Sustainable, Responsible &/or ESG Policy:

Our starting point revolves around screening for those companies that satisfy our definition of ‘sustainable’ and ‘value’. Once we have identified potential investments, they are candidates for further proprietary research. The screening process has two key elements.

Sustainability leaders

Sustainable Value Equity will not invest in any company with significant exposure to fossil fuels, weapons, alcohol, gambling, adult entertainment, or tobacco. The team implement this through a mixture of maximum revenue thresholds and complete exclusions.

Complete exclusions include any company that fails the UNGC (United Nations Global Compact) by breaching one of the 10 UNGC principles. The team also exclude any company on the Carbon Underground 200 list. Produced by FFI Solutions the list shows the top 100 coal and top 100 oil and gas companies based on the amount of potential carbon emissions if all the reserves held by the company were to be extracted.

With the universe trimmed of those companies that clearly do more harm than good via revenue based exclusions, the team apply a further filter on sustainable leadership. The Global Value team define these leaders as companies that have both positive societal benefits, and are industry leaders. They screen for these attributes using MSCI ESG scores that screen for industry leaders. The team exclude any company that scores below an ‘A’.

Undervalued

The Global Value team use quantitative screens to highlight the cheapest stocks in the market. They rank the list of potential sustainable leaders by valuation, and this is the sole source of their investment ideas. This ensures that they cannot succumb to any style drift; their funds will always be steadfastly deep-value.
The primary screen is today’s enterprise value (EV) to 10-year average net operating profit after tax (NOPAT). This measure takes account of the balance sheet; adjusts enterprise value for pensions/other items and uses taxed profits enabling comparison across geographies.

Secondary screens include a cyclically adjusted price-to-earnings ratio (CAPE), and a free cash flow yield to assess income. The team also use sector specific screens, such as a price-to-tangible-book screen for banking and insurance, where there are accounting differences due to the nature of their business models. They use these additional screens alongside other balance sheet measures.

Process:

The Global Value team believe strongly in the benefits of independent fundamental research and undertake their own analysis of individual companies. They seek to invest in undervalued businesses with leading sustainability profiles. The fundamental analysis part of the process is therefore focused on answering two questions: 1) Is the risk-reward trade-off attractive? and 2) Is this business a sustainability leader?

1) Is the risk-reward trade-off attractive?

The team construct a financial model for each company. This is based on at least ten-year’s worth of company accounts (where available) to help them understand how a business has performed through a full economic cycle. They have a standardised model template that helps them when sharing, comparing and debating work with other members of the team. The main aims of the model are:

• To verify the output of the screening process and/or the accuracy of the company’s financial disclosure
• To understand the main dynamics of the business including operating leverage, cash conversion, sales volatility etc.
• To investigate balance sheet strength and balance sheet dynamics under stress
• To investigate historic levels of profitability and enable conservative modelling of future profits.

This is a multi-layered fundamental deep-dive into a company, where our analysts and fund managers will seek to quantify, and account for, such variables as missing liabilities, reliability and repeatability of profits, cash-flow, structural issues/changes to the company/industry and the overall ‘quality’ of the business.
Throughout this process, we also incorporate sustainability factors into our analysis. For example, historical controversies, social and environmental concerns and corporate governance risks. The bottom line is that ESG concerns affect the bottom line.

The team spend significant time identifying and appraising stakeholder issues including employees, customers, suppliers, governments/regulators, environment and shareholders. For this analysis, they leverage internal resources including our proprietary tools and tap into the expertise of the Schroders’ Sustainable Investment team’s sector specialists.

2) Is this business a sustainability leader?

The Sustainable Value strategy necessitates a two-pronged approach and will incorporate a materially expanded sustainability assessment as part of the analysis. This is because for a company to be considered for the strategy, it is not enough for shares to be mispriced. The business in question also must be classified as a sustainable leader by the team. A Sustainable Leader is defined as a business that: a) has a positive societal benefit as measured by Schroders SustainEx™; and b) is best-in-class relative to peers in their approach to sustainability.

This approach serves as a deliberately high bar for entry into the strategy and means that Sustainable Value goes far beyond a simplistic, industry exclusion-based approach. For example, while most healthcare companies can probably claim to have an overall positive benefit on society simply by virtue of the industry they operate in; not all healthcare companies are at the leading end of their peer group when it comes to sustainability policies and initiatives. By incorporating both an absolute societal effect and industry relative assessment, the team aim to ensure that only businesses with very strong sustainability credentials can enter the strategy.

The Global Value team assess sustainability leadership through their triple lens approach which encompasses our own proprietary models, (SustainEx™ and CONTEXT™), external resources (MSCI) as well as the team’s own analysis.

The rationale behind the triple lens approach is that companies can screen strongly on both internal and external ESG resources, but the team’s own analysis will often uncover issues or weaknesses that quantitative tools fail to fully identify. No ESG scoring mechanism is likely to be perfect or accurate 100% of the time, which is why they feel a combination approach is most likely to prove effective in identifying businesses with strong sustainability credentials.

The key internal resources shown above are SustainEx™ and CONTEXT™. SustainEx™ measures the costs companies would face if all of their negative externalities were priced, or the boost if benefits were recognised financially. An externality is a cost or benefit caused by a producer that is not financially incurred or received by that producer.

Companies face carbon pricing, sugar taxes, minimum wages and a raft of other political changes that will turn more of those social impacts into financial costs. Viewing those costs and benefits through a hard economic lens provides an objective measure of companies’ credit or deficit with society, which will become more important as they crystallise into financial costs or benefits. The analysis is built up by looking at over 70 individual measures – like wages, carbon emissions, tobacco sales, workplace stress and so on. Schroders Sustainable Investment team have examined over 1,000 academic studies to put an economic cost to those activities and use data from dozens of sources to measure the effects for 16,000 companies.

In cases where social and environmental costs or benefits are most reliably estimated at a global level, the tool attributes that total cost or benefit to individual companies in proportion to their market share of the activity responsible for the impact. The Schroder Sustainable Investment team have examined as many credible academic and industry studies as possible, quantifying the scale of the damage or benefit created by each activity. Those studies are based on analysis of different countries and different years.

The net result is a measure of the risk every company would face if these externalities were addressed through taxation and regulation. This result is quantified in terms as a monetary value. This value is deemed to be the ‘Social Value’ (‘SV’) of each company. This Social Value can be expressed as a monetary amount, or as a percentage of the company’s annual sales (‘SV/Sales’).

CONTEXT™ is an input during the analytical edge of the team’s investment process in order to assess both whether a company has positive societal benefits and to assess whether the company is an industry leader. CONTEXT™ provides a systematic framework for analysing a company’s relationship with its stakeholders – employees, suppliers, environment, communities, customers and regulators – and the sustainability of its business model. It starts by identifying key stakeholder trends for each sector, their implications and the questions they create. CONTEXT™ then logically attempts to answer those questions using metrics embedded within the tool. CONTEXT™ includes over 250 objective data points to assess how well 13,000+ individual companies are likely to adapt to changing social and environmental pressures, drawing on both conventional and unconventional data sources to build a more complete picture of companies’ performance.
This helps the team identify material issues and analyse how well the company is positioned to deal with these. In addition to identifying and assessing relevant themes, the team also take note of the CONTEXT™ ‘score’ for each stakeholder.

Companies are ranked quantitatively relative to their sector peers. Whereas there is no particular ‘threshold’ that the team look for in a company to pass for inclusion in Sustainable Value, the tool is designed to ensure the team robustly analyse companies from the perspective of all stakeholders.

The result of this analysis influences whether a company will be suitable for Sustainable Value, and it would be highly unlikely that the team would invest in a company that was in the bottom quartile vs peers across any stakeholder metric. However, should this occur, then the team would prioritise engagement with the company around their interactions with stakeholders, giving each of the reasons why they score bottom quartile, and following their usual engagement process.

Engagement for progress

Disciplined engagement is critical to the team’s process through their research, portfolio construction and as active owners. The fund managers have a strong record of promoting sustainable investment particularly through active engagement over the last 20 years. As long-term investors, they aim to be responsible stewards of capital seeking to influence and improve a company’s performance by engaging directly with the board and management on matters they view as material to long-term shareholder value creation. Schroders’ strong franchise as well as scale provides the investment team with excellent access to senior management including CEOs, CFOs and chairs. In addition, through the corporate governance specialists in Schroders Sustainable Investment team, the team arrange ad hoc meetings with the board and senior management of companies when issues arise that they believe require engagement.

Sustainability is naturally a part of most conversations the team have with management covering business practices, operations and products and services. They are robust on these issues with management teams. The Global Value team work closely with Schroders Sustainable Investment team to co-ordinate engagement and voting. Engagement is usually direct with management teams and the team use voting rights against management to try to improve outcomes for clients and society. The team will also collaborate with other investors where they believe this will increase the effectiveness of the engagement.

The team only buy companies they believe are sustainability leaders for Sustainable Value but accept that no sustainability leader is perfect. There can be sustainability issues at purchase, or during the holding period. Their in-depth analysis will reveal areas where issues are present – whether this is improving their supplier policies, increasing board diversity, or other areas for improvement. The team consider materiality and achievability to decide whether their engagements have high potential for affecting change. They use the expertise of Schroders’ Sustainable Investment team to input their analysis of the management’s common sense and ability to change (this is based on assessing management’s previous decision making and behaviour and track record of executing strategy), alongside an assessment of the ease and timeframe for a business to improve. When a company is added to the strategy the team write a letter to them that sets out what the team believe to be the key strengths, weaknesses, and priorities for improvement. The result of these letters is often a meeting with management to further discuss the issues raised in the letter thereby initiating longer-term engagement.

Fund governance is through a regular committee with engagement specialists in Schroders Sustainable Investment team and the Global Value team to decide engagement strategy and appraise progress for investee companies. Together they will identify areas for improvement that have the highest potential to improve outcomes for clients and society. An engagement plan for each ESG issue, including a description of key milestones required and a time frame for these changes to be made is recorded. The progress of these engagement efforts is continually assessed using this engagement plan.

The outcome of these engagements affects the team’s assessment of whether the company is a sustainability leader. Where there are highly material sustainability issues and their engagement plans are deemed unsuccessful, the company may be reclassified and sold.

Risk management

The Global Value team view risk as the probability of permanent financial loss and that to achieve superior long-term returns, capital losses need to be minimised. They therefore look at risk in absolute terms focusing on four main sources of risk:

• Sustainability: The risk that the company is no longer a sustainability leader.
• Valuation: The risk of paying more for a share than is warranted by the intrinsic value of the underlying business.
• Earnings: The risk that the earnings of the company are in structural decline over time.
• Financial: The risk the company becomes insolvent.

The team attempt to minimise absolute risk by concentrating on sustainability leaders with low valuations, resilient earnings and strong balance sheets. They conservatively analyse the financial information of each company they research and demand a sizeable discount between the price they are willing to pay and what they believe to be its true worth. This margin of safety protects capital in event of an unexpected adverse outcome.

Resources, Affiliations & Corporate Strategies:

Sustainable Investment Team

Sustainability is fundamental to our investment principles at Schroders, and we have an experienced and well-resourced (40+ members) 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 who is also a member of our Group Management Committee. 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:

1. Sustainable Investment Management, incorporating advisory and integration, models and data, climate and nature and sustainable research
2. Active Ownership, encompassing engagement and voting
3. Impact
4. Regional experts in Asia Pacific, Europe and North America.

We outline their key responsibilities and areas of focus below.

A. 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 Data 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.

B. 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.

C. 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.

D. 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.

Governance of our ESG strategy and policies

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 Group Management Committee (GMC) and 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 Sustainability Regulations Steering Committee (Sustainability Reg SteerCo) oversees the progress of in-flight sustainability regulatory change programmes, as well as monitoring emergent sustainability regulations and determining their high-level impact on our Group sustainability strategy and supporting operations. The Sustainability Reg SteerCo receives input on planned or potential sustainability-related regulation from our Public Policy team, which actively engages with relevant regulators, industry trade associations and other bodies in the United Kingdom (UK) and European Union (EU). The Sustainability Reg Steerco has senior representation from across the business including Investment, Wealth Management, Schroders Capital, Legal, Risk & Compliance, Product and Operations Management.

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).

Industry involvement

We believe we have a particular role to play in sharing our expertise on different areas, supporting best practice but also learning from others.

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. 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 ESG within the investment industry. A list of organisations and initiatives of which Schroders is a member or signatory is available on our website (Industry involvement| Schroders global).

Dialshifter

This fund is helping to ‘shift the dial from brown to green’ by…

…… investing in sustainability leaders in global equities. The strategy offers clients the Schroder Global Value Team’s tried and tested value approach with investment in companies that have a positive societal benefit as measured by our proprietary tool and are in our view industry leading in sustainability. The team explicitly only invest in undervalued sustainability leaders. These are companies that must have positive societal benefits for society and the environment and be best-in-class versus peers. The team engage with every company in the portfolio to improve sustainability outcomes over time.

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

… As a founding member of the Net Zero Asset Managers initiative, we are taking action to achieve net zero GHG emissions by 2050 across the investments we manage and our own operations. Our decarbonisation targets have been validated by the Science-Based Target initiative and our Climate Transition Action Plan sets out our strategy for achieving them.

SDR Labelling: Sustainability Focus label

• Consumer Facing Disclosure
• Fund Factsheet