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Schroders

PRI reporting framework 2019

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ESG issues in asset allocation

SG 13. ESG issues in strategic asset allocation

13.1. Indicate whether the organisation undertakes scenario analysis and/or modelling and provide a description of the scenario analysis (by asset class, sector, strategic asset allocation, etc.).

Describe SustainEx is a proprietary model which measures the net positive or negative impact companies have on the environment and society. It quantifies the extent to which companies are in credit or deficit with the societies to which they belong, and the risks they face if costs are crystallised.
Describe Climate Progress Dashboard Carbon Value at Risk Physical climate risk model Climate Change Growth model Fossil Fuel risk model

13.2. Indicate if your organisation considers ESG issues in strategic asset allocation and/or allocation of assets between sectors or geographic markets.

We do the following

13.3. Additional information. [OPTIONAL]

The majority of our assets are single asset class. So the most effective way on ensuring ESG is integrated is through stock, regional and sector selection. 

Investment desks incorporate ESG considerations when determining allocations amongst different geographies and sectors. For example our Asian team has historically been underweight Korea due to governance concerns.

Financial analysts across asset classes operate on sector lines. They have to build up a picture of the long term outlook for their sectors which is based on how environmental and social change will impact the operating backdrop. Such factors feed into their regular sector reviews and recommendations which influence allocations at a portfolio level.

The fixed income team will adjust portfolio duration according to their view of ESG risks and when they might impact specific credit investments. They have also brought credit protection against certain names where they think there is a long term risk that is not priced in.


SG 13 CC.

13.4 CC. Describe how the organisation is using scenario analysis to manage climate-related risks and opportunities, including how the analysis has been interpreted, the results and any future plans.

Describe

We look at 2°C, 4°C and 6°C temperature rise scenarios, relying on the analysis of the International Energy Agency as far as possible. In practice, those scenario analyses describe emissions reductions needed to meet long run temperature rises consistent with each outturn, as well as fossil fuel consumption, clean energy production and a few other key measures that are consistent with each scenario.  However, the IEA (nor other similar organisations) does not project all of the measures on which are our analysis relies, such as carbon prices, investment requirements or hydrocarbon prices.  As a result, a large part of our analysis relies on translating those standard scenarios to projections of value drivers we can use in risk measurement and management. 

We have primarily focused on 2 degrees to “stress test” investment risk.  Our analysis indicates that current climate action is likely to lead to a long run temperature rise around four degrees, making the six degree outcome unlikely in our view. On the other hand, the huge practical challenges of decarbonising the global economy within the next 10-15 years makes a rise below 2 degrees unlikely, in our view. 

The models we have developed and provide to investors across Schroders focus on the impact to valuations of transitioning to a two degree climate pathway, from current levels.  That 2-degree assumption underpins all of our models and provides a consistent basis to compare relative risks across companies and assets. 

Describe

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 (for further details see: http://www.schroders.com/en/about-us/corporate-responsibility/sustainability/climate-progress-dashboard/carbon-var/). We have also looked at how falling demand will impact the profitability and the fate of fossil fuel producers. Our analysis shows that up to 20% of listed companies' cashflows are at risk if policies strengthen in line with political commitments (for further details see: http://www.schroders.com/en/about-us/corporate-responsibility/sustainability/climate-progress-dashboard/fossil-fuel-producers/).

We have developed a proprietary model to help our analysts, fund managers and clients measure and manage the physical risks climate change poses. Effectively, we ask “what would it cost a company to insure against physical risks caused by climate change for the remaining life of their assets?”. The costs to most global companies are under 5% of their current market value, but are higher for the most exposed companies. While smaller than the risks posed by carbon pricing or changes in demand growth, the impact is clearly significant and more certain. For further information, please see: https://www.schroders.com/en/sysglobalassets/digital/insights/2018/thought-leadership/climate-change---the-forgotten-physical-risks_final.pdf/.

We have examined the impact on companies’ valuations from increases or decreases in growth stemming from a transition to a two degree pathway. That transition would require faster growth in low carbon industries (such as clean energy technologies) and lower investment in emissions intensive sectors (eg coal power generation). By combining the required change in growth from current levels to those needed to meet two degree targets, and combining that growth impact with profitability measures, we gauge the value impacts – positive or negative – for individual industries and companies.  For information please see: https://www.schroders.com/en/us/institutional/insights/climate-progress-dashboard/fossil-fuel-producers/.

We have looked at the impacts on fossil fuel companies of sharp declines in demand for hydrocarbons, required to contain long run temperature rises to two degrees. By combining analysis of producers’ cost positions, reserves and fossil fuel mixes, we gauge the risks posed by those assets becoming “stranded”.  For information please see: https://www.schroders.com/en/us/institutional/insights/climate-progress-dashboard/fossil-fuel-producers/.

We make all of those tools available to our analysts and fund managers and our sustainability team works with them to understand their application and implications.  We focus on ensuring the risks climate change poses – positive or negative – are measured and considered in their investment decisions (and have focused on measures which quantify climate risk in dollars of value rather than tonnes of carbon as a result).  That work has informed different teams’ investment decisions, typically by identifying potential beneficiaries or losers, which are then examined more detail by our sector and sustainability analysts, including for instance investments in a low carbon aluminium producer and nuclear utility.

Furthermore, in several funds we explicitly avoid fossil fuel producers or limit carbon intensity of portfolios.

Describe

Schroders has been actively involved in assessing the risks and opportunities that climate change presents to the financial services industry for a long time. We have been voting on climate change resolutions since 2000 and have recorded engagements on the topic since 2002.

We have joined a number of investor initiatives to push for greater transparency and disclosure on climate risks and opportunities, including:

  • CDP: we recognise that one of the key tools needed to integrate a consideration of climate change into the investment process is to be able to analyse companies on their greenhouse gas performance and the targets that they have set. This is why we were an early signatory to the Carbon Disclosure Project in 2006. In 2017, we engaged with 125 companies which had not responded to the CDP survey. We outlined the importance of transparency and the value of disclosures addressing their exposures to climate risks and opportunities.
  • Carbon Action Initiative: we were a founding signatory of this initiative which aims to accelerate company action on carbon reduction and energy efficiency activities. Our involvement has been to engage with selected emissions-intensive companies that have yet to establish an emissions reduction target.
  • 'Aiming for A' investor coalition: we have co-filed a climate change resolutions at Anglo American, Glencore and Exxon. We have supported the climate change resolutions filed at Shell and Rio Tinto.
  • Climate Action 100+: we were a founding signatory to this initiative, a five-year collaborative engagement project to engage over 100 of the world's largest corporate greenhouse gas emitters to improve governance on climate change, curb emissions consistent with a 2 degree scenario and strengthen climate-related financial disclosures in line with TCFD recommendations.

In 2018, we had more than 100 individual climate change-related engagements with companies identified in our research as being materially exposed to climate risk. We were involved in collaborative engagements, such as the Climate Action 100+ initiative, and signed a joint letter to oil and gas companies strongly encouraging them to clarify how they see their future in a low-carbon world. This should involve making concrete commitments to substantially reduce carbon emissions, assessing the impact of emissions from the use of their products and explaining how the investments they make are compatible with a pathway towards the Paris goal. We also voted on 28 climate-related shareholder resolutions.

specify

          To engage with policy makers
        

Describe

Schroders regularly support requests to policy makers to establish binding global targets for GHG emissions reduction as well as the establishment and support for carbon markets and emission reduction technologies in order to create the soft infrastructure that will support the market in a transition to a low carbon economy.

G7 and G20 leaders: In May 2015, ahead of the Paris climate change negotiations (COP 21) we co-signed a letter to finance minsters expressing our views on the systematic risk that climate change poses. Our letter called for an ambitious long-term goal to be adopted by the G7 to limit global warming to 2 degrees Celsius above pre-industrial levels. We followed this up in 2017 with a letter to G20 leaders encouraging them to continue with progress in this area. 

We have also responded to a number of consultations related to climate change and green finance.

TCFD: Following our submission in May 2016, we responded to this public consultation in February 2017. We argued that given the systematic risks climate change poses and the scale of the challenge to mitigate its effects, every sector will be impacted. We agree with the call for more standardised data in an audited setting, but feel that the report could have gone further than endorsing many of the disclosure projects currently underway. We also advocated and encouraged the development of stronger models and analytical tools to be developed in tandem with increased reporting.

Financial Conduct Authority (FCA) consultation on climate change and green finance: Schroders provided input to IA and EFAMA and an individual response to the discussion paper on climate change and green finance (view here). We summarise the idea that climate change has no precedent, so it is very difficult to assess what the future impacts to asset valuations will be. As a result, we find that many investors respond with broad “rules of thumb” to investment strategies, which do not reflect a considered understanding of the risks posed by climate change.

13.5 CC. Indicate who uses this analysis.

13.6 CC. Indicate whether the organisation has evaluated the impacts of climate-related risk, beyond the investment time-horizon, on the organisations investment strategy.

Describe

Our approach to climate risk analysis focuses on the long-term impacts of a climate transition, rather than emphasising changes likely to occur within a specific timeframe, which we consider a secondary question.  As a result, our analysis is explicitly longterm rather than time-bound.  We recognise that the timing and pace of the climate transition remains uncertain and attempting to forecast the policy, behavioural or technology changes likely to occur within a specific timeframe is fraught. 

We translate those long-term climate trends to investment implications in specific investment horizons by monitoring the speed and scale of changes in climate policy and other drivers, for instance using the Climate Progress Dashboard. 

Our economists have similarly assessed the long-term impacts of climate change on the global economy, under different scenarios, gauging the impacts on world GDP through 2100.  For more information please see: https://www.schroders.com/en/sysglobalassets/staticfiles/schroders/sites/americas/canada/documents/wade-climate-change-global-economy.pdf.

13.7 CC. Indicate whether a range of climate scenarios is used.

Indicate the climate scenarios the organisation uses.
Provider
Scenario used
IEA
IEA
IEA
IEA
IEA
IRENA
Greenpeace
Institute for Sustainable Development
Bloomberg
IPCC
IPCC
IPCC
IPCC
Other
Other
Other

SG 14. Long term investment risks and opportunity

14.1. Some investment risks and opportunities arise as a result of long term trends. Indicate which of the following are considered.

other description (1)

          Geopolitical risk: risks of increasing barriers to global trade, capital flows and migration
        

other description (2)

          Social unrest: resulting from within country disparities in income and opportunity
        

14.2. Indicate which of the following activities you have undertaken to respond to climate change risk and opportunity

Specify the AUM invested in low carbon and climate resilient portfolios, funds, strategies or asset classes.

Total AUM
trillions billions millions thousands hundreds
Currency
Assets in USD
trillions billions millions thousands hundreds

Specify the framework or taxonomy used.

We have developed a number of proprietary tools to help us understand how climate change will impact industries and companies:

  • Climate Progress Dashboard: Tracks the pace of change across a range of measures that will be required to meet long term emissions reduction targets. It provides us and our clients with an objective, transparent and comprehensive view of the pace and scale of global climate action
  • Carbon Value at Risk: Measures risks to companies’ earnings should carbon prices rise to $100/t, modelling direct and indirect cost increases as well as price and volume implications
  • Physical Risk model: Measures the risks to the value of companies’ assets from rising physical damage caused by climate change
  • Climate Change growth model: Measures the positive or negative impacts on companies’ value from the faster or slower growth in demand for different products and services resulting from a low carbon transition
  • Fossil fuel risk model: Measures the risk to hydrocarbon valuations from phasing out fossil fuel use

other description

          Assessment of the impact of company profitability if carbon prices price to $100/tonne. Physical Risk exposure assessment
        

14.3. Indicate which of the following tools the organisation uses to manage climate-related risks and opportunities.

other description

          Please refer to Schroders’ proprietary tools mentioned above.
        

14.4. If you selected disclosure on emissions risks, list any specific climate related disclosure tools or frameworks that you used.

We have tools to provide clients with reports showing how the funds they are invested in compare to the benchmark across a range of climate measures. We are also able to show fund exposures using our proprietary climate models.

14.5. Additional information [Optional]

We continue to develop climate change models and provide our investors with data on climate risk.

In 2017 we launched our Climate Progress Dashboard. The 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 Paris in 2015. More information can be found at: http://www.schroders.com/en/lu/professional-investor/featured/climate-change-dashboard/.

We then developed a proprietary carbon Value at Risk model which provides a systematic and objective guide on the effect of higher carbon prices on companies' earnings and value. It takes into account a number of factors neglected by standard methods of analysis such as carbon footprints. More information can be found at: http://www.schroders.com/globalassets/global-assets/english/pdf/climate-change---redefining-the-risks.pdf.

In 2018 we built on our previous climate change research and developed a proprietary model to help our analysts, fund managers and clients measure and manage the physical risks climate change poses. Effectively, we ask “what would it cost a company to insure against physical risks caused by climate change for the remaining life of their assets?”. The costs to most global companies are under 5% of their current market value, but are higher for the most exposed companies. While smaller than the risks posed by carbon pricing or changes in demand growth, the impact is clearly significant and more certain. For further information, please see: https://www.schroders.com/en/sysglobalassets/digital/insights/2018/thought-leadership/climate-change---the-forgotten-physical-risks_final.pdf/.


SG 14 CC.

14.6 CC. Please provide further details on these key metric(s) used to assess climate related risks and opportunities.

Metric Type
Coverage
Purpose
Metric Unit
Metric Methodology
Weighted average carbon intensity
          Provided to interested clients on request
        
          Tonnes CO2e/ $mn sales invested
        
          Scope 1 and 2 greenhouse gas emissions relative to market cap. for each company, weighted according to the company’s weight in each portfolio
        
Carbon footprint (scope 1 and 2)
          Provided to interested clients on request
        
          Tonnes CO2e/ $mn sales
        
          Scope 1 and 2 greenhouse gas emissions relative to market cap. for each company, weighted according to the company’s weight in each portfolio
        
Portfolio carbon footprint
          Provided to interested clients on request
        
          Tonnes CO2e/ $mn sales
        
          Scope 1 and 2 greenhouse gas emissions relative to sales for each company, weighted according to the company’s weight in each portfolio
        
Carbon intensity
          Provided to interested clients on request
        
          Tonnes CO2e/ $mn market cap
        
          Scope 1 and 2 relative to sales
        
Exposure to carbon-related assets
          Provided to interested clients on request
        
          % current portfolio value
        
          Percentage of portfolio’s assets invested in companies which generate more than a specific share of revenues from fossil fuel assets (either production or power generation)
        

14.8 CC. Indicate whether climate-related risks are integrated into overall risk management and explain the risks management processes for identifying, assessing, and managing climate-related risks.

Please describe

We consider it important to quantify the financial exposures companies or sectors face, in order to compare those risks to others facing companies.  We have developed proprietary tools such as the Carbon VAR model described above to provide an objective measure of the risk exposure companies face.  The likelihood that risks translate into tangible investment impacts is also important in their prioritisation.  Our Climate Progress Dashboard provides an objective way to gauge changes in the key elements of climate action.

 

14.9 CC. Indicate whether the organisation undertakes active ownership activities to encourage TCFD adoption.

Please describe

Schroders has publicly supported the TCFD recommendations: https://www.fsb-tcfd.org/wp-content/uploads/2017/06/TCFD-Supporting-Companies-28-June-2017-FINAL.pdf.

We have also signed up to a Global Investor Statement on Climate Change (post-Paris climate agreement) along with around 400 global investors, committing to take a series of steps to contribute to a low carbon and climate resilient investments (see here: http://globalinvestorcoalition.org/wp-content/uploads/2016/09/2014_GlobalInvestState_ClimChange_092316.pdf).

One of these steps is to work with the companies in which we invest to ensure they are minimising and disclosing climate risks and opportunities. While our engagement records demonstrate that this commitment is not new to us, our expectations of investee companies and the relevance of material climate-related disclosure are both rising rapidly.

In 2018, we had more than 100 individual climate change-related engagements with companies identified in our research as being materially exposed to climate risk.  We have specifically asked companies to report in line with TCFD recommendations.

We have also exerted our influence through voting in support of resolutions asking for greater transparency around companies’ scenario planning. We typically support resolutions asking companies to disclose the impacts of a climate transition on their business and their planning for that transition.  Scenario analysis and transparency are key elements of the TCFD recommendations.


SG 15. Allocation of assets to environmental and social themed areas

15.1. Indicate if your organisation allocates assets to, or manages, funds based on specific environmental and social themed areas.

15.2. Indicate the percentage of your total AUM invested in environmental and social themed areas.

0.2 %

15.3. Specify which thematic area(s) you invest in, indicate the percentage of your AUM in the particular asset class and provide a brief description.

Area

Asset class invested

0.1 % of AUM

Brief description and measures of investment

Schroder ISF Global Climate Change Equity is an actively managed, thematic global equity strategy that seeks to maximise excess returns by investing in companies that are positively impacted, or likely to benefit, from efforts to mitigate or adapt to the impact of climate change. The strategy does not invest in companies that own fossil fuel reserves (e.g. oil, coal, gas, tar-sands, shale-gas).

Asset class invested

0.1 % of AUM

Brief description and measures of investment

See above response for our Global Climate Change strategy.

Asset class invested

0.1 % of AUM

Brief description and measures of investment

Schroders' Global Healthcare Fund invests in healthcare, medical services and related products and companies on a worldwide basis.

          Schroder ISF: Global Sustainable Growth, QEP Global ESG, QEP Global ESG ex Fossil Fuels, Sustainable Multi Factor Equity, European Sustainable Equity
        

Asset class invested

0.2 % of AUM

Brief description and measures of investment

Schroder ISF Global Sustainable Growth: an actively managed, global equity strategy investing in companies demonstrating positive sustainability characteristics, defined as managing the business for the long-term, and recognising their responsibilities to a broad group of stakeholders.

Schroder ISF QEP Global ESG: ESG considerations are incorporated into our fundamental analysis of companies. Companies with strong ESG credentials receive higher allocations. We also conduct a programme of engagement on the fund's holdings.

Schroder ISF Sustainable Multi Factor Equity: 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), and is integrated into the multi-factor strategy alongside value, quality, momentum and low volatility. The fund is constrained to half the carbon intensity of the index.

Schroder ISF European Sustainable Equity: focuses on companies demonstrating positive sustainability characteristics, measured by Schroders’ proprietary ESG analysis tool, CONTEXT.  The fund managers believe companies demonstrating positive sustainability characteristics e.g. 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. 

15.4. Please attach any supporting information you wish to include. [OPTIONAL]



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