Sustainable, Responsible &/or ESG Policy:

The fund invests at least 70% of its portfolio in assets which the Investment Manager deems to be either:

1) Low carbon investments – these are companies or countries which are operating at a GHG intensity below the level required to meet net zero GHG emissions by 2050, in line with the EU Technical Expert Group (TEG) on Sustainable Finance’s recommendation2 that the global economy should decrease emissions by 7% per year (which equates to approximately a 90% reduction from 2020 levels to 2050).

Companies whose GHG intensity is 90% lower than the average intensity of their industry group in 2020 are therefore classified as low carbon. Countries are classified as low carbon if their GHG intensity is 90% below 2020 levels. GHG intensity is calculated using scope 1 and 2 emissions divided by a company’s sales (tonnes of carbon equivalent per $1 million of sales), or a country’s nominal gross domestic product (tonnes of carbon equivalent per $1 million of nominal GDP). The calculation is based on the most recent reported data available (or where an issuer has not reported emissions data, estimated data may be used).

2) Decarbonising investments – these are companies or countries that have the potential to achieve a GHG intensity below the level required to meet net zero, based on the targets those companies or governments have publicly committed to or evidence of previous emission reductions. A company can demonstrate this potential by meeting at least one of the following criteria: – The company has set targets to reduce scope 1 and 2 emissions in the mid-term (5-15 years) or long-term (>15 years), which translate to a company temperature alignment score of less than 2.5°C based on an industry standard methodology (the CDP-WWF Temperature Scoring Methodology). – The company has publicly committed to develop science-based emissions reduction targets and submit these to the Science Based Targets Initiative (SBTi) for validation within two years of their commitment. – The company has a downwards trend in scope 1 and 2 emissions intensity over the past six years. – The company’s trend in scope 1 and 2 emissions intensity over the past six years is lower (i.e. it is decarbonising faster) than its respective industry group average trend over the same period. – The company’s scope 1 and 2 emissions intensity, based on the most recently reported or estimated emissions, is below the level required for its relevant industry group to be in line with a 2°C pathway. A country can demonstrate this potential if its government has publicly committed to mid-term (5-15 years) or longterm (>15 years) emissions reduction targets that are in line with achieving net zero, based on those countries having established “net zero” or equivalent national emissions reduction targets in the public Net Zero Tracker database, or similar other sources. Absolute emissions measure the total amount of emissions of the issuer, while emissions intensity measures emissions relative to an issuer's revenue. Scope 1 and 2 emissions come from an issuer's direct activities and indirect energy consumption.

1 With effect from 1 April, Schroder Dynamic Multi Asset Fund changed its name to Schroder Sustainable Future Multi-Asset Fund and changed its investment objective and policy.

Please note that the assessments above do not include scope 3 emissions, which means that indirect emissions from an issuer’s value chain are not taken into account.

By investing in companies and countries that are operating at a greenhouse gas (GHG) intensity below the level required to meet net zero (or those that have the potential to achieve this over time), the Fund aims to helps them continue to contribute to the positive sustainability outcome of reducing GHG emissions and therefore slowing global warming. The fund’s holdings in such investments may also allow the Investment Manager, through engagement, to encourage them to set better emissions reduction targets and to further reduce their GHG emissions in practice.

Process:

Within Multi-Asset Investments, we consider ESG factors when making investment decisions. Our approach to sustainability considers both a top-down view when allocating to asset classes and a bottom-up view when selecting securities. As shown in Figure 1, ESG factors are embedded throughout our investment process, from research and asset allocation, through to portfolio construction and portfolio implementation. From a bottom-up perspective, we delegate security selection to the underlying desks as we allocate to funds across Schroders. Every desk has their own sustainability accreditation document, which is independently reviewed by the ESG Advisory and Integration team. We rely on the fact that the desk is accredited under the Schroders framework to be confident that ESG factors are being integrated into the investment process of the funds that we hold. When allocating to a Schroders fund, the multi-asset investment team may invite the desk to present at the monthly portfolio manager meeting, where they would do a deep dive into their strategies. The teams can also do their own analysis using tools such as Aladdin to look for style, sector or regional biases and have access to proprietary sustainability tools to see if the funds are complimentary to the gap they are looking to fill in portfolios.

Figure 1: Embedding ESG into our multi-asset process

Source: Schroders. Environmental, Social & Governance (ESG) Integration means that certain ESG risks were considered in the evaluation of the investments made in the portfolio in line with clients’ priorities. This is not a sustainable product for the purposes of the FCA rules. Information is provided solely on investor request and may not be used in a promotional context.

Below we have summarised each stage in more detail:

Research: One of the challenges of capitalism has always been the existence of negative externalities which occur when production or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. This causes social costs to exceed private costs. There is a renewed sense of urgency on this front because of the very real challenge posed by climate change and because the pandemic accentuated the gap between the “haves” and the “have-nots”. We believe that, as these ESG factors are being increasingly considered by our governments, they are likely to have an impact on the investment environment in which we operate.

From a top-down perspective, the foundation for all Multi-Asset investments is the research carried out by the Strategic Investment Group - Multi-Asset (SIGMA). We have adopted a risk-premia based approach for multi-asset research, investment and risk management. Our research effort is organised into six risk premia groups (equities, term, credit, commodities, currency, and private assets). The aim of the groups is to utilise both quantitative and qualitative approaches to assess opportunities within each risk premium and come up with a medium-term return view for that premium.

When determining their views, the research groups also use a cross-asset framework considering a number of factors, the primary ones being cyclical, valuation and momentum. This framework is the responsibility of the cross-asset research group, which using these factors, provides a suite of clear, consistent models and qualitative considerations to provide insight on the relative attractiveness of asset classes. The risk premia teams consider political, regulatory, social and positioning trends such as globalisation, geopolitical risks and other macroeconomic factors that correlate with environmental, social and governance factors. These could result in negative externalities (impacts on society) being internalised in the performance of companies and markets.

Once a month, the risk premia groups and cross-asset team meet formally to discuss their research at SIGMA and review their asset class scores. While this meeting is scheduled to occur monthly, teams may amend the score of any of their risk premia intra-month if a major event occurs which has a significant impact on them.

Figure 2: Global Research Platform

Source: Schroders. *Strategic Investment Group Multi-Asset. Sectors and securities mentioned are for illustrative purposes only and should not be viewed as a recommendation to buy/sell.

Asset allocation and portfolio construction:

Asset allocation: The Global Asset Allocation Committee (GAAC) is responsible for asset allocations views across multi-asset portfolios. The GAAC meets monthly and is comprised of five senior multi-asset fund managers. Our process is primarily qualitative, with each member of the GAAC responsible for identifying valuation and thematic anomalies over a 3 to 12 month time horizon that can be implemented as active asset allocation positions within portfolios. These trade ideas can be expressed as pair trades, i.e. where we believe one asset will outperform another. The pair trade is, therefore, to buy the preferred asset and to sell the less favoured. In order for any trade idea to be accepted, it must be proposed by one member, seconded by another, have a strong rationale and have profit and stop loss limits. Consequently, each position has two names backing it and, crucially, the performance of each trade forms a part of each proposer’s and seconder’s annual assessment and compensation. Figure 3 illustrates the framework surrounding the GAAC idea generation process.

Figure 3: Global Asset Allocation Committee (GAAC) idea generation process

Source: Schroders, for illustrative purposes only.

Using the output of the investment meetings (SIGMA and GAAC) the fund managers decide the overall asset allocation. Critical to the success of a multi-asset portfolio is a deep understanding of risk and the impact of combining the underlying components. We express our current level of conviction by ranking each asset in order to construct the portfolio. Our starting point is to rank assets from 1 to 4, 1 being our most preferred, 4 our least. We find this process to be a more effective way of expressing conviction than using short term return forecasts. The fund managers use our proprietary portfolio construction system to derive the optimal set of capital weights expected to meet return and risk objectives, while being sufficiently flexible to adapt to different market environments.

Importantly, from an ESG perspective, we use long term asset class return and risk forecasts adjusted for the impact of climate change in our optimisation process. We have a three-step approach adjusting for the physical costs, transition costs and stranded assets. The first step is a focus on what happens to output as temperatures rise, which we will refer to as the ‘physical cost’ of climate change. The second considers the economic impact of steps taken to mitigate those temperature increases, or the ‘transition cost’. This second step is slightly more complicated, in that there are a range of possible transition scenarios. Finally, we adjust for the effects of stranded assets. This is where we take account of the losses incurred where oil and other carbon-based forms of energy have to be written off, as it is no longer possible to make use of them, such that they are left in the ground.

Portfolio Implementation:

In implementing our views, we aim to be as efficient as possible, combining passive and active approaches to achieve a superior access to the underlying risk premia at reasonable fees. We have access to an outstanding range of Schroders funds, plus the ability to include external funds where we deem appropriate.

At this stage, if investing in an internal Schroders fund, we ensure we understand their approach to ESG and how they demonstrate their impact on people and planet. As previously mentioned, every desk has their own sustainability accreditation document, which is independently reviewed by the ESG Advisory and Integration team. We rely on the fact that the desk is accredited under the Schroders framework to be confident that ESG factors are being integrated into the investment process of the funds that we hold. Furthermore, we believe successful investing is intrinsically linked to identifying, understanding and incorporating the effects of ESG trends and for this reason many of our portfolios allocate to sustainable strategies. A few examples are included in section 4.

Where possible, from a strategic core multi-asset portfolio perspective, we prioritise physical investments, allowing us to make meaningful use of the most potent sustainability tools available, which differs by asset class. The three core sustainability levers for change we use are: 1. Active ownership; 2. Use of proceeds and provision of capital; 3. Direct outward impact. Figure 5 outlines each sustainability lever for change.

We believe active ownership through engagement and voting is the most potent sustainability lever for physically invested equities. Active engagement is also a lever used by credit investors, however we believe the use of proceeds and provision of capital is the most powerful sustainability lever for fixed income investing. The third lever - ‘direct outward impact’ - is used by strategies delivering financial returns through investments that contribute to societal or environmental goals or strategies intend to generate a positive & measurable societal or environmental impact, alongside financial returns.

Figure 4: Portfolio implementation - sustainability levers for change

Source: Schroders, for illustrative purposes only.

From a portfolio implementation bottom-up stance, security selection and active ownership play a key role:

Security selection: The Multi-Asset Investment team is integrated with Schroders’ global resources, drawing on the expertise of specialist equity, fixed income and alternative security selection teams. We have access to extensive alpha generation capabilities across our equity fixed income and alternative sustainable investment strategies.

Active ownership: Effective and responsible active ownership has long been part of our fundamental approach to investment at Schroders, and is performed by the underlying security selection and Sustainable Investment teams (not by Multi-Asset). We recognise that companies play a critical role in societies and are heavily exposed to changes in those societies and the natural environment. We believe by engaging with companies and their management we can improve our understanding of the issues they face and their approaches to managing them, helping us to protect or enhance the value of our investments. The overriding principle governing our approach to voting is to act in line with our fiduciary responsibilities. We aim to support the management of the companies we invest in; however, we will oppose management if we believe that it is in the best interests of our clients.

A key part of our multi-asset approach is our engagement with underlying security selection managers to understand and ensure sustainability risk and opportunities are managed. For more information on our approach to active ownership, please refer to question 3.

ESG Measurement: We are able to measure and monitor our multi-asset portfolios using a number of proprietary sustainability tools such as SustainEx™.

Our proprietary tool, SustainEx™, 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 externalise are pushed into companies’ own costs. SustainEx™ helps us to measure the potential exposure to ESG risks at the portfolio level. In addition to SustainEx™, we have several proprietary sustainability tools to assess the investment implications of ESG factors at the top-down asset allocation level and the bottom-up security selection level.

Resources, Affiliations & Corporate Strategies:

Sustainability is fundamental to our investment principles at Schroders and we have an experienced and well-resourced Sustainable Investment team, who are embedded within our Investment function. We are a global team, spread across four regional hubs in London, Paris, Singapore and New York, aiming to ensure that sustainability is embedded through our global investment teams and client functions.

The team is led by Andrew Howard, Global Head of Sustainable Investment. As team head, he oversees our approach to ESG integration, active ownership, our sustainability research and tools, and our reporting and product strategy.

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

It is organised into four pillars:

We outline their key responsibilities and areas of focus below.

1. Sustainable investment management

Our Advisory and Integration team acts as a central contact point and consultant for a range of stakeholders across the business. This includes advising investment teams on ESG integration best practice; compliance, risk and legal teams on ESG regulation; and working with our regional experts; across Asia Pacific, Europe and North America, as outlined under pillar four.

Our Models and Analytics team is responsible for the maintenance and evolution of our suite of proprietary tools. They are also responsible for ESG data, ensuring we harness sustainability data effectively from both conventional and unconventional sources.

Our Strategy and Research team is responsible for undertaking sustainability research to: inform firmwide strategy and commitments; provide insights for investment teams to analyse sustainability-related risks and opportunities; and provide research-related and technical support for other stakeholders across the firm.

2. Active ownership

Our Engagement team partners with investors to have dialogue with the companies in which we invest, seeking to understand how prepared they are for a changing world and pushing them towards more sustainable practices. The team track the progress of these engagements and hold companies to account.

Our Corporate Governance team is responsible for voting in line with our Voting Policy and Principles.

3. Impact

Our Impact team is responsible for scaling our impact product offering in line with best-practice impact principles. The team works closely with investment desks and is responsible for developing and implementing our impact management and measurement framework, including impact assessment and monitoring at transaction and portfolio level, product development, impact strategy and impact reporting.

4. Regional Expertise

Our Regional Experts based in Asia Pacific, Europe and North America have a deep understanding of local market characteristics and nuances, and are responsible for staying abreast of sustainability-related developments. Our experts work with clients and internal teams to navigate and support clients’ ESG aspirations and challenges, utilising Schroders’ proprietary tools and research to develop investment solutions that meet their needs. They also engage with regulators and industry bodies to shape and support the global sustainable finance agenda. Our regional experts are a critical extension of the central team in London as the firm continues to evolve its global ESG strategy.

We have a number of governance structures in place for decision-making and oversight of our approach to sustainable investment. The Board of Schroders plc (the Board) has collective responsibility for the management, direction and performance of the Group, and is accountable for our overall business strategy. The Group Chief Executive is responsible for proposing the strategy for the Group and for its implementation, supported by the Group’s senior management team and a number of Committees, some of which are noted below.

The Group Sustainability and Impact (GSI) Committee provides advice to the Group Chief Executive on sustainability and impact matters. The Committee considers, reviews and recommends the overall global sustainability and impact strategy, including key initiatives, new commitments and policies for approval. The Global Head of Sustainable Investment and Global Head of Corporate Sustainability are members of the Committee and report to the Board.

The Sustainability Executive Committee (ExCo) develops and oversees the delivery of our Group-level sustainable investment management strategy. The ExCo also advises on the development of our sustainability and impact investment and product frameworks. The ExCo has senior representation from across the business including Investment, Client Group, Wealth Management, Schroders Capital and Corporate Sustainability.

The Group Regulatory Oversight Committee (GROC) oversees the progress of sustainability regulatory change programmes, as well as facilitating the monitoring of emergent sustainability regulations and ensuring we have appropriately determined the impact on our Group sustainability strategy and supporting operations. The GROC receives input on planned or potential sustainability-related regulation from our Public Policy and Compliance teams, which actively engage with relevant regulators, industry trade associations and other bodies in our key markets of the UK and EU. Once the business implications of new legal and regulatory requirements are defined, the relevant sustainability regulations programme workstreams deliver the necessary change to our business operations. The GROC oversees the progress of the programme, including monitoring and mitigating associated risks and issues. Where necessary, risks and key issues from the GROC can be escalated to the Group Risk Committee for resolution.

Certain Schroders entities, businesses and Investment teams also have their own committees which consider their sustainable investment activities. For example, the Private Assets Sustainability and Impact Steering Committee (PA S&I SteerCo) develops and oversees the implementation of the Private Assets Sustainability and Impact strategy. In addition, the Wealth Management Sustainable Investment Committee (WMSIC), a sub-committee of the Wealth Management Investment Committee (WMIC), has delegated responsibility for recommending Wealth Management's Sustainability models, as well as providing investment strategy and direction for client portfolios that are linked to the sustainable models.

Alongside our central Sustainable Investment team, sustainable investing is also overseen and delivered by dedicated teams and expert individuals embedded throughout the firm (including across Investment teams and Client Group functions).

We have a long-standing commitment to support and collaborate with several industry groups, organisations and initiatives to promote well-functioning financial markets.

Our key stakeholders include exchanges, regulators and international and regional trade associations. For example, Schroders is a member of trade bodies such as the Investment Association in the UK, the European Fund and Asset Management Association (EFAMA), the Asia Securities Industry and Financial Markets Association (ASIFMA) in Hong Kong and the Securities Industry and Financial Markets Association (SIFMA) in the US. Through this participation we share our insights to support the development of policy recommendations, share best practice and build coalitions of like-minded market participants to advocate for better functioning markets.

Our activity with policymakers aims to help them ensure that the measures they take support businesses and provide clear direction. By monitoring and influencing regulatory initiatives at their inception, we aim to support the development of a business environment which is conducive to Schroders’ clients’ best interests.

We aim to engage with the regulatory environments in which we are operating and raise awareness on sustainability matters. We believe well-designed regulation is an important cornerstone to promoting healthy markets, and have asked publicly that policy makers support sustainable finance legislation and regulation and deliver on commitments, including around climate mitigation.
We consider this to be key in improving responsible investment standards across sectors, establishing a consistent dialogue with companies, and in promoting the ongoing development and recognition of sustainability and Environmental, Social and Governance (ESG) topics within the investment industry. A full list of organisations and initiatives of which Schroders is a member or signatory is available here (https://www.schroders.com/en/global/individual/corporate-transparency/working-with-policy-makers/memberships/)