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Schroders

PRI reporting framework 2019

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ESG incorporation in actively managed listed equities

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate (1) which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities and (2) the breakdown of your actively managed listed equities by strategy or combination of strategies (+/- 5%)

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied
11.2 %
Percentage of active listed equity to which the strategy is applied
88.7 %
Percentage of active listed equity to which the strategy is applied
0.05 %
Percentage of active listed equity to which the strategy is applied
0.07 %
Total actively managed listed equities 100.02%

01.2. Describe your organisation’s approach to incorporation and the reasons for choosing the particular ESG incorporation strategy/strategies.

At Schroders, we see ourselves as stewards of our clients' capital and this philosophy naturally leads us to focus on the long term prospects for companies in which we invest.   We also observe that environmental and social change is accelerating and creating an increasingly challenging backdrop for companies to navigate.  The result is that understanding the likely impact of a huge range for issues, from climate change, to inequality, resource scarcity, diversity, health and safety is becoming increasingly important for active fund managers.  We have an overarching commitment to ESG integration across all of our fundamental investment processes. 

While ESG issues are sometimes difficult to value, we recognise these factors can have a material impact on a company's performance both in the short and long term, as well as the inherent risk of investing in a company. Therefore we firmly believe analysing a company's exposure to, and management of, ESG factors, in addition to traditional financial analysis, will enhance our understanding of a company's fair value and ability to deliver sustainable returns.

Our integration approach spans the breadth of the ownership lifecycle, from identifying trends and analysing companies through ownership, engagement, voting and reporting.

Schroders has been incorporating ESG considerations into our equity fundamental research and stock selection process for more than twenty years. We published our first corporate governance policy in 1998, followed by our responsible investment policy in 2001. Since then, the information and tools available to us, our resources, the depth of our expertise and our approach to integrating responsible investment principles have evolved, but our commitment has remained the same: to be active owners of the companies in which we invest and to reflect environmental, social and governance (ESG) factors within our investment process, with a particular focus on security selection.

We believe there are four principal dimensions to ESG investing:

1) as responsible owners seeking to manage, protect and enhance the value of investments on behalf of our clients through active engagement and voting

2) as an integral element of understanding companies' long term competitive strengths and the risks that they face

3) to help identify structural shifts that will drive growth in new markets, technologies and assets; and

4) to provide investment solutions aligned with our clients' core values and beliefs.

Schroders fully supports the international conventions on cluster munitions and anti-personnel mines (APM). Consistent with this support, and in line with our commitment to responsible investment, we will not knowingly hold any security that derives revenue from or provides funding for cluster munitions or anti-personnel mines. Schroders will apply this policy to all Schroders funds that we directly manage.

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

​We’re committed to ESG integration across all our investment processes and see ESG as an alpha source. We’re also committed to active engagement and encourage our holdings to improve their management of material ESG processes and performance.

We offer a number of sustainable products. As well as the systematic integration of ESG in investment processes, they also incorporate one or more of the following:

Negative screening: Many investors hold firm views that their investments should not be associated with companies engaging in specific activities. Around 11% of our total Group assets have ethical exclusions applied. We have built tools to ensure ur clients' ethical views are effectively translated into the exclusions of specific securities. 

Thematic focus: We manage funds seeking to benefit from specific themes such as the opportunities that will be created from climate change and transitioning to a low carbon economy and broader sustainability themes. We have established processes that screen sectors and identify securities for exposure to these themes.

Sustainability focus: We manage funds with a specific sustainability focus that actively seek to invest in companies that are best-in-class or demonstrating an improving sustainability profile.  The overall sustainability profile of these portfolios is superior to their benchmarks.


LEI 02. Type of ESG information used in investment decision (Private)


LEI 03. Information from engagement and/or voting used in investment decision-making (Private)


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

As at 31 December 2018, 11.2% of Schroders assets under management had ethical screening criteria. We apply a range of different negative or exclusionary screens across a number of segregated funds for institutional clients at Schroders Investment Management, as well as a number of private wealth clients and charity funds managed by our subsidiary, Cazenove Capital. Whether this is in the form of ethical screens based on a client-specific moral investment objectives (for example, the exclusion of tobacco or alcohol producers), or in response to national or regional legislation (such as the state responses to the US government's State Sponsors of Terrorism list).

We annually update our firm-wide Cluster Munitions exclusion list and statement to incorporate anti-personnel landmine manufacturers. This is publically available on our website http://www.schroders.com/en/about-us/corporate-responsibility/sustainability/integrity/.

Screened by

Description

Increasingly we have funds that are systematically identifying positive / best-in-class approach when looking at different ESG pillars and relative ESG performance. Their objective is to deliver funds with a strong sustainability profile as well as capable of generating investment returns.  The majority of screens are proprietorial, in particular those that look at ESG performance and countries.

This approach is applied across some segregated mandates as well as specific Schroder funds, including Global Climate Change Equity, Global Sustainable Growth, Sustainable Multi Factor Equity, QEP ESG, QEP ESG Fossil Fuel Free and Sustainable Convertible Bonds.  However all of the tools that are used are accessible to other investors across the equity team to enhance their own processes. 

Screened by

          US Global Sanctions List
        

Description

We screen some client portfolios for exposure to historical controversies. We assess the company's response to date to ensure that it is adequate, and set clear objectives and future milestones to track progress. Those companies who have not addressed the underlying issues are excluded. We use a variety of data sources, including MSCI, Bloomberg and ERIS.

Some segregated funds exclude companies that have breached international norms such as the International Labour Organisation (ILO) conventions.

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

For a segregated mandate, we first speak to the client to understand their views and what they are trying to achieve. While negative screening is superficially simple, there are many ways to translate exclusion principles into the objective rules required for rigorous implementation. Differences in the specific exclusion criteria used for apparently similar exclusion policies can result in very different exclusion lists. We have written thought leadership on this topic (see https://www.schroders.com/en/uk/pensions/insights/thought-leadership/demystifying-negative-screening/), to ensure that all the impacts are well understood. 

Following our discussion with the client, our Sustainable Investment team will create the required screen using the input of various research providers. These exclusions are managed through Aladdin, our trading system, which codes and implements all exclusions across different client portfolios. These will be reviewed, on average, twice a year or in line with client agreements.  We have been consistent with the data sources used over time, which has led to relative stability of the lists.  Any breaches or errors and omissions are handled in line with our usual procedures and all of our processes are subject to periodic review by internal audit. 

In our experience, clients typically ask for the number of sectors to be excluded to increase.  As a result we may have an ongoing dialogue with them as their requirements change over time to help them implement these.  With regards to our cluster munitions and anti-personnel landmines exclusion list, the Sustainable Investment team undertakes an annual review, sourcing input from published lists, specialist research providers as well as our own internal research and feedback from engagement with companies. This list is reviewed and approved by asset class heads and published in our Annual Sustainable Investment report and on our website (see http://www.schroders.com/en/about-us/corporate-responsibility/sustainability/integrity/)

Where our approach to implementing screens changes – for example because existing data sources become unavailable or new, better sources become available – we will engage the client (via the Client Directors responsible for that relationship) to ensures any changes are discussed and agreed, where appropriate.


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure screening is based on robust analysis.

          Multiple data sources are used and compared
        

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]

Schroders primarily uses MSCI ESG Research, Eiris and Bloomberg for screening purposes. Schroders regularly reviews its research providers with the help of our quantitative equity team who have deep experience in such matters.


LEI 06. Processes to ensure fund criteria are not breached (Private)


(B) Implementation: Thematic

LEI 07. Types of sustainability thematic funds/mandates

07.1. Indicate the type of sustainability thematic funds or mandates your organisation manages.

07.2. Describe your organisation’s processes relating to sustainability themed funds. [Optional]

We manage the following sustainability themed strategies: Global Climate Change, Global Sustainable Growth, Global Healthcare, QEP Global ESG, QEP Global ESG ex Fossil Fuels, European Sustainable Equity and Sustainable Multi Factor Equity.

Schroders' Global Climate Change strategy is an actively managed, thematic global equity strategy that seeks to invest in companies that are positively impacted, or likely to benefit, from efforts to mitigate or adapt to the impact of climate change. Stocks are researched and reviewed by the portfolio managers and two members of the Sustainable Investment team who are climate change specialists. The overarching principle is that climate change must have a significant positive impact on the long-term business outlook for a stock to be included. Importantly, the ESG specialists have a veto on whether the stock should be included in the universe. The strategy does not invest in companies which own fossil fuel reserves (e.g. oil, coal, gas, tar-sand, shale gas).

Schroders' Global Sustainable Growth strategy is an actively managed, global equity strategy investing in companies demonstrating positive sustainability characteristics, defined as those companies managing the business for the long-term, and recognising their responsibilities to a broad group of stakeholders. We believe that when aligned with strong underlying fundamentals, this can result in consistently stronger earnings growth which is often under appreciated by the market.

Schroders' Global Health Care strategy invests in healthcare, medical services and related products and companies on a worldwide basis. The investment approach is built on the insights gained from proprietary local research, combining top-down analysis of the four healthcare sub-sectors: pharmaceuticals, medical services, medical supplies/devices and biotechnology, with bottom-up stock research of companies within these sub-sectors. Four locally-based healthcare analysts examine companies on a stock-by-stock basis, and our capabilities mean that we are able to pick up on stocks which are off the radar screens of many other investors. These include medium size and smaller companies that have strong growth potential.

Schroders' QEP Global ESG invests in stocks on the basis of valuation and business quality to deliver higher returns across the market cycle. The fund has a number of social and environmental exclusions and also seeks to overweight companies that have a higher sustainability score. The QEP Investment team analyses a broad, global universe of over 5,500 ESG-rated stocks to build a highly diversified portfolio. The team currently has access to over 400 different data items which provide varied insights into ESG issues for companies globally.

Schroders’ QEP Global ESG ex Fossil Fuels leverages the same investment process as Schroders' QEP Global ESG, with additional, more stringent exclusions for fossil fuels.

Schroders’ European Sustainable Equity focuses on companies demonstrating positive sustainability characteristics, as measured by Schroders’ proprietary ESG analysis tool, CONTEXT.   The fund managers believe that companies demonstrating positive sustainability characteristics, such as managing the business for the long term, recognising its responsibilities  to its customers, employees, and suppliers, and respecting the environment, are better-placed to maintain their growth and returns over the long term.

Schroders’ Sustainable Multi Factor Equity is a systematic, benchmark-relative global equity strategy with a fully integrated approach to sustainable investing.  Sustainability is treated as a risk factor, using an innovative proprietary framework (SustainEx) to measure the environmental and social impact of companies, and is integrated into the multi-factor strategy alongside value, quality, momentum and low volatility. The strategy constrains carbon intensity to 50% of the benchmark (MSCI ACWI).


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the ESG factors you systematically research as part of your investment analysis and the proportion of actively managed listed equity portfolios that is impacted by this analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

We continue to evolve our ESG integration process. During 2018 we continued to roll-out proprietary ESG analysis tools to our investors and increased collaboration across asset classes.  We hired a dedicated ESG integration manager to strengthen ESG integration across investment desks.

Responsibility for ESG analysis primarily lies with our investment analysts as part of their company research. They are trained on ESG issues and evaluated on their analysis. Portfolio holdings are screened against 3P ESG ratings as a sense check. Some teams do additional work on ESG issues independently.

Our voting decisions are made in line with our ESG policy which was drafted following investor consultation. Fund managers are consulted on controversial decisions, those against the recommendation of our proxy research provider and against company management recommendations. Investors meet with governance specialists to discuss market-wide and company-specific issues. At this time voting decisions and reports are circulated to investors for a final review.

On a regional basis investors have regular meetings with corporate governance specialists to review voting decisions, discuss regional issues and best practice, identify companies at risk and set engagement priorities. Information from these meetings is circulated widely. Around the AGM season there is additional engagement on voting.


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on a robust analysis.

          Holdings of companies with poor or declining ESG ratings are flagged to investment teams each quarter.
        

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

          Case studies on how ESG analysis has influenced decisions are recorded for investment processes.
        

09.6. Additional information.[Optional]

An analysis of relevant and material ESG factors is incorporated within company research notes by financial analysts, whether embedded within the main text, as part of the assessment of quality and risks or more specifically in an ESG section. These research notes are uploaded onto our global research platform and are easily accessible to all analysts and investors.

In addition the Sustainable Investment team periodically reviews a sample of research notes from the investment desks to assess the quality of ESG analysis, highlight best practice and provide feedback on how to enhance analysis. This is an important part of our process to continuously enhance the level of ESG integration within investment processes.

There are regular meetings for senior investors in which our sustainability and ESG research is discussed in more depth. This also enables investors to shape the research pipeline for their needs. Sector emails of relevant ESG research are regularly circulated to both analysts and fund managers.

Finally, desk holdings are reviewed on a quarterly basis and those companies with poor or declining ESG ratings are flagged to investment teams.


LEI 10. Aspects of analysis ESG information is integrated into

New selection options have been added to this indicator. Please review your prefilled responses carefully.

10.1. Indicate which aspects of investment analysis you integrate material ESG information into.

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

          A specific issue, for example litigation or possible future fines provision, would be capitalised in the valuation.
        

Proportion of actively managed listed equity exposed to investment analysis

10.2. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis and/or portfolio construction.

          Value at Risk analysis for carbon risk
        

10.3. Describe how you integrate ESG information into portfolio weighting.

Securities are rated 1 to 4 by financial analysts responsible for covering each company. ESG analysis is incorporated into analysts' valuation models and grading, these in turn influence the portfolio construction process. Where ESG risks are material, position sizing may be adjusted to reflect these risks according to upside to fair market value, level of conviction and portfolio risk. Where ESG risks are more manageable a program of engagement on the relevant issue will take place.

10.4. Describe the methods you have used to adjust the income forecast / valuation tool

The adjustments to income, forecasts and valuation tools will differ according to the company and sector. When we feel that the company is of a high quality and managing ESG risks well we may assign a higher target multiple to earnings or EV/EBITDA. If using a Sum of the Parts method, a discount or premium may be applied given the quality of governance. We may impair assets on the balance sheet if we feel that their useful life is impacted. With a DCF we may adjust the terminal growth figure, the company maturity year or WACC. In other instances ESG considerations may directly impact the cost or revenue lines e.g. carbon price in operating costs.

Our Carbon Value at Risk model highlights EBITDA at risk from rising carbon prices while our physical risk model shows the potential impact to EV based on companies’ asset exposure to the physical risks of climate change. For information, please see http://www.schroders.com/climatechange/.

For our systematic equities, we developed a model which looks at the net impact companies have on the environment and society and capitalises externalities.

10.5. Describe how you apply sensitivity and/or scenario analysis to security valuations.

We believe climate change will be a defining driver of the global economy, society and financial markets over coming years, decades and beyond. Therefore much of our scenario work has centred around this risk.   

Our Climate Progress Dashboard monitors 12 indicators to show the progress governments and industries around the world are making towards decarbonising the global economy. It compares projections made by international organisations to estimate the temperature change implied by the progress in each area. Together, they suggest we are heading for a rise closer to 4° than the 2° commitment global leaders made in 2015. For more information see: http://www.schroders.com/en/lu/professional-investor/featured/climate-change-dashboard/.

We have examined the extent to which company profits and investor returns could be at risk from tougher climate policies and higher carbon prices. Our Carbon Value at Risk model shows almost half of listed global companies would face a rise or fall of more than 20% in earnings if carbon prices rose to $100 a tonne (see: http://www.schroders.com/en/about-us/corporate-responsibility/sustainability/climate-progress-dashboard/carbon-var/). Our forecast of $100 a tonne is in line with where carbon prices have to rise over the medium term to limit global warming to 2° according to our dashboard, but this can be flexed for different scenarios.   

10.6. Additional information. [OPTIONAL]

There is no set tool for integrating ESG considerations into valuations, just as there are various methods of applying a valuation to a company. Analysts are free to explore whichever tool works best for the type of analysis they are undertaking. For example, it maybe that a cost of carbon will affect earnings and so is reflected in investment forecasts or we may adjust our future margin assumptions to reflect living wages.  However, for some ESG factors that are difficult to put a number on, such as board diversity relevant issues may be reflected in valuation tools such as discount rates.


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