Sustainability at Schroders
For use only with the Chartered Financial Analyst (CFA) Institute. Not for redistribution under any circumstances. June 2020 Environmental, Social and Governance is referred to as ESG throughout the presentation. Sustainability A perfect storm
Accelerating Regulatory Global Client change scrutiny challenges pressure Average tenure in the S&P 500 Sustainable finance at the Require finance’s Savers are has dropped from forefront of policymakers’ involvement to solve increasingly focused 50 years to under 15 years over agenda on sustainability- the last five decades related issues
Source: Schroders
2 Social impacts are becoming financial costs As their role has expanded, large businesses face growing pressures
Large companies have become 20–30% more Growing pressures to contribute to societies; important to economies and societies over last 20y irresponsible behaviour is becoming a liability % % % % 45 12 0.6 60
11 0.5 50 40 10
9 0.4 40 35 8 0.3 30 7 30 6 0.2 20
25 5 0.1 10 4
20 3 0.0 0 1950 1960 1970 1980 1990 2000 2010 1975 1985 1995 2005 2015
Fortune Global 500 revenues as share of global GDP (LHS) Regulatory costs % US GDP (LHS) Large companies' share of total US employment (LHS) OECD avg corporate tax rate (RHS) OECD corporate profits as share of GDP (RHS) Public mistrust of major US companies (RHS)
Source: Fortune, IMF, OECD, BEA, Gulling et al., OECD tax database, General Social Survey, American Action Forum, Heritage Foundation, Schroders calculations and estimates. Note: data from Fortune is not available prior to the 1990s; we have estimated the equivalent values, using data from Thomson Reuters.
3 Sustainability at Schroders Our experience and expertise
With Across With 20 21 1,570+ Dedicated 210 years+ Engagements 57 5,800+ years+ ESG Combined investment Countries Company meetings in 2019 ESG integration specialists experience globally voted on
10 A+ 9,000+ 1st UN 100% Proprietary investment UN PRI annual Companies covered by our Asset manager to tie global compact Renewable energy by tools and frameworks 2 portfolio-level sustainability their cost of capital to 2025 and carbon assessment Signatory reporting tools sustainability goals neutral from 2020
Source: Schroders, April 2020, unless otherwise stated. 1As at 31 December 2018. 2PRI, 2015, 2016, 2017, 2018 and 2019 Assessment Reports. Please refer to the Important Information pages in the back for additional disclosures.
4 Data is the new alpha, but the power is human Integrating sustainability factors leads to better investment decisions
Example datapoints that can influence Assessing businesses long-term performance ESG practices
Carbon footprint Environmental (E) Resource management
Human rights Data allows us to Social (S) Staff mental health have a better understanding today of which companies Board gender diversity will succeed or fail in Governance (G) Independent boards the future
Source: Schroders. There is no guarantee the Environmental, Social & Governance (ESG) approach to investment analysis will boost a portfolio’s performance.
5 ESG integration in practice Fixed Income case study: Chinese air quality
Fundamental Credit Analysis + Sustainability + Data Insights Unit Chinese air quality is seen as a major driver for the commodity supply and demand picture. The hypothesis is that the government focus on reducing pollution as a national priority will lead to a focus on closing heavy plant in the areas where the air quality is the worst.
Source: Schroders as of August 22, 2018
6 Identifying companies exposed to coal using text data Using natural language processing to identify coal exposed companies
Set-up Example – Context: Environmental indicators have low coverage in EM Company attributes – Goal: Use text data on EM companies to predict probability of coal exposure Jaiprakash power
GICS Sub industry Renewable electricity Data MSCI ESG data Missing Business descriptions, conference calls, reports and accounts (US only)
Whether companies have coal reserves or revenue Business description
Jaiprakash Power Ventures Limited is engaged in the generation of power, including Model hydro and thermal; cement grinding; captive coal mining, and transmission of power……is also engaged in Captive coal mining operations at Amelia Coal Block for ‘Process’ disorganized data into a simplified format supply of Coal to Jaypee Nigrie Super Thermal Power Plant. The Company is operating a 660 MW Thermal Power Plant through Prayagraj Power Generation Company Train Random forest to predict coal exposure Limited….
‘Trained’ QEP random forest Predictions
Use trained model to compute probability of coal exposure 90% probability of coal exposure
Source: QEP
7 SustainEx Companies do not operate in a vacuum How companies make money is as important as how much they made
Companies contribute to society and impose costs on it, neither of which have been reflected in their financial statements.
Those social deficits and credits are becoming real financial impacts as regulator and social pressure grows
Source: Schroders.
9 Companies are facing significant headwinds The risks are real Social value & net profit, both as a % of MV – Companies are facing growing social and regulatory headwinds – The scale of the externalities companies impose has grown so large that in many industries, those costs exceed their total earnings. – Earnings listed companies generate for shareholders currently total US$4.1 trillion, which would fall by 55% to US$1.9 trillion if those social impacts crystallized as financial costs. – One third of companies would become loss- making. The risk to profit pools and competitive positions is clear.
Schroders: Schroders, Social value & net profit, both as a % of MV. The views and opinions shared are those of the Schroders Sustainable Investment team and are subject to change.
10 Rigorous bottom up analysis is vital Social impacts can be quantified
Over 400 academic and industry studies of social Over 70 data points for each company, estimated impacts and externalities where not disclosed e.g. wages, taxes
~9k
large global companies examined
Rigorous implementation combining academic analysis and objective company data
Source: Schroders as at Schroders SustainEx research published April 2019.
11 Systematic analysis Three approaches to calculating company level impacts
Share global cost between Estimated annual global Define activity responsible Global value companies based on social burden/impact for impact activity
Quantify or estimate level Calculate burden Estimated impact of Unit activity of activity for each associated individual actions company with company actions
Calculate baseline Compare actual Geographically Impacts which vary requirement based on contribution to required defined between countries company exposure baseline
Source: Schroders. We make additional adjustments to account for missing data points or extreme values.
12 Analysis spans a wide range of positive & negative impacts Net impact of each measure examined
US$bn 1,500
1,000
500
0
-500
-1,000
-1,500
Alcohol
Plastics
Injuries
Salaries
Training
Tobacco
Taxation
Fertilizer
Fatalities
Medicine
Gambling
Pesticides
Sanitation
Donations
Innovation
Corruption
FoodWaste
Overfishing
Armaments
Connectivity
WaterUsage
WaterAccess
SOxEmissions
NuclearWaste
CO2Emissions
VOCEmissions
Contraception
NOxEmissions
WasteCreation
PowerProvision
FinancialStability
FinancialInclusion
PredatoryLending
FoodBorneIllnesses
MiningWasteCreation HeavyMetalsProduction
Source: Schroders. August 2019. Based on analysis of c.9,000 global companies, aggregated to ICB industries. Industries shown are for illustrative purposes only and do not reflect any recommendation to buy/sell any security.
13 Worked example A consistent approach across global companies
Social impact as % sales 7
Training Other benefits Donations Other costs 6 Innovation Taxation Salaries and benefits Water use Carbon emissions 5
4 Which can be compared to Alcohol production Social value % sales peers on a consistent basis 3 Company A Adding together positive and Company B negative impacts yields an Total Company C 2 assessment of every Company D company Company E 1 Company F Company G 0
Source: Schroders, Asset4, Worldscope. Categories shown are for illustrative purposes only and do not reflect any recommendation to buy/sell any security.
14 Portfolio analysis Potential to examine & compare company, sector or portfolio exposure
Portfolio social impact comparison to benchmark
Portfolio B’mark
Portfolio Benchmark
-8% -7% -6% -5% -4% -3% -2% -1% 0%
Monitoring exposures of individual holdings
Company 1 Company 2 Company 3 Portfolio Company 4 B’mark Company 5
-7.0% -6.5% -6.0% -5.5% -5.0% -4.5% -4.0% -3.5% -3.0%
Source: Schroders, Asset4, Worldscope. Based on a hypothetical portfolio and benchmark. Asset4 is an ESG Data Provider
15 CONTEXT ESG integration 2.0 Stakeholder analysis provides insights into managing change Employees Communities Employer choices, motivation Disruption to local operations
Suppliers Customers Operational continuity, Brand perceptions, reputational risk product demands
Company
Environment Regulators Cost pressures, License to operate, pricing, product efficiency competitive structure
Source: Schroders. Governance Management Quality 17 Introducing CONTEXT What is CONTEXT?
Themes 735 global ESG trends for 47 sub-sectors ~Conventional data sources
Metrics ~150 data points from 50 sources
~Unconventional data sources Companies 10,000 companies covered
Time 2 years in the making
Source: Schroders. For illustrative purposes only. The logos shown are the property of their respective entity and do not indicate any endorsement by, or with, Schroders.
18 Stages of CONTEXT Investment teams control each level within CONTEXT
Set Weight Select View View themes stakeholders metrics rankings company details
Source: Schroders.
19 CONTEXT and SustainEx Balancing empirical evidence and analyst insight
What does CONTEXT enable us to do? What does SustainEx enable us to do?
Focus our attention on companies with best in sector or Detailed analysis of a company’s and portfolio’s net misunderstood sustainability profiles. impact on society.
Go beyond traditional hard revenue exclusions. Are Help analysts gauge companies’ credit or deficit companies doing enough? with society and the financial risks they face as social externalities crystallise as financial costs or Effect positive change by enabling targeted engagement benefits. with “improving companies”.
Much more than a blunt score
Source: Schroders
20 MUSE MUSE– a proprietary ESG tool A data-driven tool that ranks US counties based on a variety of ESG factors
Themes Metrics Entities Time Conventional Proprietary data sources data sources
Isolates trends and Over 40 data points 3,100+ counties Continuously – Private sources – 8 Environmental challenges in an from a variety across the US improving and – Government factors adding new attempt to identify of sources sponsored – Political metrics investment impacts Congruence – School District Rating
Source: Schroders.
22 MUSE – a proprietary ESG tool A data-driven tool that ranks counties based on a variety of factors
Source: Schroders. For illustration only.
23 Tracking unemployment during the COVID-19 Crisis
Source: Schroders as of April 25, 2020.
24 MUSE – a proprietary ESG tool A data-driven tool that ranks counties based on a variety of factors
Source: Schroders. For illustration only.
25 MUSE – a proprietary ESG tool A data-driven tool that ranks counties based on a variety of factors
Source: Schroders. For illustration only
26 Reporting outcomes Transparency Fund level reporting with different sustainability lenses
SDG Category: Planet Measure: Carbon Intensity Description: Scope 1&2 GHG emissions relative to each $1mn of sales Units: Tonnes of C02 per $mn sales
Scores: Fund: 70 MSCI: 161
SDG Category: People Measure: Employee fatalities Description: Employees killed during the year, while at work Units: Number of employees
Scores: Fund: 1.7 MSCI: 3.1
Engagements by topic (left): tracks number and breadth of engagements (governance oversight, business integrity, customers, product safety, etc.)
Voting record (right): tracks votes cast (how frequently (%) we vote with/against management)
Source: Schroders for illustrative purposes only. Based on third party data from Thomas Reuters.
28 Reporting Fund level reporting with different sustainability lenses
Source: Schroders for illustrative purposes only.
29 Check out your own county with the Schroders MUSE tool
https://www.schroders.com/en/us/wealth-management-solutions/thought-leadership/muse/
Contact Questions regarding sustainable strategies and funds at Schroders contact Anna Sayer
[email protected] 646-239-7458
Schroder Investment Management North America Inc. 7 Bryant Park, New York, NY 1001-3706
schroders.com/us https://www.linkedin.com/in/sarah-bratton-hughes-10174819/ Appendix Sustainability at Schroders Promoting responsible investment through various initiatives
Logos shown are the property of their respective entity and do not necessarily indicate any endorsement by, or with, Schroders. 32 Important information The views and opinions contained herein are those of the Schroders Sustainable Investment team and are subject to change.
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 mentioned in this commentary. The material is not intended to provide, and should not be relied on for accounting, legal or tax advice, or investment recommendations. Information herein has been obtained from sources we believe to be reliable but Schroder Investment Management North America Inc. (SIMNA) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document when making individual investment and/or strategic decisions. Schroders has expressed its own views and opinions in this document and these may change.
The opinions stated in this presentation include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee that any forecasts or opinions will be realized. The forecasts included in this presentation should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.
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The success of any quantitative research model depends largely upon the effectiveness of the investment team’s quantitative model. A quantitative model, such as the risk and other models used by the investment team requires adherence to a systematic, disciplined process. The team’s ability to monitor and, if necessary, adjust its quantitative model could be adversely affected by various factors including incorrect or outdated market and other data inputs. Factors that affect a security’s value can change over time, and these changes may not be reflected in the quantitative model. In addition, factors used in quantitative analysis and the weight placed on those factors may not be predictive of a security’s value. No investment strategy, technique or model can guarantee future results or eliminate the risk of loss of principal.
Indexes are unmanaged. Investors cannot invest directly in any index. Actual results would vary due to, among other things, fees and expenses. Past performance is no guarantee of future results.
Any backtest/simulated results shown must be considered as no more than an approximate representation of the portfolio’s performance, not as indicative of how it would have performed in the past or may perform in the future. Simulated returns are the result of statistical modeling, with the benefit of hindsight, based on a number of assumptions and there are a number of material limitations on the retrospective reconstruction of any performance results from performance records. For example, it may not take into account any dealing costs or liquidity issues which would have affected the strategy’s performance. In addition, gross returns would be lower if applicable management fees and expenses were factored in to the calculation. There can be no assurance that this performance could actually have been achieved using tools and data available at the time. No representation is made that the particular combination of investments would have been selected at the commencement date, held for the period shown, or the performance achieved. This data is provided to you for information purposes only as of the dates of this material and should not be relied on to predict possible future performance. There can be no guarantee that these or any simulated and/or carve-out results will occur in the future, generate a positive return or protect against loss of principal. 33 Important information
Schroder Investment Management North America Inc. (“SIMNA Inc.”) is registered as an investment adviser with the US Securities and Exchange Commission and as a Portfolio Manager with the securities regulatory authorities in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan. It provides asset management products and services to clients in the United States and Canada. Schroder Fund Advisors LLC (“SFA”) markets certain investment vehicles for which SIMNA Inc. is an investment adviser. SFA is a wholly-owned subsidiary of SIMNA Inc. and is registered as a limited purpose broker-dealer with the Financial Industry Regulatory Authority and as an Exempt Market Dealer with the securities regulatory authorities in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Quebec, and Saskatchewan. This document does not purport to provide investment advice and the information contained in this material is for informational purposes and not to engage in a trading activities. It does not purport to describe the business or affairs of any issuer and is not being provided for delivery to or review by any prospective purchaser so as to assist the prospective purchaser to make an investment decision in respect of securities being sold in a distribution. SIMNA Inc. and SFA are indirect, wholly-owned subsidiaries of Schroders plc, a UK public company with shares listed on the London Stock Exchange. Further information about Schroders can be found at www.schroders.com/us or www.schroders.com/ca. PRI Important Information: Schroders is an investment management signatory member of the PRI, the rights of membership for which it pays a fee. The report is provided to member firms at their request. Signatory scores for each indicator will be peered against all other signatories for whom that indicator was relevant, regardless of their type, size or location. Module level: Signatory scores for each module will be displayed in six broad performance Bands (A+ to E) at an absolute level as well as relative to peers of a similar type, size or location. Each signatory’s total aggregated module score will be compared to relevant peer groups in a series of distribution charts.. The PRI document is based on information reported directly by signatories. Moreover, the underlying information has not been audited by the PRI or any other party acting on its behalf. While every effort has been made to produce a fair representation of performance, no representations or warranties are made as to the accuracy of the information presented, and no responsibility or liability can be accepted for damage caused by use of or reliance on the information contained within this report. For more information on the methodology, visit www.unpri.org.
Schroders Sustainability Accreditation consist of one of three accreditation marks (Screened, Integrated and Sustainable) and are based on both qualitative and quantitative evaluation conducted by the Schroders Sustainable Investment team, at either the fund/portfolio level or the management team. For further information about our Schroders Sustainability Accreditation please visit www.schroders.lu/sustainabilityaccreditation.
34 Contact Schroder Investment Management North America Inc. 7 Bryant Park, New York, NY 10018-3706 212.641.3800
schroders.com/ca