Sustainable, Responsible &/or ESG Policy:

The Schroder Sustainable Future Multi-Asset Fund (’the ‘fund’) offers clients access to a actively managed sustainable solution, that aims to deliver growth with a smoother path of returns than equities at a low cost. The Fund was launched in July 2011 and is managed by our experienced multi-asset investment team, who have been successfully managing diversified growth mandates since we pioneered this approach for our own pension scheme in 2005. Sustainability has been an important  feature of the Fund’s investment process since 2019, as we have introduced sustainable components and ESG analysis into asset allocation decisions. Today, we have developed what we believe is an industry leading capability in ESG analysis and research that is integrated at every stage of our investment process, including asset allocation. Our approach spans proprietary analytical tools, research incorporating climate change into long-term return forecasts and tactical trade screening through to measurement using a variety of lenses and reporting tailored to our client’s needs. We implemented a Responsible Investment Strategy in 2000, became a signatory to the UNPRI in 2007 and have received the top score of A+ in each of the last seven annual PRI assessments for our overall approach to responsible investment. Schroders is at the forefront of ESG thought leadership; we were the first manager to have two articles on sustainable multi-asset investing published by the UNPRI. For us, Sustainability is part of our firm-wide mission; we were founding members of the Net Zero Asset Managers Initiative and were among the first financial institutions to have our Science Based Targets formally validated by the Science Based Targets Initiative (SBTi).

Fund Screens:

At the firm level, we exclude investments that fail to comply with the international conventions on cluster munitions, anti-personnel mines, biological weapons and chemical weapons. All funds in this portfolio will have exclusions to thermal coal and tobacco. More broadly, we take an inclusionary approach to sustainability and we regard stewardship as an integral part of our investment process, which we believe leads to better investment decisions for our clients. We believe long term financial success and investment returns are intrinsically tied to corporate sustainability and that many companies and assets face significant challenges in adapting to those pressures. Across the firm, we believe active ownership and exerting our influence to support companies’ transitions helps protect value for our clients, and generally emphasise robust stewardship practices over divestment. Some of the underlying sustainable funds state that they have exclusions not because they exclude these sectors a priori but because the search for truly sustainable businesses they would preclude businesses of this nature in any case. As a result, in the cases of those sustainable funds, the exclusions implemented are a reflection of their investment strategies rather than a constraint on performance, bourn out by the strong performances those strategies have delivered. For example, we have listed below the exclusions in underlying sustainable funds held currently in the fund:

• Schroder Global Energy Transition Fund - Fossil fuels, nuclear, weapons, tobacco and alcohol.
• Schroder International Selection Fund (ISF) QEP ESG - Fossil fuels, nuclear, weapons, tobacco, predatory lending, alcohol, adult entertainment and gambling.
• Schroder ISF Global Sustainable Growth - Fossil fuels, weapons, tobacco, high interest rate lending, alcohol, adult entertainment, gambling and human embryonic cloning.
• Schroder ISF European Sustainable Equity - Fossil fuels, nuclear, weapons, tobacco, alcohol, adult entertainment and gambling. The fund also excludes issuers which are ranked in the 4th quartile within CONTEXT™, issuers where the social value/sales = -100% and issuers which account for 50% of negative externality costs
• Schroder ISF Sustainable Euro Credit- Thermal coal production, oil and gas extraction, unconventional oil and gas production, tar sands, uranium extraction, nuclear energy, oil and gas powered energy generation, thermal coal energy generation, alcohol, tobacco, gambling, adult entertainment, weapons

Thematic themes:

The fund allocates to thematic themes. For example, the portfolio includes focused thematic exposure to the best performing companies involved in new clean energy systems, as the world transitions to lower-carbon energy, through our energy transition strategy. It will target global resource emerging technologies and strategic industries integral to the global shift to cleaner energy, seeking opportunities across key value chains, including renewable energy, energy storage and electric vehicles. It will also selectively offer exposure to the underlying materials and technologies required for the transformation to take place.

Process:

At the heart of our investment philosophy is the belief that through analysis of ESG factors we can make better investment decisions. Our approach to sustainability takes both a top-down and bottom-up view. We integrate ESG factors at every stage of our investment process, top down through our global research platform, applying our asset allocation decisions and finally when constructing our multi-asset portfolios using long term asset class return forecasts adjusted for climate change.

From a bottom-up perspective in constructing our portfolios, we draw on the sustainable security selection expertise of our underlying equity and fixed income teams and work with these teams and the sustainable investment team to ensure that we actively engage and vote on the companies we invest in. Finally, we measure and monitor our portfolios through a variety of ESG lenses.

Below we have summarised each element of our ESG approach 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 a greater impact on the investment environment in which we operate.

To that end, the cornerstone of our ESG integration is the Cross-Asset Sustainability Research Group, which sits across the seven risk premia research groups. The Cross-Asset Sustainability Research Group’s focus will be on identifying ESG trends that could impact markets and our portfolios, with an emphasis on political, regulatory, social and positioning trends that could result in negative externalities (impacts on society) being internalised in the performance of companies and markets. 

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 portfolio level. The analysis produced from the Cross-Asset Sustainability Research Group helps us to understand what is driving our SustainEx™ scores and assess the probability that some of these risks could be crystallised in terms of impacting the performance of our portfolios.  In addition to SustainEx™, we have several market-leading 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.

Asset allocation: We consider ESG factors in both long term asset class returns forecasts and short term tactical trades.

• 30-year asset class returns adjusted for climate change: We believe climate change will be a defining driver of the global economy, society and financial markets over coming years, decades and beyond. Whether the global economy is rebuilt on less carbon intensive foundations or the temperature continues to escalate, investors will be unable to avoid its impacts. Either way, the financial risks and opportunities are enormous, and could have a material impact on investments. For this reason, we have integrated climate change into our 30-year asset class return and risk forecasts. We use these forecasts adjusted for climate change in our construction process through our proprietary tool, Schroders Multi Asset Risk Technology (SMART). SMART offers portfolio managers a flexible approach to modelling and optimising multi-asset portfolios. We believe this approach is unique and our competitors typically use forecasts agnostic on the subject of climate change.
• Tactical trade sustainability screening: Our Global Asset Allocation Committee (GAAC) are responsible for asset allocations views across multi-asset portfolios. From a sustainability perspective, we review all GAAC trades and use a traffic light system to highlight low ESG rated trades. This process is a mixture of quantitative and qualitative measures, considering proprietary Schroders rating through SustainEx™ and external vendors such as MSCI.

Security selection: The Multi-Asset Investment team is integrated with Schroders’ global resources, drawing on the expertise of specialist equity and fixed income security selection teams. We have access to extensive alpha generation capabilities across our equity and fixed income sustainable investment strategies. The multi-asset team also allocates to security selection impact goals strategies, which has a dual aim of delivering risk-adjusted returns whilst seeking to contribute positively to the solutions needed to solve societal and environmental challenges. An example of this type of strategy is the Schroder Global Energy Transition Fund. This fund is a thematic exposure that invests in the best-performing companies driving the transition to a low-carbon economy over the medium to long term.

Active engagement & voting: Effective and responsible active ownership has long been part of our fundamental approach to investment at Schroders. 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. Accordingly, we actively engage with companies on a variety of ESG issues.

The aim of our engagement is threefold:

• Encourage companies to adopt longer-term approaches to their stakeholder relationships
• Improve investment insights on emerging risks and opportunities
• Generate better returns

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.

Sustainability budget: We developed the idea of a sustainability budget, measuring the percentage of the capital allocation in the portfolio allocated to a sustainable approach. The trade-offs involved in establishing a sustainability budget revolve around removing or reducing asset classes and company components that are not deemed ‘sustainable’ from the universe available for investment. This may be easy to comprehend, but it can reduce the portfolio’s diversification. The sustainability budget provides the investment team with a flexible tool to monitor and measures the sustainability of the portfolio, while permitting other assets that are useful for diversification, tactical asset allocation and risk reduction. This concept was featured in a case study, published on the United Nations Principles of Responsible Investment (UN PRI) website.

Measurement through a variety of ESG lenses: We recognise clients are increasingly interested in fund-level sustainability reporting. Some clients are interested in the overall ESG profile of their portfolio while others are focused on a particular aspect, such as the environment. We provide a range of metrics; for example impact reporting from proprietary tools such as SustainEx™ and climate metrics from third party data to support our clients with Task Force on Climate-Related Financial Disclosures (TCFD) reporting.

Resources, Affiliations & Corporate Strategies:

Our Sustainable Investment Team

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. As at March 2023, the team comprises over 50+ dedicated ESG professionals with over 400 years’ combined investment experience. 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 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 three pillars: 1) Sustainable Investment Management, incorporating integration, thematic research and models and data, 2) Active Ownership, encompassing engagement and voting and 3) Product, which entails our client, product and solutions activities. We also have regional sustainability specialists in Europe, Asia and North America, who work closely with our regional investment desks and clients globally. We outline their key responsibilities and areas of focus below.

• Sustainable investment management

Our Integration team works with our investment teams to integrate our proprietary ESG tools and research into their investment processes. They are also responsible for the annual review and integration accreditation of all our investment desks.

Our Research team is responsible for conducting research into our key thematic areas and working in collaboration with investors to help them understand how these themes impact their portfolios.

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.

• 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.

• Product

Our Product team is responsible for all the externally-facing aspects of our sustainability strategy. This includes our suite of products and solutions, client engagement and our engagement with regulators and industry bodies. We also have regional specialists who help our clients around the globe to achieve their sustainability objectives.

For us, sustainability is a core part of our firm-wide strategy and is fundamental to our ultimate objective which is to achieve better outcomes for our clients. The Sustainable Investment team work in partnership with many teams around Schroders including our investment teams, Investment Insights Unit, Product Governance and client teams. We also have a number of dedicated sustainable equity and credit analysts who are embedded within our investment desks, along with 50+ Sustainability champions across investment globally.

Source: Schroders, as at 31 March 2023.

What is more, 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
• Responsible Investment Association of Australasia (RIAA).

For further details on our industry involvement, please refer to pages 44-47 of our 2022 annual sustainable investment report.

Dialshifter

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

• Working in partnership with asset owner clients on decarbonisation goals, consistent with an ambition to reach net zero emissions by 2050 or sooner across all assets under management;
• Setting an interim target for the proportion of assets to be managed in line with the attainment of net zero emissions by 2050 or sooner; and
• Reviewing our interim target at least every five years, with a goal of ratcheting up the proportion of assets covered until 100% are included, as efforts to structurally decarbonise economies play out.

SDR Labelling: Sustainability Mixed Goals label