Sustainable, Responsible &/or ESG Policy:
RLAM’s ethical framework combines the avoidance of companies involved in excluded activities with the identification of best of breed companies in permitted sectors. Companies that generate over 10% of their turnover from either one or a combination of the following categories are excluded:
- Armaments manufacturing armaments or nuclear weapons, or associated strategic products.
- Tobacco growing, processing or selling tobacco products.
If a company breaches this threshold, then it is likely that that company’s involvement in that excluded sector is a noteworthy part of their business and strategy.
Also, this threshold is deemed to be realistic and appropriate in terms of assessing a company, given that it may not be possible to always pinpoint the exact turnover derived from an excluded activity. This threshold ensures that a minimum of 90% of each holding meets the ethical criteria.
Sustainable, Responsible &/or ESG Process:
Investment team
RLAM’s investment team of fund managers and analysts work in a close and highly collegiate environment designed to encourage the free flow of thoughts and ideas across the team. The nature and size of the team enables new ideas and opportunities to be discussed freely. The close proximity of all members of the team allows agreed decisions to be implemented quickly, ensuring that all portfolios benefit from relevant new ideas with minimal delay. The individual fund managers consult with other team members and credit analysts in on-desk discussions. The Cash and Rates team and the rest of the Fixed Income team are central to the research process.
The decisions to trade individual securities are made by the lead fund managers. This process ensures quick implementation of all buy/sell decisions. In addition, individual stocks are reviewed during the weekly off-desk team meeting. All investment decisions must fit within the team’s overall views.
Portfolio construction
Cash
The portfolios only invest in straightforward, highly liquid instruments issued by a wide range of highly rated banks. This diversification spreads the credit risk and provides greater security for investors in the funds. All banks have the minimum of an A1, P1 or F1 rating from the major ratings agencies. We monitor the ratings of all of the institutions we lend to on a real-time basis by subscribing to Standard & Poor’s, Moody’s and Fitch’s online ratings services. Any credit changes are notified to us immediately, ensuring the funds maintain the highest credit quality.
Government Bonds
The portfolios may invest in UK government bonds (gilts and index linked gilts). Investment in short and medium-dated government bonds allows the managers to take advantage of opportunities to capture short-term movements in the government bond yield curve and bond prices, in order to achieve higher overall returns.
Management of gilts follows a top-down process, but we believe significant value can be added through stock selection. Our investment approach for UK government bonds encompasses two elements:
- An assessment of the market drivers and their behaviour in a way that allows us to define the sources of incremental return; and
- Ensuring that portfolio construction and risk allocation remain consistent with the portfolio objectives.
Covered Bonds
The funds may invest in covered bonds when thought appropriate by the managers. Issued by financial institutions, these bonds are asset backed, most often by a pool of mortgages. These highly liquid securities are regulated in the UK by the FCA and are exempt from being bailed-in.
Corporate Bonds, Sovereigns and Supranationals
The funds may also invest in Floating Rate Notes (FRNs) and short-dated bonds issued by banks and building societies with a minimum credit rating of AA- for the Cash Plus Fund and investment grade for Enhance Cash Plus. Sovereign and supranational bonds may be held and would be rated AA or above for the Cash Plus Fund.
Our credit analysis process is characterised by a focused team of experienced investors working together by utilising an efficient and disciplined approach to analysing the investment universe. We separate portfolios into four issuer categories, each requiring a different analytical approach depending on the degree of operational and financial volatility the issuer exhibits, and the extensiveness of external research coverage the issue receives. Our philosophy leads us to place a higher degree of emphasis (relative to our peers) on analysing the covenants and security that protect our investors in a default scenario. Only then can we be fully confident that we are being well compensated for taking credit risk. There is high degree of interaction and cohesiveness within the Credit team in analysing credit bonds. Our size allows decision making to be efficient, informal, and dynamic.
ABS and MBS
The Royal London Enhanced Cash Plus Fund may buy securitisations with a credit rating of AA- or better, which will typically be secured against prime residential mortgages or commercial property. This pool of high quality assets combined with strong covenants or rules help to protect bondholders in the event of default. We think this is a safer and more efficient way to increase yield whilst mitigating risk within the fund.
Asset allocation
Allocation across the permitted asset classes is largely driven by the risk/return profile of the funds in relation to their Fitch Rating. This rating reflects high quality debt in the underlying holdings, and a low volatility to market risk.
Recent process changes
Our overall investment process and philosophy has remained unchanged over time, and continues to deliver strong returns for our clients. We believe that volatility in government bond markets is likely to persist and that, as an active manager, RLAM can take advantage of pricing anomalies.
ESG Integration
Our team’s approach to ESG integration is a 4-step process which comprises ethical exclusion criteria, quantitative and qualitative analysis, and engagement.
- Ethical Exclusion: in addition to our RLAM firm-wide exclusion policy on controversial weapons, the Cash funds’ ethical policy excludes issuers that generate over 10% of their revenue from armaments, tobacco and fossil fuel extraction, or a combination of the three. A breach of the threshold would indicate that an issuer’s involvement in the excluded sector is a noteworthy part of their business and strategy.
- Armaments – manufacturing armaments or nuclear weapons or associated strategic products.
- Tobacco – growing, processing, or selling tobacco products.
- Fossil fuel – exploration, extraction and refining of oil, gas or coal
- Quantitative Analysis: the quantitative framework uses ESG risk scores as an input, through which scores assigned to issuers in our Cash range are adjusted with a specific instrument’s duration, under the premise that instruments with a shorter duration are less exposed to ESG risk. ESG scores are considered alongside credit ratings and the team model the impact of each proposed trade on the overall fund ESG risk score. Overall, this approach allows them to actively and dynamically monitor the fund’s exposure to ESG risk monitoring pre- and post- trading decisions. Individual ESG security risks are aggregated to allow managers to arrive at a portfolio-level score. The managers also carry out regular stress testing to evaluate an ESG rating downgrade effect of the top 3, top 5 and all rated positions within the fund, on the ESG risk profile of the fund as a whole.
- Qualitative Analysis: is based on research and insights produced by our team of RI specialists. To ensure key ESG themes impacting sectors or issuers within the fund are routinely assessed, the RI team conduct quarterly reviews with the Cash management team. These reviews adopt a more formal approach and supplement the regular/ad-hoc interaction between the teams and provide an opportunity to overlay bespoke insights into the strategy. Ongoing monitoring of ESG issues is aided by an AI-based tool that alerts RI analysts and cash specialists of ESG controversies as they arise.
- Engagement: RLAM’s robust engagement programme covers all the asset classes we manage. Ultimately, we use engagement as a tool to aid selection and monitoring of companies/issuers in our funds, and to improve their corporate behaviour and performance over time. Engagement in this case adopts two non-mutually exclusive forms: for information, where we seek to uncover additional evidence to supplement existing research or findings that feed into the investment process; or for change and influence, that seeks changed behaviour as a direct outcome of the engagement. Both forms are crucial to being a good steward of our clients’ assets.
Resources, Affiliations & Corporate Strategies
RLAM has an in-house team consisting of 11 Responsible Investment (RI) professionals that are a dedicated resource for implementing our stewardship and responsible investment activity by directly supporting front office teams to integrate material ESG research into investment processes.
The RI team is led by Head of Responsible Investment who reports to the Chief Investment Officer (CIO) and is a member of the Front Office leadership team. RLAM’s Investment Committee however has ultimate responsibility for setting RLAM’s risk appetite and reviewing our strategic risks. Our Chief Investment Officer is a regulated Senior Management Function (SMF) and is the Executive team member that is accountable for setting the investment strategy, and overseeing our Responsible Investment function, including our approach to stewardship and climate investment risk. The CIO, with support from the investment teams, updates the Investment Committee and monitors responsible investment in line with RLAM’s risk tolerance threshold. The CIO is also responsible for ensuring responsible investment, stewardship and climate change risk management is embedded across RLAM’s investment strategies. The CIO is a member of RLAM’s Executive Committee and chairs the Investment Committee.
UN PRI
RLAM has been a signatory to the United Nations Principles for Responsible Investment (UN PRI) since 2008.
As a result of our membership status, we commit to submitting and publishing our annual assessment response to demonstrate adherence to the principles. Our summary scorecard as at 2020 has been provided below. These scores are a testament to our continued efforts to become leading in responsible investment. We are engaging with the PRI to understand the current changes to its methodology and how we might need to adapt our practices to capture the required information according to these changes going forwards.
- Strategy & Governance - A+
- Listed Equity – Incorporation - A+
- Listed Equity - Active Ownership - A
- Fixed Income – SSA - A
- Fixed Income - Corporate Financial - A
- Fixed Income - Corporate Non-Financial - A+
- Fixed Income – Securitised – A
Stewardship Code
For a long time, we have been a tier one signatory of the 2016 UK Stewardship Code. That is why we wanted to be early adopters of the 2020 UK Stewardship Code, following its release in October 2019. After implementing the new reporting standards set by the FRC in our 2020 Stewardship report, a year earlier than required, we received highly positive feedback from the FRC and were featured as examples of best practice throughout the FRC’s Review of Early Reporting. We were recently recognised as official signatories to the Financial Reporting Council’s UK Stewardship Code 2020. This follows the submission of our Stewardship and Responsible investment 2021 report (covering our stewardship and responsible activities in 2020) earlier this year.
RLAM is also member of:
- Investment Association – Member of the IA Responsible Investment and Sustainability committee as well as the Climate Change and Stewardship working groups.
- UK Sustainable Investment and Finance Association (UKSIF), since 2016
- Climate Action 100+ – Co-leading engagement and dialogue with Glencore on climate risk. Member since 2019
- 30% Club Investor Group – We participate in regular investor meetings to discuss board and executive diversity and participate in collaborative engagement. Member since 2016
- Institutional Investor Group on Climate Change (IIGCC) – RLAM leads the sector-focused work on Utilities. We are also members of the Resolution and Paris Aligned Portfolios Advisory Groups. Member since 2019
- Workforce Disclosure Initiative (ShareAction) – We co-signed on the Workforce Disclosure Initiative, convened by ShareAction. Member since 2018
- Just transition – Joined in November 2020 and supported the launch of the Financing the Just Transition Alliance.
- Global Real Estate Sustainability Benchmark (GRESB) – We are a member of GRESB and our property team regularly engages with them on ESG performance in our property portfolio. We have been members since 2013.
- CFRF (FCA and PRA Climate Financial Risk Forum) – Disclosure working group member. Member since 2020
- TCFD – As part of our commitment with TCFD, which we formally became a signatory of in 2020, we are incorporating scenario analysis, for physical and transition risk into our analysis. We have several metrics and tools at our disposal to help us evaluate security and fund-level exposure to climate risks which we can use in quarterly ESG reviews, in-depth security analysis, or company engagement
RLAM signed the “Net Zero Asset Management initiative” in March 2021. This follows the Royal London Group commitment to the net zero investment framework earlier in the year. The Net Zero Asset Managers initiative launched in December 2020 and aims to galvanise the asset management industry to commit to a goal of net zero emissions.
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