Schroders
Responsible Investment Report
2013 Annual Report
Contents
Page
Schroders overview ··········································································································· 1
Active owners ··················································································································· 3
Engagement ···································································································3
Proxy voting and shareholder resolutions ······························································8
Integration ······················································································································ 11
Responsible investment special topics ································································ 14
Themed funds ······························································································· 16
Ethical assets under management ····································································· 19
Collaboration, industry involvement, seminars and training ······················································ 22
Collaborative initiatives ···················································································· 22
Industry bodies promoting ESG practices ···························································· 22
Seminars providing training and learning ····························································· 22
Responsible property investment ························································································ 23
Responsible fixed income investment·················································································· 24
Compliance with UN principles for responsible investment ····················································· 25
Important Information
This document is intended to be for information purposes only and it is not intended as promotional material in any
respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The
material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment
recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders)
does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This
does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and
Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own
views and opinions in this document and these may change. Reliance should not be placed on the views and
information in the document when taking individual investment and/or strategic decisions. Issued by Schroder
Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the
Financial Conduct Authority.
Schroders Responsible Investment Report
2013 Annual Report
Schroders overview
Schroders is a global asset management company which has developed under stable ownership for over
210 years. Asset management is our business and our goals are completely aligned with those of our
clients – the creation of long-term value.
We are a diverse asset management company, managing £262.9 billion (as at year-end 2013) on behalf of
institutional investors, financial institutions and high net worth clients around the world, invested in a broad
range of asset classes across equities, fixed income and alternatives.
Figure 1: Assets under management (AUM) by product and region (December 31, 2013)
11%
7%
Equities
Fixed Income
45%
Multi-asset
EMD, Commodities & Property
20%
Wealth Management
17%
2%
13%
UK
Continental Europe
41%
24%
Middle East
Asia Pacific
North America
South America
3%
17%
We employ more than 3,500 talented people worldwide, operating from 37 offices in 27 different countries
(as at year-end 2013) across Europe, the Americas, Asia and the Middle East.
As responsible investors we consider the long-term risks and opportunities that will affect the resilience of the
assets in which we invest. This approach is supported by the Global Equities Responsible Investment Policy,
the Investment & Corporate Governance: Schroders Policy, the Global Fixed Income Policy and the
Responsible Property Investment Policy.
1
Schroders Responsible Investment Report
2013 Annual Report
Responsible investment at Schroders
Schroders has had a responsible investment (RI) approach for over 15 years. Whilst the moniker for this
investment process has varied over the years, its aims and methods have not. These are to be active owners
of the companies in which we invest and to reflect environmental, social and governance (ESG) value drivers
within our investment process. It includes the long-term aim of developing an investment process which meets
the needs of the current generation without compromising the ability of future generations to meet their own
needs. Below we list the areas of responsible investment in which we are involved and which will be covered
in greater detail within this report.
Active owners
This refers to our role as active stewards of the companies in which we invest and covers our voting and
engagement activities with management on ESG issues in order to enhance shareholder value and to improve
our understanding of these companies.
Integration
Integration is one of the most recent phrases to come under the responsible investment umbrella of terms. It
refers to how ESG factors are integrated into the investment process. This can mean many things to many
people, and the level of sophistication behind integration will vary. Within the integration section of this report
we include the following sections:
- Negative exclusion: this excludes stocks on the basis of the products or services they provide.
Whilst this has tended to reflect moral views, the issues covered tend to have had a financial impact to
a business whether this is through customer boycotts (e.g. anti-Apartheid) or through regulatory costs
(e.g. evolving tobacco and alcohol regulation)
- Thematic investment: for example, the Schroders Global Climate Change fund. This has a high
degree of integration with the philosophy of the product reflecting the belief that thematic factors (such
as climate change or water resources) will be a driver for future value within an identified investable
universe.
- Integrated analysis: when a company’s management of its ESG risks and opportunities is used to
inform stock valuation and selection decisions, as well as to inform stewardship activities with
company management.
Our approach to ESG has historically focused on the equity side of the business. This partly reflects the fact
that equity holders have more access to company management and hence the ability to engage companies on
ESG issues, but also reflects historical demand trends for ESG approaches. However, in addition to our ESG
focus on global equities, we also have ESG policies covering our property and fixed income products and the
integration of ESG into these product classes is an evolving area.
There is a team of six ESG specialists involved in the implementation of our responsible investment and
corporate governance policies, three of whom focus on corporate governance and three on the environmental
and social elements of ESG. This year saw the team being managed under one team manager who also
brings considerable investment expertise to the role which will help in the continued efforts to develop tools for
integrating ESG research into our investment process. The ESG team is supported by specialist ESG
research providers as well as by allocating a proportion of our broker commission to those brokers providing
value through their ESG research services.
Industry involvement
In addition to our work with the internal investment teams we also participate in and support industry initiatives
in ESG. In the majority of cases we have been long-term supporters of these initiatives, helping to bring our
learnings to a wider audience as well as learning from other practitioners in this field. Support for industry
bodies such as the UK Sustainable Investment and Finance forum, European Sustainable Investment Forum
and the Principles of Responsible Investment helps to promote the need to place more emphasis on how ESG
factors are reflected in today’s investment processes and the relevance of these to beneficiaries’ long-term
well-being.
2
Schroders Responsible Investment Report
2013 Annual Report
Active owners
On behalf of our clients, Schroders has share ownership rights; exercising these rights, through company
engagement and proxy voting is an integral part of our role in managing, protecting and enhancing the value of
our clients’ investments. In exercising these responsibilities we combine the perspectives of our portfolio
managers, company and ESG analysts to form a rounded view of each company and the issues it faces. It
follows that we will concentrate on each company’s ability to create sustainable value and may question or
challenge companies about ESG issues that we perceive may affect their future value.
The following section details our activities with regards to corporate engagement on ESG-specific issues and
our voting activities.
Engagement
Why do we engage?
Engagement with companies is part of our fundamental approach to the investment process as an active
investor. We believe that additional value is created by engaging with companies and their management, but
we also recognise that stock selection and asset allocation may have a greater impact on the financial returns
of a client’s portfolio. Having said this, we believe that engagement serves to enhance communication and
understanding between companies and investors. When engaging with companies on ESG issues it is
generally for one or more of the following three reasons:
1.
Seeking change in ESG performance and processes that will protect and enhance the value of the
investments for which we are responsible.
2.
Monitoring the on-going development of ESG practices, business strategy and financial performance
within a company.
3.
Filling in gaps in our analysis.
How do we engage?
There are numerous permutations for how engagement with company management can be undertaken, from
the engagement to collaboration with other stakeholders.
Typically the mechanism of engagement with representatives of a company can involve any of the following
methods:
- Meeting with company representatives (e.g. members of the Board, senior executives, managers of
specialist areas)
- Written correspondence
- Phone calls
- Discussions with company advisers and stakeholders
- Voting.
Collaboration with other stakeholders can range from no collaboration to working with a large number of
organisations co-ordinated by a dedicated initiative. Most of Schroders’ engagement activity is a solitary
endeavour, though we will also engage with other investors in group meetings (either arranged by us or in
which we participate) or through participation in a dedicated initiative (e.g. the Carbon Disclosure Project
(CDP)). We do not record the number of companies engaged with through multi-stakeholder initiatives such
as the CDP within our engagement figures. The CDP will contact more than 5,000 companies to encourage
disclosure on climate change-related topics on behalf of its investor signatories. However, our involvement in
this is limited to providing input to the development of the questionnaires and to using the data as collated by
the CDP.
On a quarterly basis we assess the ESG ratings of our desk portfolios alongside the materiality of our
exposure to a stock (either by size of clients’ assets invested in a stock or by the percentage of shares held) in
order to identify those stocks where ESG performance presents a risk to our investment in the company. This
therefore provides a tool for prioritising which stocks to engage with. However, this is not the sole method for
determining engagement activities as there will also be instances where a company is on an ESG roadshow
and it will benefit us to engage with the company in order to understand what it is doing within ESG.
3
Schroders Responsible Investment Report
2013 Annual Report
Alternatively we may be researching a specific topic and will therefore need to engage with companies with
exposure to the topic. A further example could be as a form of re-active engagement as a result of a negative
incident with the company in order to understand why it may have occurred and actions the company is taking
as a result.
What is the purpose of engagement?
As we have said earlier, engagement is not always with the sole purpose of encouraging change in company
ESG performance. It could also be to improve our understanding of a company’s ESG management
programme (“fact finding”) in order to improve our knowledge and analysis. Where we do seek change
(“change facilitation”), this can be on various topics, from a simple request to encourage improved disclosure
on an ESG indicator (in order to enable better analysis), to encouraging the adoption of a specific performance
target which would demonstrate effective management of ESG risk exposure. Figure 2 demonstrates that, on
average, almost 40% of our company engagement activities have been to request change.
Figure 2: Aims of engagement over last five years
100%
90%
80%
70%
60%
50%
Change Facilitation
40%
Fact Finding
30%
20%
10%
0%
14-yr
average
2009
2010
2011
2012
2013
Once a request for change has been made we will review the company’s progress in meeting that request on
an annual basis (Table 1). Our assessment of the progress a company has made in meeting the request for
change is subjective (and therefore susceptible to human influences) and ranges from “no change” to
“achieved”. Table 1 shows the outcomes of the requests for change that we have made. We recognise that
every company has a multitude of stakeholders, from employees, customers, the environment, regulators,
management and investors, all of whom will be impacted by and impact on the strategy and performance of
the company. We therefore recognise that in responding to any request for change, management will have to
take into account the range of opinions of these stakeholders and therefore it is unlikely that any one
stakeholder group will be solely responsible for any changes made. We also acknowledge that any changes
will take time to be implemented into a company’s business process, and therefore only review requests for
change a year after they have been made.
Table 1: Effectiveness of requests for change
14 yr Average
2009
2010
2011
2012
2013
50%
45%
33%
19%
25%
3%
Almost
33%
48%
40%
51%
5%
0%
Some change
9%
6%
20%
14%
33%
3%
No change
8%
0%
7%
16%
38%
0%
On-going
10%
0%
0%
0%
0%
95%
Success rate
83%
94%
73%
70%
30%
3%
Achieved
The data in Table 1 clearly shows the influence of time on the success of any requests for change. We put
this down to a number of possible reasons:
4
Schroders Responsible Investment Report
2013 Annual Report
–
Companies might take longer than one year to implement a response to change (note the difference
between the success rate for 2012 requests for change versus 2011).
–
As companies continue to improve their ESG performance, any requests for change may be focusing on
more specialist areas making the likelihood of achieving change smaller.
–
We re-visit older requests, aiming to ensure that over time the request is at least “almost” achieved or a
good reason provided for this not to be the case, meaning that older requests for change are more likely to
be successfully addressed over time. This process of review has seen the long-term average success rate
improve from 76% in 2012 to 83% by 2013.
The large number of on-going assessments for 2013 demonstrates the annual review process at work, as the
majority of these requests will not have been assessed at the time of writing this review.
On what do we engage?
Over the course of the year our engagement activity covers numerous companies and sectors whose value
chain will be exposed to a large variety of differing ESG issues. This means that we do not have an
overarching format for dictating on what issue we should be engaging with a company but rather that the
topics for engagement are dictated by each company’s individual circumstances. Given the number and
diversity of companies with which we engaged on ESG issues during 2013 (as demonstrated in Table 4) there
is a great variety of industries and geographies that these companies belong to and hence a great variety of
ESG issues to which they are exposed. In addition to this, the level of ESG disclosure by companies varies
significantly both by sector and geography. This means that we will find ourselves engaging on a variety of
topics (see Table 2) depending on the company we are meeting with.
Table 2: Indicative list of ESG topics engaged on over the course of 2013
Environmental
Social
Governance
Arctic drilling
Biodiversity
Climate change
Ecosystem services
Equator principles
Genetically Modified Organisms
Product life cycle assessment
Resource scarcity
Sustainable palm oil
Access to medicines
Bribery and corruption
Employee engagement
Employee health and safety
Food safety
Human capital management
Human rights
Labour standards
Local community
Money laundering
Nutrition and obesity
Operational health and safety
Security
Supply chain management
Acquisitions and mergers
Board structure
Business strategy
Dividend policy
Governance frameworks
Key performance indicators
Remuneration
Succession planning
Targets and objectives
Transparency
A look at our work with mining company BHP Billiton offers an example of our engagement activities. We
have been meeting with the company since 2002 to discuss its ESG performance. At our first meeting we
discussed board diversity (there were no women on the board), coal exposure (it made up 50% of revenues),
health and safety, and bribery and corruption. These have been regular topics of engagement throughout our
fourteen ESG meetings since 2002. Of the fourteen meetings four have been at the behest of Schroders, and
at three of the meetings we have made specific requests for change.
Table 3: Engagement topics with BHP Billiton 2002-2013
Year
Topics of engagement
2002
2003
2004
Board diversity, coal exposure, health and safety, bribery and corruption
Climate change, health and safety, AIDS, biodiversity
Health and safety, reflecting health and safety performance in executive remuneration,
contractor management, water management
Social licence-to-operate
2005
5
Schroders Responsible Investment Report
2006
2007
2008
2010
2011
2012
2013
2013 Annual Report
Political risk, health and safety, environmental and social risk assessments of projects,
performance targets
Energy and greenhouse gas conservation programmes, coal exposure and clean development
mechanisms
Health and safety performance and remuneration
Health and safety performance and remuneration, updating the existing corporate
responsibility systems
Carbon trading and exposure to high carbon fuels
Setting absolute reduction targets, water risk exposure, UK Bribery Act, political and corruption
risks in project decision making, carbon tax and fossil fuel exposure
Impacts on and impacts by climate change, unburnable carbon, carbon price in project
decision making
Where do we engage?
As active investors we are engaging with companies on a regular basis. In 2013 our equities teams had
13,396 meetings with companies, whilst the fixed income team had 3,231 meetings. While these meetings
may have focused primarily on financial performance they will also have been used to address questions on
ESG issues where necessary, though as yet there is no formal process for recording this. However, we do
have a formal process for recording instances of specific ESG engagement by the ESG team: the team’s
activity in this area is demonstrated in Figure 3. As we have mentioned previously, we do not include the
figures for collaborative engagement initiatives such as the Carbon Disclosure Project or the Sustainable Solar
Initiative in these figures.
Figure 3: Geographical spread of E&S engagement over the last 5 years
140
120
Africa
100
Asia
80
South America
60
North America
Australasia
40
Continental Europe
UK
20
0
5-yr
average
2009
2010
2011
2012
2013
Figure 3 shows the geographic spread of the ESG team’s engagement. Whilst it is encouraging that we have
managed to increase the global scope of our activities there is still work to be done in making this distribution
more reflective of geographic distribution of our investments. In addition, from a sustainability point of view,
there is a strong argument for increasing ESG engagement in regions where current levels of corporate ESG
practice and performance could improve considerably. Achieving this objective will have its challenges in the
form of language and cultural differences, differing ESG governance systems, the size of our holdings and, not
least, the location of the ESG team. During 2013 we participated in a field trip to China, with the explicit
purpose of meeting Chinese companies to discuss ESG issues with them and to demonstrate foreign interest
in this aspect of their business.
6
Schroders Responsible Investment Report
2013 Annual Report
Table 4: Companies specifically engaged with on ESG topics during 2013
Sector
Sub-sector
UK
Automobiles
Consumer
discretionary
Hotels, restaurants & leisure
Multiline retail
Textiles, apparel & luxury goods
Carnival
Intercontinental Hotels
Kingfisher
Marks & Spencer
Burberry
Beverages
Britvic
Food & staples retailing
Sainsburys
Tesco
Wm Morrisons
Food products
ABF
Unilever
Consumer
staples
Metro
LVMH
Pepsico
Ahold
Carrefour
Colruyt
Danone
Groupe Casino
Nestle
Oil, gas and consumable fuels
Capital markets
Commercial banks
Financials
Consumer finance
Diversified financial services
Insurance
Real estate
Healthcare
Pharmaceuticals
Aerospace & defence
Airlines
Industrials
Building products
Commercial services & supplies
Electrical equipment
Asia Resource Minerals
Royal Dutch Shell
3i
HSBC
Royal Bank of Scotland
Standard Chartered
Provident Financial
ENI
Neste Oil
Repsol
Total
Credit Suisse
BNP
Credit Agricole
Societe Generale
Information
technology
Munich Re
Bayer
Novo Nordisk
BAE Systems
Ultra Electronics
International Consolidated
Airlines Group
Lockheed Martin
Xinyi Glass
G4S
Alstom
Sime Darby
Swire Pacific
Construction materials
Materials
Vallourec
Prysmian
Croda International
Victrex
AMEC
Dassault
Solvay
Syngenta
Containers & packaging
Metals & mining
Paper & forest products
Electric utilities
Multi-utilities
Utilities
Water utilities
7
Bodycote
Machinery
Transportation infrastructure
Communications equipment
Internet software & services
Semiconductors & semiconductor
equipment
Software
Chemicals
Gazprom
Apache
Exxon Mobil
Petrochina
Santos
Nomura Holdings
RSA Insurance group
British Land
GlaxosmithKline
Industrial conglomerates
Machinery
China Mengniu Dairy
China Modern Dairy
Kraft Foods
BP
Integrated oils
Energy
Rest of world
L’Oreal
Personal products
Energy equipment & services
Continental Europe
BMW
Volkswagen
Anglo American
Antofagasta
BHP Billiton
GlencoreXstrata
DS Smith
Drax
Centrica
Arcelor MIttal
Zhejiang Expressway
Cisco
Tencent Holdings
Mediatek
Samsung Electronics
Monsanto
Semen Indonesia
TOTO ltd
Greatview Aseptic
Packaging
Grupo Mexico
Newcrest Mining
Teck Resources
Rocktenn
Beijing Enterprises Water
Group
CT Environmental Group
Schroders Responsible Investment Report
2013 Annual Report
Proxy voting and shareholder resolutions
We recognise our responsibility to make considered use of voting rights. We therefore evaluate voting issues
on our investments and, where we have the authority to do so, vote on them in line with our fiduciary
responsibilities in what we deem to be the interests of our clients. We vote on all resolutions unless we are
restricted from doing so (e.g. as a result of share blocking).
Table 5: Voting activity 2009-20131
2013
2012
2011
2010
2009
Meetings
6,489
5,633
5,191
4,758
5,032
Resolutions
63,422
49,536
45,350
43,674
46,521
Votes with management
58,862
46,065
42,101
41,497
42,181
Against management
4,560
3,471
3,339
2,177
4,340
Figure 4: 2013 breakdown of resolutions voted on by category (according to MSCI ISS classifications)
3%
7%
1%
Capitalisation
22%
Takeover related
Director related
Reorganisation and mergers
0%
Non-salary compensation
8%
Preferred/bondholder
3%
55%
Routine business
Shareholder resolutions
As Figure 4 shows, the majority of resolutions target specific corporate governance issues which are required
under local stock exchange listing requirements (e.g. approval of directors, accepting reports and accounts,
approval of incentive plans). A small minority of these resolutions are tabled by shareholders in the company
and focus on the social, ethical and environmental (SEE) issues that a company faces. As with previous
years, the majority of these shareholder resolutions have tended to be tabled at the AGMs of US companies
(because US corporate governance regulations make this easier to achieve than in other jurisdictions). Where
a shareholder resolution of an SEE nature is tabled at the AGM of a company, we will take into account
company performance, best practice, whether the company has faced similar resolutions before and,
ultimately, if the resolution is in shareholders’ interest. We normally hope to support company management;
however, we will withhold support or oppose management if we believe that it is in the best interests of our
1
Please note the figures in this table do not include resolutions or meetings at which we did not vote. We aim to vote
at all meetings except were there are onerous restrictions – for example, where trading is restricted prior to a meeting
in shares committed to vote (share blocking), we will usually only vote in cases where the benefit of voting outweighs
the ability to trade.
8
Schroders Responsible Investment Report
2013 Annual Report
clients to do so. Further details about Schroders’ approach to voting are covered in Investment and Corporate
Governance Policy.
Table 6 provides a historical breakdown of recent shareholder resolutions that we have voted on (our records
go back to 2000). Whilst it is feasible to attempt to draw conclusions from an analysis of the trends it should
also be noted that the investment strategies of Schroders’ fund managers will determine which sectors and
companies we will have exposure to and will thus influence which resolutions we will have to vote on. Having
said this, we have noticed that certain topics have dropped off shareholder resolution filings (e.g. access to
protected areas and AIDS/HIV) whilst there has been a growing interest in areas such as fracking and political
lobbying.
Ethical
Toxic chemicals
Climate change
Renewable energy & energy efficiency
Nuclear power
Environmental policy / programme
Forestry
Shale gas/fracking
Miscellaneous
Other
Social
Issues
Animal testing/welfare
GMO
Weapons
Tobacco
Miscellaneous
Environment
Table 6: Social, environmental and ethical shareholder resolution five-year voting records by
issue
Equal Opportunities
Labour standards & human rights
Drug pricing / access
Healthcare
Health & safety
Pay disparity
Miscellaneous
Sustainability report
Link pay to ESG performance
Political activity
Miscellaneous
Number of resolutions voted on
2013
2
2
0
0
2
2012
9
1
0
0
0
2011
6
1
0
1
1
2010
5
0
2
3
1
2009
8
1
5
5
0
1
4
0
0
4
0
1
5
0
5
8
14
6
0
1
7
3
9
5
5
2
0
3
12
4
16
4
20
16
0
0
6
0
15
0
3
0
2
11
7
0
0
1
1
3
8
3
0
0
3
0
4
12
6
1
0
2
3
2
7
15
0
0
2
0
2
16
12
0
12
3
1
2
3
1
2
4
3
0
7
0
3
1
0
3
9
0
0
4
6
0
0
0
54
79
81
116
99
8
Figure 5 demonstrates that the incidence of SEE shareholder resolutions since our records began. There
would appear to be a four year decline in the number of SEE resolutions tabled at AGMs, which could reflect
improvements in ESG performance at US companies (where the majority of SEE shareholder resolutions are
tabled).
9
Schroders Responsible Investment Report
2013 Annual Report
Figure 5: Total number of shareholder resolutions voted on (2000-2013)
Number of resolutions voted on
140
120
100
80
60
40
20
0
2000
10
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Schroders Responsible Investment Report
2013 Annual Report
Integration
In its 2013 report “Integrated Analysis: How Investors are addressing environmental, social and governance
factors in fundamental equity valuation” the Principles of responsible Investment presented a very useful
diagram for picturing how ESG factors could be integrated into the different stages of a textbook stock
valuation process. This is shown in Figure 6.
Figure 6: Integrating ESG analysis into listed equity analysis
Economic
Analysis
Industry
Analysis
Company
Strategy
Financial
Reports
Valuation
Tools
Understanding
how ESG factors
affect economic
growth and
macro themes,
such as resource
scarcity
Understanding
how ESG factors
influence
consumer
preference and
regulatory
change, such as
environmental
legislation
Understanding
how a company
manages ESG
risks and
opportunities, for
example in
supply chain
management
Understanding
how ESG factors
impact on
earnings growth,
operational
efficiency,
intangible assets
and underlying
cash flows
Understanding
how analysts are
integrating ESG
considerations
into valuation
tools, such as
discount rates
and economic
value added
Source: PRI, Integrated Analysis, 2013
Within Schroders we have been working on addressing all the stages of this ESG integration investment chain.
1. Economic Analysis
Whilst the majority of historical ESG work has tended to focus on sector or company-specific research we
have been increasingly realising the need to emphasise that ESG needs to be reflected in the macroeconomic research which guides growth forecasts used in most analysts’ models. This is based on the
understanding that the economy is a sub-system of the global environmental system and that changes to one
will result in changes to the other (e.g. water scarcity will reduce productivity).
We first began writing on this issue in 2009 with the publication of our report “Ecosystem credit crunch”, which
2
highlighted that the depletion and pollution of ecosystem services caused by unsustainable population and
economic growth would have impacts on the sectors and companies directly exposed to these services. We
followed this report up in 2011 with “Ecosystem services: Where’s the discussion” which presented the results
of our efforts to engage the chief economists of some of the world’s biggest investment banks on how, if at all,
they took account of changing ecosystem service function within their long-term forecasts (the catalyst for this
piece of work was reading several 2050 economic outlooks, which all failed to reference the impacts of climate
change to their forecasts). In 2013, we collaborated with two other asset managers, Alliance Trust and
Newton Investment Management, in a repeat of the 2011 project, culminating in the publication of “Broken
Models: Economics and ecosystem services”.
There are numerous challenges in seeing environmental factors recognised in economic forecasts (one could
easily argue that social factors, in the form of productivity and education are already well integrated) ranging
from a lack of data, a lack of understanding of the data, client demand and short termism. However we
believe that greater integration will improve the quality of analysts modelling, provider greater recognition of
2
There are four recognised ecosystem service groups: supporting services (e.g. nutrient cycling, soil
formation, primary production), provisioning services (e.g. production of fresh water, food, materials and fuels,
genetic resources), regulation services (e.g. climate and flood regulation, water purification, pollination and
pest control) and cultural services (e.g. aesthetic, spiritual, educational and recreational).
11
Schroders Responsible Investment Report
2013 Annual Report
the need for a more rapid update of truly sustainable financial models and enable more informed political
discussion and decision making on environmental factors. We are planning on updating the “Broken Models”
report in the near future.
2. Industry analysis
Perhaps one of the easiest concepts to model is how do ESG factors affect an industry. The impacts could be
through numerous factors such as changing consumer preferences (e.g. the increase in demand for organic
produce, changing demand for tobacco or alcohol), regulatory impacts (e.g. the aviation sector being included
in the EU Emissions Trading Scheme). Clear examples that we would use within Schroders are in the
inclusion of a cost of carbon for carbon companies with exposure to Canadian tar sands regulation or indeed
for those with exposure to the growing global use of emissions trading regimes.
The unburnable carbon piece (see page 15) is an example of an industry-level piece of research, and typically
many of our quarterly research reports will focus on industry issues.
3. Company strategy
Essentially this refers to how a company’s management is implementing a strategy to minimise the ESG risks
and maximise the ESG opportunities presented by the economies and industries to which a company is
exposed. The ESG analysts would prepare an in depth report on a company’s ESG performance prior to
engaging with a stock, and this would typically enable them to form a view on management’s strategy. For
example, “The bee and the stockmarket” (page 14) included an analysis of corporate strategy for managing
the issue of pollinator decline. Another example of integration would be in considering how management is
minimising corporate exposure to climate change risks (e.g. decreased demand for high-carbon fuels, or
increasing supply chain disruptions).
This sort of analysis has a much more qualitative nature to it, though quantitative measures could be used to
assess the performance of management’s strategy. One would expect that this assessment of ESG strategy
(and hence corporate strategy) would be reflected in the growth forecasts that an analyst makes (e.g. terminal
growth figures, maturity year and adjustments for the risk premium); however, the extent that ESG
performance will impact on this is a subjective assessment.
One could also use an assessment of ESG strategy as a differentiator at the stock selection level when faced
with an investment choice between two similar stocks.
4. Financial reports
There are numerous examples from the companies that we have engaged with over the years demonstrating
how ESG factors can affect fundamental financial returns. For example, how will sales be affected by
consumer demand, changing weather patterns or new regulations? Or indeed how will ESG factors influence
raw material availability, labour costs, research and development, and hence cost forecasts? It is clear that
ESG factors should legitimately be considered when taking a view on future revenue streams or costs;
however, in our experience, there are two constraints to this. One is that analysts very rarely adjust individual
estimates for revenue or costs, preferring to use a macro growth figure (based on their thoughts on parts 1, 2
and 3 above). Second, individual examples of ESG impacts on costs or revenues have tended to be
immaterial when considered in isolation and against the income statements of some of the world’s largest
corporations.
Naturally there are some examples, e.g. inputting labour cost increases where regional changes to labour laws
will impact these (e.g. China and textile manufacturers) or a cost for carbon could be included in an analyst’s
model.
As we mentioned last year, it is also possible to put a cost on the ecosystem services that a company uses
and impacts on (as has been done by the oft cited Puma environmental profit and loss report), which would
enable management to identify areas in its value chain where efficiencies and processes could be improved.
However, this relies on placing a value on externalities, which is currently outside of standard market practice,
though tools for valuing these services are improving.
12
Schroders Responsible Investment Report
2013 Annual Report
5. Valuation tools
It is here that the elements of assessing the previous factors come together into determining what the impact
may be on the valuation of a company. For example, an analyst may judge that better ESG practices will have
a positive impact on free cash flow and hence on the return on invested capital (ROIC), or that a well-managed
company will benefit from lower cost of capital. Or indeed an analyst may adjust the risk premium attached to
a company based on its ESG performance, or the discount rate (e.g. two mining stocks could have different
discount rates applied depending on the commodity that they mined).
For the past five years we have been working on integrating ESG into the investment notes of our analysts,
with the ESG specialists auditing these notes. This has seen a gradual improvement in the level of integration
with many of the examples cited in this section being reflected in the analysts’ notes.
ESG Integration at Schroders
At Schroders we facilitate the integration of ESG into the mainstream investment process through the following
tools:
1. The ESG teams sit with the equity analyst teams to facilitate regular dialogue between ESG
specialists and company analysts.
2. The ESG team provides both general ESG training as well as very detailed sector specific ESG
training for investors.
3. ESG specialists and company analysts have collaborated on the production of an online, sectorfocused, ESG guideline template which is available to all analysts.
4. We are gradually rolling out (at desk level) a requirement for all company analysts to complete an
ESG review of the stocks under their coverage. The ESG analysts audit a proportion of these notes,
and provide feedback to the analysts.
5. We use the ESG ratings from our specialist ESG research provider to undertake a review of each
desk’s holdings. This information is fed back to the desk and helps to facilitate further discussion on
the reasons for the low rating as well as being used as a tool to guide our engagement programme.
6. In addition to company-specific research the ESG specialists produce regular thematic research
reports which explore ESG concepts and how, or why, they should be integrated into the investment
process (please see the “responsible investment special topics” section for examples of this research).
There is a long way to go in integrating ESG into the investment process and numerous challenges to
overcome. We hope that the above steps help to facilitate this process, but recognise that there are other
changes that could also speed up this process (e.g. integration into macro-economic forecasts, not just
company analysis; increasing investor time horizons; regulation). But we also recognise that these steps may
not be enough on their own for humanity to operate within the planetary limits as defined by the Stockholm
Resilience Centre. Perhaps this is one of the risks of ESG integration, in that there is an imagined belief that
simply taking account of ESG factors in the investment process means that the investments (and their
outcomes) will deliver the goals of sustainable development. We believe that this is not necessarily the case
and will seek to develop other indicators in order to measure the sustainability impact of client portfolios (e.g.
the carbon or water footprint of their portfolios versus the benchmark).
13
Schroders Responsible Investment Report
2013 Annual Report
Responsible investment special topics
In order to enhance our understanding of how ESG issues may create risks to or opportunities for our
investments we produce specific research reports into a range of topics. Some of these may be topical issues,
others more forward looking pieces addressing topics that may impact the financial markets. During 2013 we
published the following special reports:
Broken models? Economics and ecosystem services
A collaborative research project between Alliance Trust Investments, Newton Investment Management and
Schroders.
As changes to ecosystem services continue to increase in visibility on a global level, from the drought in the USA to
the smog of Beijing, there is increasing recognition that the consequences of these changes are having material
economic impacts. The evidence may emerge quickly through visible indicators, such as rising crop prices, or
gradually through less immediately tangible indicators, such as declining health. This short report (a follow-up to
Schroders' 2011 report "Ecosystem Services: Where's the discussion?") summarises the findings of a project which
set out to explore how the chief economists of some of the world's largest investment banks are integrating changes
to ecosystem services into their economic forecasts.
The bee and the stock market
An overview of pollinator decline and its economic and corporate significance
For several years there has been a constant flow of research on the topic of pollinator decline and its impact on food
security. This report aims to distil the current research and to determine if this is a current or future material issue
for companies with exposure to agricultural produce within their supply chain.
The majority of research has focused on the demise of the most active pollinator species apis mellifera – or the
European honey bee (though there are another 25,000 to 30,000 bee species and around 150,000 different
pollinator species in total). Research has focused on the European honey bee as it is one of the most common
commercial bees; the research has predominantly been conducted in North America and Europe (where the
majority of specialists are located). This research shows that honey bee numbers in these regions are in decline.
Looking on a global scale, the UN’s Food and Agriculture Organisation estimates that around three quarters of all
pollinators are in decline and that their numbers have reduced by about a third in the past decade. There are
several reasons for this which include habitat decline, pesticide use (in April 2013 the EU placed a two year ban on
the use of neonicotinoids which had been linked to bee deaths) and the spread of disease vectors.
The importance of pollinators to agricultural crops varies. In all, around 70% of agricultural crops (by crop species)
depend to some degree on pollination, though if looked at by mass, 60% of global agricultural yield is not affected by
animal pollination (this refers to crops such as wheat, maize and rice). In total it is estimated that should animal
pollinators disappear, this global agricultural production would only decrease by 4-6% by mass. That does not
measure the nutritional or economic value that could be lost as pollinator-dependant crops are an important source
of proteins, vitamins and minerals in our diet and also tend to have a higher economic value than non-pollinator
dependant crops.
By calculating the yield dependency on animal pollination, economists have been able to determine that pollinators
contribute around £130 billion to the global economy (a service that is predominantly provided for free). Should this
service be lost then the impact on food prices would mean a consumer surplus loss of £160 billion to £260 billion.
The degree of economic importance of pollination services at a national or farm level can be much more significant
than within the global economy as at these smaller scales exposure to pollinator services may be greater. Farmers
clearly put a value on pollination by employing the services of commercial bee keepers but there is also strong
evidence to suggest that payment for commercial pollination services could be better employed by investing in the
conservation and establishment of wild habitat for pollinators near crops with pollinator dependence.
At the corporate level this is clearly an issue that will affect cash flow due to the impact on raw material prices and is
therefore a topic that should be addressed by companies with exposure to agricultural produce. However, our
research suggests that there is limited focus on this specific issue by the companies we assessed, though there is a
broader, and growing, recognition of the economic value of maintaining biodiversity and ecosystem services within
the supply chain. We will follow up on this report by engaging with the companies we analysed to develop our
thinking further.
14
Schroders Responsible Investment Report
2013 Annual Report
Unburnable carbon
How should investors respond?......RSVP
97% of the world’s climate scientists agree that human emissions of greenhouse gases are responsible for
climate change. Limiting atmospheric concentrations of CO2 to 450ppm will give us a 50% chance of
o
o
avoiding a dangerous level of global warming (2 C by 2100). 2 C warming will have significant biophysical
and economic impacts, potentially causing a drag on the world’s GDP of up to 20%.
o
The world’s governments are committed to limiting warming to 2 C. Current atmospheric concentrations of
CO2 are 395ppm. This means we can only emit around 570GT of CO2 between now and 2050 to stay
within 450ppm.
The carbon embedded in the world’s fossil fuel reserves is around 2,800GT, implying that the majority of it
cannot be burnt. This means that the majority of assets for listed fossil fuel companies cannot be burnt and
(under this scenario) should be recognised as a liability
The question is: how should institutional investors respond to this carbon bubble? We recognise that, as a
discretionary fund manager, the responsibility for considering such issues lies with us; however, we are
interested in gauging opinions on this topic and welcome all comments, thoughts and suggestions.
Mining the ESG ground
Assessing the financial component of sustainability strategies in the mining sector
Mining operations have considerable impacts on the environment and the wider communities in which they
operate. The ESG performance of companies in the sector has traditionally been under great scrutiny and
this has led to higher levels of disclosure on key material risks from large mining companies.
These traditional ESG risks, however, are now being exacerbated by more difficult operating conditions,
mainly because of lower quality ore grades and access challenges. Mining companies have also had to
broaden their horizon and look for materials in emerging market countries. This has, in turn, led to the
emergence of new areas of risk, which include resource nationalism and community actions, whereby key
mining stakeholders are increasingly challenging companies for a better management and fairer share of
the resources. Corruption and water are also amongst the new areas of risk that mining companies have
had to cope with in recent years. Poor governance systems in some developing countries and localised
water scarcity both threaten the ability to continue to mine.
These vulnerabilities and risks have tangible financial implications for mining companies. The adaptation to
adverse environmental and social impacts that jeopardize operations bears additional costs for the miners.
More adverse operating conditions have led to higher consumption of energy and water, while production
output has remained quite stable in comparison.
Despite the financial materiality of some of these issues and their impact on shareholder value, it remains
difficult to assess if, and to what extent, mining companies have had to spend more on environmental or
social mitigation programmes over the years. Usually subsumed in operating and capital expenditure
figures, these costs are not easily identified and quantified by companies. Therefore, a qualitative
appreciation of these factors remains the most robust way of assessing good ESG management practices
in the mining sector.
15
Schroders Responsible Investment Report
2013 Annual Report
Themed Funds
Schroders’ Global Climate Change Fund
Schroders’ Global Climate Change Fund was launched in June 2007. Since inception the fund has performed
broadly in line with the MSCI World Index to December 2013 (see Figure 7, below) but has also exhibited
periods of significant outperformance (and underperformance) relative to the benchmark, reflecting the market
background. The fund has, though, performed consistently relative to its peer group for the three year and
since inception time periods, and it is in the second quartile for the one year period (see Figure 8).
Schroders believes that climate change will be the catalyst for a new “industrial revolution” as the world moves
inextricably towards a lower carbon economy. Increasingly stringent emissions targets will necessitate largescale capital investment alongside less costly abatement measures. The economic consequences both at a
country and corporate level are becoming increasingly clear. Climate change policy and regulation will have a
profound effect on most companies’ revenues, operating costs, competitive advantage and ultimately,
earnings growth.
Schroders’ Global Climate Change Fund seeks to maximise excess returns by investing in companies which
are beneficiaries of efforts to both mitigate and adapt to the impact of climate change. The investment thesis
for the fund is founded on the expectation that the accelerating pace of national and international policy action
on climate change is creating a favourable outlook for companies involved in efforts to mitigate climate change
as well as the need to adapt to the impacts of climate change. The fund draws its ideas from five broad
pockets of opportunity:
1.
Environmental resources (e.g. water resource management, agriculture)
2.
Low carbon fossil fuels (e.g. natural gas)
3.
Clean energy (e.g. solar power)
4.
Sustainable transport (e.g. electric cars)
5.
Energy efficiency (e.g. light weighting in transport).
More broadly, however, any company that is positively affected by climate change will be considered as a
potential investment candidate for the fund.
16
Schroders Responsible Investment Report
2013 Annual Report
Figure 7: Schroders Global Climate Change Fund performance since inception versus the
MSCI World Index
Schroder ISF Global Climate Change Equity vs MSCI World (rebased to 100)
130
120
110
100
Schroder ISF Global
Climate Change Equity Net
90
MSCI World TR ‒ Net
Return
80
70
60
50
Jan-14
Dec-13
Jul-13
Jun-13
Jan-13
Dec-12
Jul-12
Jun-12
Jan-12
Dec-11
Jul-11
Jun-11
Jan-11
Dec-10
Jul-10
Jun-10
Jan-10
Dec-09
Jul-09
Jun-09
Jan-09
Dec-08
Jul-08
Jun-08
Dec-07
Jun-07
40
The global nature of climate change inevitably requires a global investment perspective. It should therefore be
no surprise that the fund’s managers are fully integrated within Schroders’ Global and International Equity
team, where climate change is regarded as a key theme supporting long-term structural growth.
17
Schroders Responsible Investment Report
2013 Annual Report
Figure 8: Schroders Global Climate Change Fund peer group comparison
Peer Group Ranking relative
to Peer Group universe
1 Year to 31 January 2014
30
Peer Group Ranking relative
to Peer Group universe
3 Years to 31 January 2014
30
28
Peer Group Ranking relative
to Peer Group universe
Since Inception* to
31 January 2014
25
+23.3
0
26
Category 1
20
24
22
+17.3
5
+21.8
-5
15
-10
20
10
18
-15
5
16
-20
14
0
Category 1
12
-5
-25
10
8
6
-10
-30
-15
-35
Category 1
1st Quartile
2nd Quartile
3rd Quartile
4th Quartile
Schroder ISF Global Climate Change Equity
Source: Factset, Schroders, Morningstar Micropal. Universe = Offshore, Sector Equity – Ecology, in USD. We have
excluded the top 5 and bottom 5 percentiles from the peer group charts above.
*Note: Inception date is 29 June 2007, C-share class Acc units
18
Schroders Responsible Investment Report
2013 Annual Report
Ethical assets under management

Ethical exclusions
As Table 7 shows, we have continued to see a remarkable increase in the value of assets under management
(AUM) to which some form of ethical exclusion is applied. Here, “ethical exclusion” can be defined as the
screening out of certain stocks from the investment universe, also commonly referred to as “negative
screening”.
AUM with some ethical exclusion has increased 69% year-on-year. This is far greater than the 20% increase
in the MSCI World index during the same period, indicating a clear increase in client demand for ethically
managed portfolios on top of any growth in assets due to market changes.
Table 7: Group ethical assets under management (2009-2013)
Year
Ethical AUM (GBP bn)
% of Group AUM
2013
25.3
9.6
2012
15.0
7.0
2011
11.3
6.1
2010
8.2
4.2
2009
3.8
2.6
Of the £25.32 billion of AUM with ethical constraints in 2013, approximately £0.8bn was managed by
3
Schroders’ Private Bank team (including charities) , a similar proportion to 2012. This would indicate that the
dramatic increase in ethical investments is a response to a demand surge from the central client base.
Figure 9: Group ethical AUM by source (2011-2013)
£ bn
30
24.5
25
20
Charities/Private Bank
14.6
15
Central
10.8
10
5
0.5
0.4
0.8
2011
2012
2013
These “ethical” mandates vary from excluding stocks on a single issue to incorporating multiple issues. In
addition they often define a degree of materiality (e.g. percentage of revenues) a stock derives from its
exposure to an issue. In 2013, Schroders recorded a total of 21 different active screens applied across its
4
ethical AUMs. On a cumulative basis , tobacco, gambling and alcohol are the three screens that are most
often used, as shown in Figure 10 (please note that there is an element of double counting with Table 10 as
some of the assets will have multiple exclusions applied).
3
The total figure for Schroders Charities/Private Bank does not include Cazenove
The same account may have different ethical constraints applied to it; for instance, a client portfolio could be excluding tobacco, alcohol
and gambling stocks.
4
19
Schroders Responsible Investment Report
2013 Annual Report
Figure 10: Group ethical AUM by constraint (2013)
Tobacco
Gambling
Alcohol
Shariah
Armaments & Defense
Sudan
Adult Entertainment
Pork
Oil
Banks/Financial…
Mining
Biotech and Envt
Healthcare/Pharma
Pornography
Other
Nuclear Weapons
Cluster Munitions
Human Rights
Nuclear Energy
Company Specific
Interest Income
-

5
10
15
20
25
£bn
Regulatory Constraints
In addition to these screens, legislative developments on cluster munitions and terrorist financing in Europe
and the USA have forced the de facto exclusion of certain stocks from investment portfolios.
- Cluster munitions
The Oslo Convention on cluster munitions was signed in 2008 and became binding international law in 2010. It
prohibits all use, production, transfer and stockpiling of cluster munitions and establishes a framework for
action in that respect. While the Convention does not itself refer to the financing of cluster munitions, several
governments adopted wording of this nature in their national legislation. The Belgian and Luxembourg
governments have both augmented the initial text of the Convention to include cluster munitions financing. In
2012, we took the decision to exclude any stock we deemed to be involved in the manufacture of cluster
munitions from our Luxembourg-registered funds, using a series of “exclusion” lists available in the public
domain as guidance. In an effort to bring more clarity, we looked to governments (and government agencies)
to provide their own list of excluded stocks under their legislation. In 2013, the Dutch financial authority had
started using an indicative list compiled by the sector as its own risk radar and reviewed annually, which
Schroders has subsequently adopted. Figure 11 shows the AUM that this legislation applies to.
20
Schroders Responsible Investment Report
2013 Annual Report
Figure 11: AUM with a cluster munition screen applied (absolute and as percentage of Group AUM)
- Terrorist financing
As a result of the Patriot Act and the Anti-Money Laundering and Counter Terrorism Financing law in the USA,
many US state pension funds are now requesting their fund managers divest from any companies which could
be undertaking business within countries that the US government considers terrorist states.
As of 31 December 2013, we estimate that £5.6 billion of AUM had some form of “terror screening” applied to
them.
21
Schroders Responsible Investment Report
2013 Annual Report
Collaboration, industry involvement, seminars and
training
Over the year we have continued to lend our support (whether financial, intellectual or brand sponsorship) to,
as well as participate in, several industry initiatives. These can serve, but are not limited, to promote the ongoing development and recognition of ESG within the investment industry, to provide us with learning
opportunities or to improve disclosure standards within the companies in which we invest. The following
section summarises the additional work we have done outside of what has already been reported (this is not
an exhaustive summary).
Collaborative initiatives
Working to improve ESG disclosure
We have continued our long-term participation in the Carbon Disclosure Project and its off-shoot project, the
Carbon Action Initiative. These projects are helping to improve the level of disclosure by companies on their
carbon emissions as well as encouraging the adoption of meaningful carbon reduction targets. We have also
continued our participation in the Sustainable Solar Initiative which encourages solar companies to improve
the quality of their ESG disclosure.
Industry bodies promoting ESG practices
Sustainable investment forums
We have continued our membership of the UK Sustainable Investment and Finance Forum (UKSIF) and the
European Sustainable Investment Forum. Over the course of the year we have met with the CEOs of both
organisations to understand their plans and to provide input into the direction that we feel responsible
investment should take. In addition, we sit on the analyst committee at UKSIF, providing guidance on how the
organisation can best serve the interests of ESG analysts. We are also a member of the Responsible
Investment Working Group of the European Fund and Asset Manager Association.
We have also maintained our membership of the Principles for Responsible Investment.
Seminars providing training and learning
Over the course of the year we have attended numerous events providing us with insight into specific ESG
issues both for the ESG specialists and the wider investment teams within Schroders. We have also spoken
at seminars on the subject of our own research. Below we list some of these topics.
Environmental
Social
Governance
Other
Arctic – oil and gas
Climate change
Bribery and corruption
Executive remuneration
Tax disclosure
3D printing
Cluster munitions
ESG in the mining sector
ESG integration
Impact investing
Sustainable capitalism



Carbon markets
Portfolio carbon footprint
Unburnable carbon
Ecosystem services
Fracking
Hazardous chemicals
Resource limits
Water
Weather
22



Aerospace and defence
Cross sector risks
Extractives sector
Food safety
Health and safety
Labour standards
Nutrition and obesity
Schroders Responsible Investment Report
2013 Annual Report
Responsible property investment
Schroder Property Investment Management has been managing property funds since 1971 and operates
across Europe, headquartered in London. With £10.6 billion (€12.8 billion / US$17.6 billion) of assets under
management as at 31 December 2013, we are one of the largest institutional property investment managers in
Europe.
The issues of environmental sustainability and social responsibility have long been integrated into our
investment process. The global financial crisis accentuated the importance of understanding economic risk
that may affect our investments and the focus on environmental and social issues in recent years is no
different. It is critical to understand and manage all risks to develop resilience within our portfolios.
A good investment strategy must incorporate environmental and social issues alongside traditional economic
considerations. At Schroders we believe a complete approach should be rewarded by improved investment
decisions and performance, improved business performance to tenants, and tangible benefits to local
communities and wider society.
Investment management
Our commitment begins at the initial appraisal stage when seeking to identify new investment opportunities.
Each new acquisition undergoes a responsible property investment RPI audit tailored for each local market.
The process is designed to identify any weakness in the building’s ability to deliver future returns resulting from
issues such as flooding, contamination, energy efficiency, water management, community interaction and
long-term impacts to occupier appeal.
Asset management
Existing buildings are asset managed in accordance with our belief that through factoring environmental and
social issues into the management regime of a building it will become more attractive to occupiers. Our
approach is focused on delivering on-site solutions to achieve our clients’ objectives effectively. Where the
management of a building is undertaken on our behalf by a managing agent we ensure their policies are fully
aligned with our own. Whether driven by legislation or not, we seek to find new ways to manage occupancy
costs through energy savings, reducing water consumption and facilitating the disposal of waste away from
landfill. Where possible we will seek to work in partnership with our existing occupiers, although a cost benefit
analysis of any expenditure is important to ensure the investment objectives of our clients are protected.
New versus old
Schroder Property has limited exposure to property development, but where it does undertake schemes to
deliver new buildings to occupiers we will ensure that they are built to the high standard required to obtain
sustainability accreditations (such as BREEAM Excellent) as appropriate for local markets. It is generally
acknowledged that by 2050, the vast majority of today’s buildings will still be in existence. It is key to have a
process that both assesses the challenges of obsolescence in existing buildings and can deliver solutions that
add value by future-proofing potential new acquisitions.
Progress in 2013
In 2013 we issued a new Responsible Property Investment (RPI) statement which outlines our role and
responsibilities as owners, managers and developers of property assets. It confirms the importance we put on
identifying and understanding all investment risks in order to seek to protect our clients’ assets from
depreciation. We are continually working to improve our understanding and analysis of risk within our assets
and portfolios to help deliver resilience to the ever-changing profile of risks.
23
Schroders Responsible Investment Report
2013 Annual Report
Responsible fixed income investment
Schroders’ overriding objective for integrating an ESG approach into the credit investment process is to, wherever
possible, enhance returns and protect value for our clients.
Analysis
Schroders believes that an analysis and evaluation of ESG issues and their impact on investments is a fundamental part of
a bond valuation and selection process. Typically, ESG analysis will source information from a mosaic of sources,
including (but not limited to) the issuer itself, specialist research providers, brokers and academics. We will use
internationally-recognised benchmarks, codes and standards as guidelines for best practice within our ESG analysis, but
we are pragmatic in our recognition that no single model of ESG management can apply to a company, and that each
company has to be considered in respect of the industry and markets in which it operates.
Typically good corporate ESG practice should ensure that:
– There is an empowered and effective board
– There are appropriate checks and balances in company management systems
– There are effective systems for internal control and risk management covering ESG and other significant issues
– There is suitable transparency and accountability
– Management remuneration is aligned with long-term shareholder value.
Process changes to increase the visibility of ESG factors in the analytical process included the statement of MSCI ESG
ratings where available, alongside NSRO third party credit ratings and the commencement of training sessions by the
Schroders Responsible Investment team with Schroders’ credit research desks.
Integration
ESG factors will be initially addressed at the analyst level and will be discussed by the team to determine the importance to
the stability of future earnings streams and the resulting ability of the issuer to meet their interest and principal
obligations. ESG factors are then taken into consideration in the portfolio construction process. Whilst qualitative factors
such as ESG issues are difficult to value, we consider that they impact the likelihood of future financial success and the
risk inherent in the business. As such, while the more traditional financial indicators and the analysis of business strategy
form the basis of investment decisions, ESG factors will often impact the size of position, given its impact on the inherent
risk to our financial forecasts. We primarily focus on the longer-term impact of ESG issues rather than unduly weighting
factors which are currently occupying market attention.
From a practical perspective, analysts should integrate ESG commentary as follows:
– Initiation reports. These reports should explicitly include a commentary and ESG rating, where appropriate.
– Ongoing research reports. The process of preparing these reports should implicitly address the question “are there
any significant ESG issues with this credit?”
Engagement
Engagement with companies is part of our fundamental approach to the investment process as an active investor. It has
the advantage of enhancing communication and understanding between companies and investors. We will look to engage
with bond issuers and communicate any specific concerns we may have in respect to ESG practices. When engaging with
companies our purpose is to either seek additional understanding or, where necessary, to seek change that will protect
and enhance the value of investments for which we are responsible. We concentrate on each company’s ability to create
sustainable value and will question or challenge companies about issues, including those relating to ESG, that we perceive
might affect the future value of those issuers’ bonds.
Future actions
Our objective is to ensure the success of this policy and enable our clients to take the benefits from this best practice. We
will implement internal systems and processes to continuously improve the integration process, strengthening the links
between credit and ESG teams and developing ESG skills and knowledge among credit analysts. We will monitor the
ESG integration process into the Fixed Income investment team and will disclose on a regular basis the outcomes of the
engagement programme.
24
Schroders Responsible Investment Report
2013 Annual Report
Compliance with UN Principles for
responsible investment
This section demonstrates our compliance with the UNPRI as well as highlighting the relevant pages within
this report where evidence of this compliance is demonstrated, in addition to other sources not included in
this report.
UN PRI Principle
Schroders compliance
Location
in annual
RI report
P1. We will incorporate ESG
issues into investment analysis
and decision-making processes
–
–
–
–
Pg 14 - 21
Pg 23
Pg 24
–
–
–
–
Six ESG specialists
Over 400 investment professionals
214 years experience as active fund managers
Responsible Investment (RI) and Corporate
Governance policies for property, equities and fixed
income
Proprietary Global Research Investment Database
Joint (ESG and company analysts) attendance at
company meetings
Collaboration between specialists and professionals
Allocation of broker commission for ESG research
ESG analysts sector twinning with financial analysts
Ad hoc internal ESG training
P2. We will be active owners and
incorporate ESG issues into our
ownership policies and practices
–
–
–
RI policies for property, equity and fixed income
Global voting strategy
Active engagement, with regular monitoring of success
Pg 3 - 22
Pg 23
Pg 24
P3. We will seek appropriate
disclosure on ESG issues by
the entities in which we invest.
–
Engagement can address issues of disclosure,
when necessary
Participation in collaborative disclosure initiatives
Submissions to regulators, trade associations,
legislators and other bodies
Pg 3 - 7
Pg 22
P4. We will promote acceptance
and implementation of the
principles within the investment
industry
–
Pg 22
–
–
Submissions to regulators, trade associations,
legislators and other bodies
Membership of various bodies promoting ESG
Participating in speaker panels at conferences etc.
P5. We will work together to
enhance our effectiveness in
implementing the principles
–
–
Collaboration
Investor networks
Pg 22
P6. We will each report on our
activities and progress towards
implementing the principles.
–
–
–
–
–
–
Quarterly reports
Annual reports
Thematic and special reports
Responsible investment intranet site
Responsible investment internet
Client reporting portal
–
–
–
–
Issued in March 2014 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA.
Registration No 1893220 England. Authorised and regulated by the Financial Conduct Authority.
25