As at: 31/12/23

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Policy

We are factor investors: we believe that applying the scientific method to investment by using financial and statistical principles is an efficient and effective way to generate returns for our investors. Our mission is to provide diversified and differentiated portfolios of scientifically validated factor exposures for our investors. Some traditional factors used by investors include, but are not limited to, value, momentum, profitability and low volatility. Corresponding to each broad “factor” there may be many underlying “signals” of greater or lesser effectiveness. A key feature of our use of the scientific method is our participation in the scientific conversation: in general, we will place greater reliance on factors or signals supported by a greater body of academic research than those with more restricted evidence.

The use of ESG data constitutes a natural extension of our investment beliefs. ESG data provide an exciting set of information from which we seek to construct diversifying and differentiated signals, and potentially factors. We apply our established research framework to these signals to assess the ability of these signals to improve the expected risk/return profile of our portfolios. When selecting the factors that drive our stock selection, we apply the same research and selection process to both traditional financial factors and the sustainability factors. The sustainability signals used broadly across our product range have been empirically shown to improve the expected risk return profile of our strategies.

There are several key ways in which ESG considerations impact all investment decisions in the Fund.

• They define the universe – we employ an array of industry and revenue-based screens to avoid companies involved in unsustainable activities including Tobacco, Weapons, Gambling, Tar sands and Thermal Coal.
• Portfolio construction – the final portfolio is constrained to ensure the portfolio’s carbon footprint is less than 50% of the level of the benchmark
• Embedded in bottom-up stock selection – roughly a quarter of the Fund’s active risk budget is consumed by ES&G factors (ES through SustainEx and G from Governance)

The Fund’s range of systematically integrated ESG features described above delivers a range of Sustainability outcomes.

As of 31 March 2021, the carbon intensity of the Fund was below 50% of the benchmark. The reading was 72 for the Fund compared to 158 for the MSCI AC World Index, a 54% reduction[1].

With respect to SustainEx, Schroders proprietary measure of Sustainability impact we recorded improvements driven both by our suite of exclusions and integrating SustainEx alongside traditional factors in our bottom up multi-factor stock selection process. The overall SustainEx improvement of Fund over the benchmark was more than 5% with the benchmark showing a negative SustainEx to sales impact of -1.5% [2]. This SustainEx improvement translates to between $5-6 of relative social value benefits for every $100 of revenues generated by the underlying portfolio companies.

Similarly, inclusion of our Governance factor tends to tilt the portfolio towards companies that compare favourably with their industry cohorts on addressing the agency problem between management and shareholders.
Finally, our range of industry exclusions helps the portfolio avoid exposure to companies operating in unsustainable, socially irresponsible areas.

[1] Source: Schroders, 31 March 2021. Tonnes of scope 1 and scope 2 carbon emissions per $million of sales. Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased energy.

[2] Schroders, 31 March 2021. The aggregate social and environmental impacts of portfolio and benchmark company business activities as measured by SustainEx and shown as a percentage of sales.

Process

The Fund is designed to provide investors with ongoing access to the best thinking in two increasingly important fields of investment: factor investing and sustainability. Our approach to factor investing enables us to seamlessly integrate a number of sustainability criteria, including SustainEx (Schroders’ proprietary measure of ESG impact), sophisticated and material quantitative measures of corporate governance, and a 50% reduction in carbon intensity, compared to MSCI ACWI.

Our approach to factor investing – and to integrating sustainability – is as differentiated from most ESG funds as our approach to measuring sustainability. Factor investing involves the application of quantitative techniques to investment problems, both in seeking sources of return and in building the portfolio.

Schroders’ factor investing philosophy is predicated on a bottom-up approach to multi-factor portfolio construction. This means that we combine information about many factors (such as value, momentum, profitability, low volatility, governance and SustainEx) at the stock level and then build a single portfolio that maximises exposure to the set of factors collectively, subject to limits on risk. This advanced approach contrasts with first-generation factor investing, which combines a number of portfolios, each one corresponding to stocks favoured on the basis of only a single factor.

The starting point for the investment process is to analyse all of the stocks in the ACWI IMI universe as potential candidates for inclusion in the final portfolio. Our process for analysing each stock is systematic and involves calculating proprietary factor metrics that enable us to identify stocks with attractive characteristics across multiple factors. For each of the 9,000 companies in the MSCI ACWI IMI universe from which we draw our investments, we calculate an overall sustainability impact, measured in dollars. That value combines analysis of its impact in each of the below areas, including both positive and negative values.

We divide the total value by each company’s sales to yield a ratio on which companies are assessed against sector peers to calculate the sustainability score used in our factor analysis. This covers the E and S of ESG. For exposure to governance, we look to our enhanced, diversified Quality factor, which includes both profitability and governance signals within the factor analysis. The portfolio utilizes objective measures of the agency problem between management and shareholders, to determine the impact of governance on investment returns. By focussing on the agency problem between management and shareholders, we seek to exploit objectively observable signs of the extent to which the agency problem has been solved or at least mitigated. We focus on observable outcomes of good governance rather than more conventional analysis of governance characteristics, where evidence of efficacy is lower.

Resources, Affiliations & Corporate Strategies

Schroders has an experienced and well-resourced Sustainable Investment team, which has been embedded as part of our overall investment processes for some time. As at February 2021, the team comprises 22 dedicated ESG professionals who are responsible for ESG specialist engagement, voting and facilitating ESG integration into the investment process across teams and asset classes, ESG data management, sustainability client reporting, and product development. Together the team has over 210 years’ combined investment experience.

The team is led by Andrew Howard. As team head he oversees our corporate governance and sustainable investment analysts, integration of ESG factors into investment processes across geographies and asset classes and is responsible for thought leadership, thematic research.

Our ESG specialists engage directly with companies, prioritising those with exposure to higher ESG risk and low ESG ratings. They attend company meetings with financial analysts, portfolio managers and strategy analysts to discuss specific sustainability issues directly with company management in addition to financial performance. They will also hold dedicated meetings with company sustainability experts to discuss general ESG topics or specific issues in more detail.

Schroders’ dedicated Sustainable Investment Analysts have a sector focus, enabling them to gain a deep understanding of sector-specific ESG issues and work in tandem with our analysts and portfolio managers to identify and assess ESG risk and opportunities, and incorporate consideration of these factors into their forecasts. They also produce thematic research on emerging ESG trends and present the findings to our analysts and investors to generate further discussion and debate.

Our Corporate Governance Analysts are organised along geographical lines and have specialist knowledge of best practice in individual markets. They work alongside investors, and our internal compliance and legal teams to ensure our voting activities comply with our ESG policy.

We also have five dedicated product specialists who are responsible for sustainability reporting, product development, client education and understanding how we can meet our clients’ sustainability requirements; an Integration Manager to facilitate ESG integration across all investment desks and a Data Analyst to harness sustainability data more effectively from both conventional and unconventional sources.

Our Sustainable Investment team sits alongside investment teams rather than operating in a silo, which facilitates regular dialogue with our analysts and investors.

Schroders is a member, participant or signatory to a number of reputable industry organisations in which we share know-how and collaborate on various industry initiatives. Please find a sample list below. A full list is available on our website: https://www.schroders.com/en/sustainability/active-ownership/industry-involvement/
 

• UN Principles for Responsible Investment (PRI) - Achieving an A+ rating for six consecutive years
• Financial Reporting Council (FRC)
• CDP
• Climate Action 100+
• United Nations Global Compact (UNGC)
• Coalition for Climate Resilient Investment
• Investment Association Corporate Governance and Engagement Committee
• Investment Association Sustainability and Responsible Investment Committee
• Asian Corporate Governance Association (ACGA)
• Investor Forum
• European Sustainable Investment Forum (EuroSIF)
• Institute of Business Ethics (IBE)
• International Corporate Governance Network (ICGN)
• Pensions and Lifetime Savings Association (formerly the National Association of Pension Funds)
• SWESIF
• Eumedion
• Green Bond Principles (GBP)
• GRESB
• Net Zero Asset Managers Initiative

Literature

• Fund overview & literature (including factsheet)

Last amended: 08/02/24 02:10