability funds, or 54 percent, ranked in the top half of their respective Morningstar’s rankings in 2017.

The group noted that sustainability funds tend to tie values with potential for return — which may not necessarily be the case with investment strategies that avoid “sin stocks” like tobacco and gambling or are driven by faith-based factors.

The UN’s goals “provide a common framework” to have discussions about sustainability that can apply to any company in any industry in any country in the world, said Will Pomroy, the fund’s lead engager. And it allows the fund managers to craft a creative solution over a long period of time, getting deep into supply chains as a way to squeeze out more value.

Mr. Galpin framed Federated’s fund as an extension of sustainability funds or ethical funds — trying to extract nuggets of value even from companies that seem to operate counter to environmental goals. That is especially true in the example of the African mining company — the type of company many such funds would never touch, Mr. Galpin said.

“But actually, from our perspective, a lot of these sort of companies are based in poorly developed parts of the world, and a great big mine that employs people is good news for a local economy,” he said.

The fund brokered a partnership between the mining company and a U.S. pharmaceutical company that was able to improve health care in an HIV-ravaged region of the world.

“This fund takes the dialogue a step further,” he said. “Our ideal stock is a U.S. mid-cap company that has done nothing on sustainability.”

The initiative comes as Federated looks to grow after the $342 million purchase of Hermes. Federated has more than $389 billion in assets under management.

Since launching in November, the fund has surpassed $9 billion in assets, according to Federated’s data. The top industries in the portfolio are industrials at 31 percent, materials at 14 percent, and health care at 11 percent.

About 58 percent of the investments are in companies based in the U.S., while 11 percent are in Japan. Another 13 countries — on every continent — each represent a less than 5 percent share.

Federated is scheduled to report fourth-quarter and full-year 2018 earnings on Jan. 24.