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.

Process:

RLAM has established and maintained a commendable reputation over the last two decades as a high quality, active fixed income manager. Our long-standing philosophy and process have been central to our success and consistent record of outperformance.

The three objectives of RLAM’s credit process are:

• To exploit market inefficiencies and identify mis-priced credit risk – based on a belief that the market undervalues genuine credit enhancements, over-values more superficial credit characteristics and that the methodologies employed by rating agencies are too narrow and rigid;
• To ensure appropriate research coverage to identify and manage specific risks in portfolios; this leads to a high exposure to secured debt; and
• To ensure our funds are diversified without significant sector or issuer concentrations.

The central pillars of our investment approach which enable us to achieve these objectives are:

• A targeted allocation of resource
  • Focuses primary research (financial modelling and the derivation of financial data) on untapped and under-researched areas; targeting of primary research will be a function of both the opportunity to add value (scale, profile and third party coverage of an issuer) and potential financial risk. The nature of our universe, with a high proportion of large cap issuers, releases our analysts to focus primary analysis on genuine market inefficiencies.
  • Never duplicates third party research if it cannot be enhanced.
  • Never delegates the final evaluation; whether information is being internally or externally derived, given our very different philosophical approach to valuation, we will never delegate the final decision as to whether a bond is selected in our portfolios.
• A focus on sustainability of opening lender position
  • We are aware that volatility is damaging for providers of fixed capital and the risk profile of credit is asymmetric (bonds have capped upside – they do not participate in the profit growth of a company – but full exposure to capital loss).
  • We focus on fundamental factors that genuinely impact creditors.
  • We place most emphasis on the highest conviction characteristics of corporate bonds e.g. covenants, structure and security.
• Encouraging a collegiate approach to research
  • Team-wide decision making; maintaining a team of experienced credit specialists with contrasting and complementary knowledge and skills, sharing a common philosophy and incentives.
  • Overlapped sector coverage (ABS and unsecured); this ensures analysts have a more rounded sense of valuation to bring to their discussions with the rest of the team and increases team-wide scrutiny.
  • Dynamic interaction and prompt evaluation; maintaining an appropriate team size that avoids unnecessary bureaucracy and fragmented decision making.

While issuer type will determine the specific nature of the research undertaken and the balance of the analysis, RLAM has a long established framework for evaluating ‘overall’ credit risk. At the heart of this approach is producing ‘relevant’ corporate analysis. We do not over-emphasise short-term trends or news flow and do not produce research simply to demonstrate the breadth of our capabilities. We feel this merely adds to the mountain of research that is already produced externally across large swathes of a credit market that is dominated by large issuers. It does mean focusing on how we can add value through our research and a consideration of factors that are relevant to long-term lenders rather than traders.

Our focus is on creating robust portfolios that will deliver long-term returns in a low risk way. The core of our approach is therefore to concentrate upon the most reliable sources of outperformance.

Sector and security selection: Our philosophy is to look where others are not looking as the best way of creating diversified and robust credit portfolios. This means emphasis on bond covenant analysis and attention to the security offered by a particular bond.

Duration: Positioning is a key determinant of performance. We manage the duration of the portfolio to reflect our views on long-term interest rates. Our style is to back our views but to ensure that the scale of the duration position is appropriate.

Asset allocation: This can be a source of outperformance; we are prepared to be different from the consensus.
Yield curve: Positioning will be used to enhance return. We undertake various yield curve trades within the different segments of the portfolio while controlling overall duration.

Over the longer term, we believe that sector and security selection will be the most important component of outperformance and that the contribution to performance of other factors will vary depending on market conditions.

By emphasising a longer term investment horizon, RLAM seeks to ensure that our clients we are adequately paid for overall credit risk without an assumed safety net of constant liquidity. However, we also believe that our tested philosophy and processes, combined with an efficient team structure, provides an exceptionally solid foundation to exploit short-term valuation anomalies when these present themselves. This is very distinct from an overall strategy that is dependent on lower conviction trading to generate sustainable returns.

Ethical overlay

Our ethical investment process begins with screening for eligible investments, which is conducted by our in-house team of experts using specialist research from MSCI ESG Research and Glass Lewis. Our in-house team has extensive knowledge of environmental, social and governance (ESG) issues and has created a bespoke approach to assessing ESG from a credit perspective. RLAM’s ethical framework combines the avoidance of companies involved in excluded activities with the identification of best of breed companies in permitted sectors and integration of material ESG issues into investment decision-making.

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; or
• 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.

There is no static list of firms and organisations eligible for investment by the fund. The ethical criteria screening process is ongoing and implemented pre-trade as part of the rigorous RLAM in-house credit analysis process coupled with independent ethical screening of issuing companies (and other companies that we request ad hoc) carried out by MSCI. As per all of RLAM’s unit funds, weekly, the fund managers will sign off on the portfolio construction certifying that it adheres to the investment and borrowing powers as set out in the prospectus, and the Royal London Unit Trust Managers (RLUTM) Executive Committee will review the ethical criteria themselves on a quarterly basis.

We integrate ESG into our credit analysis as we principally see ourselves as long-term lenders of our clients’ money rather than short-term traders of bonds. The sustainability of our lending position is, therefore, critical and we tailor our approach both to the specifics of fixed income investing, reflecting the asymmetric nature of credit risk, as well as the particular characteristics of each issuer. We prioritise research on sectors where we feel there is most ESG risk and/or limited third party ESG research.

Overall credit risk identification is enhanced through dynamic interaction between our RI and credit analysts, whilst mitigation of observable risks, through bond structure, pricing and portfolio construction, is the responsibility of our credit specialists.

We use ESG data to inform our opinions but are aware of the limitations of third party data. ESG risk is nuanced and its impact on credit risk will be materially impacted by the specific nature of the bonds we purchase (structure, credit enhancements etc.). We prefer to create bespoke ESG analysis that is debt specific to support our decisions. However, we recognise clients’ needs to provide accessible ESG data for reporting and regulatory purposes. Given our dissatisfaction with third party ESG data, which is often incorrect/incomplete and distant from the economic reality of how we lend, we are in the process of developing proprietary ESG ratings.

We buy external ESG data from MSCI, Trucost, SASB and RepRisk. We have built up a significant library of proprietary ESG data and insights on more debt-centric, but often high impact, issuers such as water utilities, social housing, infrastructure companies, and MBS. Our ESG ratings will incorporate these insights, co-created by the RI and credit teams, ensuring our data is tailored to fixed income.

Resources, Affiliations & Corporate Strategies:

Please note, the following is for informational purposes only and does not necessarily reflect our response to SDR reporting.

Royal London Asset Management’s in-house Responsible Investment (RI) team of 17 professionals is led by Head of Responsible Investment, Ashley Hamilton-Claxton. The RI team works with the investment teams to monitor, assess and analyse ESG factors, vote our shares and engage with companies to encourage better social and environmental outcomes, or better risk management. This team is also responsible for helping to set out our approach and policies around systemic issues such as climate change, providing guidance, feedback and coaching to fund managers and analysts on the latest data, research, policy and industry practices.

Governance of Responsible Investment at Royal London Asset Management is integrated at varying levels of the organisation however is led by senior leadership. The Board has ultimate responsibility for setting Royal London Asset Management’s risk appetite and reviewing our strategic risks. Our Chief Investment Officer (CIO) 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 Board and monitors responsible investment in line with Royal London Asset Management’s risk tolerance threshold. The CIO is also responsible for ensuring responsible investment, stewardship and climate change risk management is embedded across Royal London Asset Management’s investment strategies. The CIO is a member of Royal London Asset Management’s Executive Committee and also chairs the Investment Committee.

Royal London Asset Management is a member of the following initiatives:

• United Nations Principles For Responsible Investment (UNPRI) (2008)
• Global Real Estate Sustainability Benchmark (GRESB) (2013)
• 30% Club Investor Group 2016 UK Stewardship Code (2016)
• UK Sustainable Investment and Finance Association (UKSIF) (2016)
• Carbon Disclosure Project (CDP) (2018)
• Interfaith Center on Corporate Responsibility (ICCR) (2018)
• Climate Action 100+ (2019)
• Institutional Investor Group on Climate Change (IIGCC) (2019)
• Investment Association (IA) (2019)
• Sustainability Accounting Standards Board (SASB) (2019)
• Task Force on Climate-related Financial Disclosures (TCFD) (2020)
• Climate Financial Risk Forum - FCA and PRA (CFRF) (2020)
• Financing the Just Transition Alliance (FJTA) (2020)
• Ceres (2020)
• Investor Alliance for Human Rights (2020)
• Better Buildings Partnership (2020)
• UK Green Building Council 2020 Better Buildings Partnership Climate Commitment (2021)
• Net Zero Asset Manager initiative (NZAM) (2022)
• FAIRR Initiative (2022)
• Workplace Mental Health Benchmark (CCLA) (2022)
• FCA Vote Disclosure Forum (2022)
• FCA Disclosures & Labelling Advisory Committee (2022)
• Church of England Pensions Board - Executive Pay (2022)
• International Labour Organisation (ILO) (2022)
• International Labour Organisation (ILO) - United Nations Environment Programme - Finance (UNEP-Fi) (2022)
• The Investor Agenda (2022)
• International Sustainability Standard Board (ISSB)(2022)
• Transition Plan Taskforce (TPT) (2022)
• World Benchmarking Alliance (WBA) (2022)
• Access to Medicine Foundation (2023)
• Net Zero Engagement Initiative (NZEI) organised by Institutional Investment Group on Climate Change (IIGCC) (2023)
• Swedish Council of Ethics - Human Rights in Technology (2023)
• Nature Action 100 (NA100) (2023)

Source: Royal London Asset Management, correct as of 31 March 2024, Year in brackets indicates date joined.

Dialshifter

Our organisation is helping to support the Paris Climate Agreement and the Race to Net Zero by…

...committing to reduce financed emissions across our in-scope AUM* by 50%, against a 2020 baseline, by 2030, and net zero across our in-scope AUM by 2050. While we continue to develop our Climate Transition Plan, in line with the IIGCC Net Zero Investment Framework, we seek to mitigate climate investment risks in three ways:

• Ensuring climate risk is integrated into our risk framework and is governed appropriately,
• Utilising our proprietary climate score and integrating other material ESG issues into our investment decision-making; i.e. Just Transition
• Serving as active stewards of our clients’ capital, using proxy voting/engagement as tools to address climate risks and opportunities.

*Our in-scope assets are those in funds managed and controlled by Royal London Asset Management, excluding segregated mandates on behalf of external clients. We are actively working to support our external clients with assets in segregated mandates where they have made an explicit commitment to achieving net zero, as disclosed to the Net Zero Asset Managers Initiative (NZAM).

SDR Labelling:

Unlabelled with sustainable characteristics