Sustainable, Responsible &/or ESG Policy:

Across all of our funds globally, Schroders has committed to avoiding any companies deriving revenue from cluster munitions, anti-personnel mines, and chemical and biological weapons. We will apply this policy to all Schroders funds that we directly manage. On occasion there may be additional securities recognised by clients or local governments; these will be added to the Schroders group exclusion list for those relevant jurisdictions or specific mandates. Schroders has the ability to manage segregated accounts which can be tailored to individual client preferences with explicit exclusion lists.

While the underlying approach of the fund does not adopt blanket positive or negative screening, the design of the strategy, which seeks to impose a high bar for inclusion, leads to a natural exclusion (or negative screen) of stocks in industries evaluated as ‘unsustainable’. For example, hard exclusions apply to stocks with material exposure to alcohol, tobacco, controversial and conventional weapons, gambling, adult entertainment, climate change (tar sands and thermal coal), high interest rate lending and human embryonic cloning. Irrespective of this screen, it would be highly unlikely for companies operating in these industries to pass our SQ assessment.

We use information from several external ESG research firms, but only ever as one input into our own company assessments to be questioned, examined and built on.

Our Sustainable Investment team has extensive networks within its respective field. Information is drawn from publicly available corporate information and company meetings, from broker reports, industry bodies, and research organizations, think tanks, legislators, consultants, Non-Governmental Organizations and academics; wherever it is felt the information would add value to our analysis.

Third party research may be used by the team; however, our analysts form a proprietary view on each of the companies we analyze. Financial analysts may also use third-party research to support their assessment of ESG issues when analyzing companies, in addition to consulting with our in-house ESG specialists. Through this process, we aim to evaluate the relevance and materiality of a range of ESG factors on the sustainability of future earnings growth and as potential risk factors for a company.

We currently subscribe to the following external ESG research providers: MSCI ESG research, Bloomberg, EIRiS, Refinitiv, Sustainalytics and Morningstar. In addition, we subscribe to Institutional Shareholder Services and the Investment Association’s Institutional Voting Information Service for our proxy voting research.

CONTEXT™

Our flagship ESG research tool, provides a systematic framework for analyzing a company’s relationship with its stakeholders and the sustainability of its business model. Comprising over 260 metrics across over 13,000 companies, it is designed to support our investors’ understanding of the sustainability of companies’ business models and profitability, and provides structured, logical and wide-ranging data to support our analysts’ views. This consistent structure makes information sharing easier and allows us to identify market wide trends and insights.

The tool goes beyond a simple tick box approach – it is interactive and highly customizable, enabling analysts to select the most material ESG factors for each sector, weight their importance and apply relevant metrics. Analysts are then able to compare companies based on the metrics selected, their own company assessment scores or adjusted rankings (size, sector or region), with the flexibility to make company specific adjustments to reflect their detailed knowledge. The tool is fully integrated within Schroders’ global research platform, which is readily accessible across investment desks and geographies.

We have also developed a number of proprietary quantitative metrics that can be used to demonstrate and measure a portfolio’s sustainability characteristics.

Carbon value at risk (VaR)

We have developed a new way of looking at carbon risk: carbon footprints remain the dominant measure of carbon exposure but are an incomplete and sometimes misleading measure of investment risk. We focus on the ways value will be lost or created as policies strengthen, through financial analysis rather than environmental research. Our carbon value at risk (VaR) model assesses the effect of a significant rise in carbon prices on a company’s cost structure, industry prices, volumes and cash flows.

SustainEx™

SustainEx™ is a proprietary model which scientifically combines measures of both the harm companies can do and the good they can bring to arrive at an aggregate measure of each firm’s social and environmental impact, allowing investors to target their ESG investments effectively. 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 the costs they externalize are pushed into companies’ own costs.

Country Sustainability Dashboard

We recognize that the importance of ESG risks to nations is likely to increase as social and environmental challenges, such as social unrest or climate change – intensify and the world becomes increasingly connected. While many investors consider country risk when allocating capital, there have been few attempts to date that consider the long-term sustainability of countries’ growth and whether risks or opportunities are reflected in asset valuations.

Our Country Sustainability Dashboard aims to provide a structure lens through which to analyst the sustainability of sovereign GDP growth. By assessing the ESG risks and opportunities that have historically driven growth, as well as those that may be influential in the future, it aims to provide investors with a long-term view of countries’ GDP growth as well as an indication as to whether the market is pricing in country sustainability factors across various asset classes.

Process:

ESG is integral to the way the Global & International Equity team appraise the risk-adjusted returns of any stock that we are seeking to analyse. Our investment approach is fundamentally-based and deliberately qualitative in is approach.

This does not lend itself to more-simplistic ‘rules-based’ screening which we believe are crude in their application and blunt in their contribution to financial and non-financial outcomes. There is therefore no formulaic approach to our assessment and we do not assign scores nor do we have minimum thresholds. However, analysis and evaluation of ESG and sustainability are systematically applied to the way we think about stocks.

We believe the non-financial analysis is a mosaic that is not easily condensed into a standardised numeric value or rating and needs to be considered based on the specifics of each company. It is an integral element within the process and is significant in shaping the way our analysts think about a company and its stock.  Once relevant information is sourced, one of the primary tasks of our analysts is to assess which aspects are material to a particular and how these factors influence such things as the durability of its business model, its license to operate and its future growth trajectory.

Central to this is the assessment of a company’s relationship with its broader-set of stakeholders.  The team use its proprietary Sustainability Quotient ‘SQ’ framework to systematically evaluate these relationships.

The ‘SQ’ analysis employs a wide range of data and resources, and  invariably requires further interactions with the company concerned, enabling the group to both clarify aspects of company policy and request additional data and, more importantly, to assess a company’s genuine commitment to the cause of sustainability rather than just disclosure levels. This also serves to highlight areas for potential engagement.

Approximately 80% of the research material that we use to make investment decisions is produced internally, with external sources providing a secondary input into the process. 

The majority of external research material is from our broker contacts. We have access to company, economic and strategic research produced by brokers on a worldwide basis. Other external sources of information include systems such as Reuters, Bloomberg and DataStream. We also subscribe to a number of industry journals and to the research of official bodies such as governments and central banks. We have entered into a strategic joint development with Thomson Reuters, whereby all salient external research may be accessed by our analysts through our Global Research Investment Database. This was developed to aid cross-border research and to ensure consistency of information.

We ensure any external data used comes from a reputable source, however it should be reiterated that the majority of our external research is only used as a secondary input and is not used for the purposes of making investment decisions, unlike the fundamental company research captured by our local analysts and Global Sector Specialists.

The Global & International Equity team’s Global Sector Specialists (GSS) build on the ESG analysis conducted across Schroders’ equity research platform by over 100 equity analysts, and provide the majority of the information and insight necessary to form a view about ESG factors for companies being considered for this fund. The GSS’ view is consolidated in an ESG assessment and reflected in a score for each company. This analysis is supplemented by work carried out by the Sustainable Growth Investor Group within our proprietary Sustainability Quotient (SQ) framework, which provides an additional layer of ESG and sustainability analysis, and forms the basis of stock selection decisions for the fund.

Our Sustainable Investment team has extensive networks within its respective field. Information is drawn from publicly available corporate information and company meetings, from broker reports, industry bodies, and research organisations, think tanks, legislators, consultants, Non-Governmental Organisations and academics; wherever it is felt the information would add value.

Third party research is used by the team as a secondary consideration, and often provides a source of challenge or endorsement for our proprietary view. It serves also to indicate where consensus sits, given that a majority of our competitors systematically utilise third party research conclusions and ratings within their processes. Sector analysts also use third-party research to support their assessment of ESG issues when analysing companies. We currently subscribe to the following external ESG research providers: MSCI ESG research, Bloomberg, EIRiS, Thomson Reuters Asset4 and CDP. In addition, we subscribe to Institutional Shareholder Services (ISS) and Association of British Insurers’ Institutional Voting Information Service for our proxy voting research.

SDR Labelling:

Sustainability Focus label

SDR Literature:

• Consumer Facing Disclosure