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:
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.
The Cash funds conducts quarterly ESG reviews with the RI team, which have focused on a number of key ESG areas, including reviewing the worst performing stocks in the funds.
Additionally, Fund Managers also monitor credit rating provider reviews and scores on companies' ESG performance and integrate this into their ongoing investment decision making practices. This process was reviewed at most recent quarterly ESG reviews. Given the more short-term nature of the cash funds, material ESG factors that tend to be governance and social factors (e.g. business ethics).
Ethical overlay
Our ethical investment process begins with screening for eligible investments, which is conducted by specialist independent consultancy MSCI, a leading provider of research into the environmental, social and governance (ESG) and ethical performance of companies.
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.
Resources, Affiliations & Corporate Strategies
For some time, RLAM has been a vocal critic of poor corporate governance. However, the acquisition in 2013 of The Co-operative Asset Management’s leading sustainable and Responsible Investment (RI) team was the surest statement of intent, and instantly made RLAM a major player in this market. RLAM has developed from having been simply a good steward of assets to choosing to make RI and sustainability one of its specialisms.
The team we acquired from The Co-operative Asset Management has significant experience of running Socially Responsible Investing (SRI) funds and RI, including non-screened funds. Adding this to RLAM’s track record on longevity, reputation and prudent management of risk, makes us well placed to become the trusted partner of charities, institutional investors and intermediaries seeking strong superior and sustained returns over the long term, and which reflect their goals.
RLAM has an in-house RI team of professionals that are dedicated to sustainable investing and ESG analysis for the business as a whole. This team has demonstrated its knowledge and expertise in the ESG space over the past 16 years, and are experts at integrating ESG across both equity and fixed income investment processes. As the demand for responsible investment grows, we can expect to expand our internal capability. Currently, we have a team of ten responsible investment specialists. In support of the responsible investment strategy, we hired seven additional people in 2019 with expertise in governance, climate risk, corporate sustainability consulting, responsible property investing, quantitative modelling, and marketing. The new roles were allocated to the Responsible Investment, Passive Equities, and Property teams.
The integration of ESG factors into investment decisions requires significant expertise and resource. While we do purchase research from third party providers, we believe ESG analysis is often best done internally as this allows the best decisions and greatest flexibility. We supplement this through a high quality external advisory committee who supplement our knowledge base and ensure we implement our principles in a dynamic and fast changing world.
We apply responsible investment to all of our asset classes. RLAM has been a signatory to the UN Principles for Responsible Investment (UNPRI) since 2008. Our membership demonstrates our commitment to stewardship and responsible investing, which is core to our investment proposition.
Principles for Responsible Investment
RLAM has been a signatory to the United Nations Principles for Responsible Investment (UN PRI) since 2008. In July 2020, we were awarded A+ scores for our Strategy & Governance, Listed Equity Incorporation and Fixed Income (Corporate Non-Financial) modules following our 2019 assessment submission. Our relationship with the UN PRI sees us respond to consultations surrounding its reporting framework and engaging in collaborative initiatives to realise collective corporate goals. We often attend PRI events, both physically and through digital channels such as webinars. We continue to monitor the situation regarding the PRI's governance. We have collaborated in Clearinghouse initiatives from time to time where the objectives of the engagement are aligned with our own, and we also signed a joint letter coordinated by the PRI to initiate engagement with over 500 mining companies requesting health and safety information in relation to tailings dam management. We have also engaged with the PRI on how to improve the annual reporting and assessment process.
Just Transition
Just transition was a request in the Paris Agreement signed in 2015. It represents an effort to move to a low carbon economy in a way that’s sustainable, and doesn’t create a skills gap for those who are directly or indirectly employed in the traditional fuel sector. In 2019, RLAM signed the Statement of Investor Commitment to Support a Just Transition on Climate Change. The statement was endorsed by 143 fellow investors and represented US9.1 trillion assets under management.
Climate Action 100+
RLAM is a signatory of the Climate Action 100+ (CA100+). We are co-leading the work on utilities as part of the European branch led by the Institutional Investor Group for Climate Change (IIGCC). We are also the lead investor on a number of company engagements.
Green Bond Principles
We leverage these principles on an ongoing basis, we provide analysis to clients and attend seminars as participants where possible.
Institutional Investors Group on Climate Change (IIGCC)
RLAM has long been a signatory and supporter of IIGCC. We have recently significantly increased our collaboration with this group after further expanding our team. We are an advisor to three IIGCC committees: portfolio alignment, resolutions, and sector coordination. RLAM collaborated with the IIGCC network to engage with companies regarding the decarbonisation and decentralisation within the UK gas sector. We are a regular spokesperson and supporter of IIGCC. We have also commented on key documents, including the oil and gas expectations for investors.
UK Sustainable Investment Forum (UKSIF)
We regularly attend members' meetings and seminars/events held by UKSIF.
Access to Medicines Index
We are a signatory to the initiative.
Workforce Disclosure Initiative (ShareAction)
We co-signed on the Workforce Disclosure Initiative, convened by ShareAction.
30% Club Investor Group
We participate in regular investor meetings to discuss board and executive diversity, and participate in collaborative engagement with companies and awareness raising activities.
During the first quarter of 2021, RLAM signed the Net Zero Asset Management initiative. The move marks the next natural step in our investment philosophy that further cements our commitment to meeting the goals of the Paris Agreement, and in turn, reinforcing our focus on supporting our clients' needs. RLAM joins the Net Zero Initiative with the precise conviction that low carbon transition requires an accelerated pace and contribution from all of society. The science behind a net zero target implies full decarbonisation of all sectors and geographies, and the utilisation of some negative emissions for residual hard-to-abate sectors. This is a major societal shift which we, as a firm, do not take lightly. For this reason, we will not claim success until we have achieved real economy impact.
Dialshifter
Literature
<
