The Sarasin & Partners Climate Active Endowment Fund

A Charity Authorised Investment Fund

February 2018

Contents

Why might ‘Climate Active’ suit you? 3

The Advisory Panel 4

The Climate Active Investment Philosophy 5

Company engagement in more detail 6

Changing the System to protect our Climate 7

Key Facts 8

Appendix 10

2 The Sarasin & Partners Climate Active Endowment Fund Why might ‘Climate Active’ suit you?

Climate change poses risks to our way of life. It is also driving Government policy that is set to transform how we produce and consume energy. The Sarasin & Partners Climate Active Endowment Fund is a multi-asset portfolio, designed for trustees who are seeking attractive and sustainable long-term investment returns against a back drop of increasing climate related risks.

Governments from around the world set out their determination Our Climate Active process also considers the investor obligations to limit climate change to well below 2°C in a landmark climate within the ‘Principles on Climate Obligations of Enterprises’ drawn accord drawn up in Paris in December 2015. up by international lawyers and judges to define how companies and investors should uphold the Paris Climate Accord. The Sarasin & Partners Climate Active Endowment Fund (the Fund) offers a timely multi-asset investment solution for charities that: The portfolio is an evolution of the core Sarasin Endowments Model, which has produced a ‘real’ return of +4.4% per annum • are concerned by increased climate risk, the actions to since its launch in December 2005 and an increased income counter climate change that government will take and the distribution in each and every calendar year.2 impact these are likely to have on asset prices Most world leaders are committed to decarbonising the global • want to play a part in driving behavioural change that will economy by the second half of this century – but divestment alone result in decarbonisation: investors will be able to join in will not result in decarbonisation, a healthier planet or a less risky engagements, adding their voice to the debate portfolio. The strategy aims to bring about, and benefit from, action by Investors in the Sarasin & Partners Climate Active Endowment businesses to strengthen their resilience to climate change in line Fund can play a role in combatting climate change while seeking with the Paris Climate Accord. attractive investment returns and performing their fiduciary duties The Fund is actively managed; the first line of defence is Sarasin & in a responsible manner. Partners’ ‘thematic’ approach to equity selection. This reduces the investment universe from over 4,500 companies to between 80 and 100. The Fund automatically divests and never owns any company that derives 5% or more of its annual revenue from either the extraction of thermal coal or oil from tar sands, the most greenhouse gas intensive fossil fuels. Further investment and divestment operates on a case-by-case assessment of the vulnerability of each company to climate change and whether it will be able to develop a climate-aware strategy that will deliver attractive long-term returns for shareholders. In reaching decisions, Sarasin & Partners are guided by: • our new Climate Active Advisory Panel • the Oxford Martin School ‘Investment and engagement Principles’1 • investors in the strategy The Fund embraces an active and focused approach to its engagement with companies and policy-makers on climate-related issues in line with the Paris goals.

1. Original principles published in 2015, with revised principles expected in 2018. See Appendix for further details. 2. Source: Sarasin & Partners LLP as at 31.10.17. Past performance is not a reliable guide to future performance.

3 The Sarasin & Partners Climate Active Endowment Fund The Advisory Panel

In 2017, we created a new Climate Active Advisory Panel to help us consider all matters related to investing against a backdrop of climate change and the need for the world to ‘decarbonise’. The panel meets four times a year to discuss exclusions, corporate engagement and activist policies, together with potential policy work in conjunction with governments and like-minded institutions. Résumés of the panel members are shown below:

David Pitt-Watson (Chair) Heidi Hellmann

David is a leading practitioner in the field Heidi became Head of Group Strategy of responsible investment. He has broad and Market & Competitor Intelligence at non-executive experience at KPMG, was Centrica in 2016. Heidi has had over 25 the Treasurer of OXFAM and an Executive years’ experience working in the oil and Fellow at The London Business School. gas and power sectors, having started her Previously, David was Chair of Hermes career at Exxon in 1991. She has an MBA Focus Funds. As co-founder, and CEO of in Finance and Multinational Management the Focus Funds and Equity Ownership from The Wharton School, University of Service, he built and led the largest Pennsylvania, having also worked at Royal “responsible investment” group of any Dutch Shell, Aramco and BG Group. institutional fund manager in the world. David has co-Chaired the UN Environment Programme’s Finance Initiative and was closely involved in the setting up of the UN’s Principles for Responsible Investment.

Sir John Beddington Professor Cameron Hepburn

Sir John was elected Fellow of the Royal Professor Cameron Hepburn is Professor Society in 2001 and appointed CMG in of Environmental Economics at the Smith 2004. From 2008 until 2013 he was the School and a Fellow at New College, Government Chief Scientific Adviser (GCSA) . He is the Director reporting directly to the Prime Minister. As of the Economics of Sustainability GCSA, he was responsible for increasing Programme at the Institute for New the scientific capacity across Whitehall. Economic Thinking and Co-Director of the During his time as GCSA he set up the Net Zero Carbon Investment Initiative at Scientific Advisory Group in Emergencies the Oxford Martin School. He has degrees (SAGE) that reported to the COBRA in law and engineering, a doctorate in committee. He is the Senior Adviser to economics, and over 30 peer-reviewed the Oxford Martin School and Professor of publications in economics, public policy, Natural Resource Management at Oxford law, engineering, philosophy, and biology. University. He is a Non-Executive Director Cameron has advised governments of the Met Office (currently Acting Chair), (e.g. China, India, UK and ) and chairs the Cabot Institute External Board international institutions (e.g. OECD, UN at Bristol University, the Global Academies organisations) on energy, resources and Panel at Edinburgh University and the environmental policy. He is a member Systemic Risk Institute at the LSE. of the Economics Advisory Group (with Lord Stern and Professor Helm) to the UK Secretary of State for Energy & Climate Change.

4 The Sarasin & Partners Climate Active Endowment Fund The Climate Active Investment Philosophy

Governments must create the environment that drives decarbonisation, but it is companies that will be the principal vehicles for achieving this energy transformation.

All companies dependent on fossil fuels – not just those who Climate-aware investing extract them - face a daunting challenge in navigating the move to The most carbon-intensive fossil fuels will be automatically a new energy system. excluded from the Climate Active Endowment Fund: fossil fuel To deliver sustained shareholder value many companies will extractive companies that generate 5% or more of their revenue need to rethink medium and long-term strategies, as well as from thermal coal or the extraction of oil from tar sands. near-term decisions on capital investment. Against this backdrop, The Fund will further divest from companies where the climate asset owners and managers must be prepared to research and risks are not being adequately managed, and there is little understand how different strategies and scenarios will impact each prospect for a profitable strategy aligned with a 2°C cap on company’s prospects, and hold management to account as and warming. when necessary. The materiality of climate risks will be determined through sector- Shareholders can play a supportive role as companies rethink specific climate stress tests that assess the earnings impact from their competitive positioning for a zero-net emissions economy. In government policies and technological advances consistent with some cases investors may be best served by companies gradually the Paris Climate Accord. As far as possible, the physical impacts winding down their operations and returning cash to shareholders from climate change will also be assessed. to reallocate to alternative ventures. Where companies are vulnerable to climate risks – in line with A holistic and fiduciary-oriented approach the Oxford Martin School investment principles – the Fund will The Climate Active Endowment Fund offers a comprehensive either divest where there is little prospect for building resilience, investment solution for trustees concerned by mounting climate or initiate a dialogue with the company to push for a strategy that risk. delivers attractive shareholder returns whilst meeting the world’s net-zero emissions target. We invest in companies that we expect to deliver enduring shareholder value in a way that is consistent with a 2°C cap in Active ownership global warming. Where we believe additional value can be added Climate Active is committed to company engagement where we through improved capital stewardship, we devote resources to think we can catalyse change to enhance a company’s resilience targeted engagements. to climate risk and deliver attractive long-term returns for The strategy is appropriate for investors with a longer-term horizon shareholders. We will seek in-depth engagements with between that need to meet clear capital and income growth goals, and who three and five companies each year. feel one or more of the following: Companies we prioritise for active engagement are vulnerable • accelerating climate change poses a risk to these ambitions to climate risk; have the potential to remain profitable in a 2°C scenario; but have yet to articulate a compelling strategy. • climate change will happen more quickly than current consensus opinion We will divest after or during an engagement if: • governments will drive increasingly intense policy action to • there is no demonstrable commitment to revising the strategy combat climate change in line with the Paris Accord’s 2°C goal within 3 to 5 years • it would be appropriate for them to help influence government or policy • concerns arise over a company’s financial outlook during an • they have a role to play in guiding management teams to more engagement process sustainable business practices Company engagements are guided by our Advisory Panel. The The Fund will therefore utilise both divestment and engagement Panel comprises individuals with deep experience of activist as tools to protect and enhance capital in line with a heightened investment, climate change, the Paris Accord and fossil fuel emphasis on climate risk, together with representations to exposed companies. Their involvement helps to ensure that we government and other regulatory bodies. select our targets wisely and the engagements are effective.

5 The Sarasin & Partners Climate Active Endowment Fund Company engagement in more detail

Where it makes sense to work collaboratively with other long-term investors to increase the pressure and ensure our voice is heard, we will seek to build alliances.

All our conversations with companies are based on an assessment Clear and achievable targets of capital deployment and long-term shareholder returns, taking The course of action identified by the Board should be achievable the Paris climate commitments into account. This assessment is and include specific targets, e.g. new operational targets to holistic, incorporating scientific data on climate change, emerging minimise emissions; capex plans that take account of a lower regulation and technological advances. carbon world; dividend policy to return cash to shareholders where Our approach to engagement seeks to be supportive of positive suitable investment opportunities do not exist. action, but challenging of inaction. Where necessary we adopt the Escalating pressure on the Board more robust tactics employed by relational activist funds that we believe to be effective in delivering change. Key features of our We always seek a constructive dialogue with the Board. Initially approach include: we seek private conversations setting out our concerns. Where appropriate, we will reach out to other large and / or concerned Prioritisation shareholders to explore joint action. Where private engagement Engagements are strictly prioritised to ensure we target companies fails to gain sufficient traction, we may look to increase pressure where: 1) there are core strategic issues around fossil fuel on the Board. Possible actions include: publicly disclosing our operations that impede long-term value creation for shareholders; concerns and calling for change; using our vote to apply pressure and 2) where we believe we can effect change. on directors; reporting breaches of director duties, or rules governing company reporting to shareholders; filing shareholder Thorough analysis resolutions; or in extreme cases putting forward director Unless we can present a well-researched and compelling case candidates. for change, we will not gain traction with the broader shareholder Winning the argument base or the targeted Board of Directors, which is essential for success. The focus is on capital allocation and strategy, but we Acting in conjunction with the unit holders, and the Advisory Panel also consider operational matters particularly where they pertain to we may make our case public to help raise awareness of risks to climate change. Our input aims to point to emerging problems from shareholder capital. Additional leverage is gained by building a a long-term shareholder perspective, to ask targeted questions to network of supportive thought leaders in the business and policy encourage a response. worlds.

6 The Sarasin & Partners Climate Active Endowment Fund Changing the system to protect our climate

Climate Active prioritises policy outreach to promote regulatory and market-wide action that supports decarbonisation. This is important because climate change is a systemic challenge, which demands an economy-wide response.

Our policy outreach dovetails our company engagements aimed at This builds on our established reputation in the UK and ensuring alignment with the Paris Climate Accord. internationally for policy work on accounting and audit standards. Our Fund is positioned to be resilient to and to gain from Apart from the change that can result from policy outreach, accelerated action to combat climate change. engaging in the broader policy debate is a powerful complement to individual company dialogues because it: For many policy initiatives we collaborate with other investment managers, joining broader initiatives like the ‘Aiming-4-A’ coalition, • builds credibility with Boards with whom we speak the International Investor Group on Climate Change (IIGCC), the and Principles for Responsible Investment (UNPRI), and the Portfolio Decarbonisation Coalition (PDC). • helps us form alliances with like-minded investors and supportive thought-leaders, improving chances of success in We also work with other like-mined professional bodies pursuing company engagements the same goals, like ClientEarth (a public interest law organisation). One area where we are taking a stronger lead is in promoting more reliable and prudent accounting for climate risk. This is vital to underpin the efficient allocation of capital between and within companies, by ensuring the correct information is sent to market participants.

7 The Sarasin & Partners Climate Active Endowment Fund Key Facts

“A multi-asset portfolio, designed for charity trustees who are seeking attractive and sustainable long-term investment returns against a backdrop of increasing climate related risks”

1. Investment Goals 3. Currency Hedging Strategy Fund Objectives The natural position for this fund is to hedge some non-sterling currency exposure back to the benchmark weighting (71.5%) in a) To achieve long-term capital and income growth. This is defined sterling. However, as an actively managed fund, the Investment as being a total return target of inflation (CPI) +4.0% per annum Policy Committee and Fund Managers may take a view on expected over the longer term (7-10 years). movements in currency and recommend more or less hedging. b) To produce a consistent stream of income: the Fund can make Cross currency hedging is permissible. use of an ‘income reserve’ account to smooth income payments 4. Portfolio Construction to unit holders. Income is expected to grow consistently over the longer term, but not necessarily every single year. Sarasin & Partners will seek to weight positions by conviction, while incorporating sufficient diversification within and across c) The Fund will seek to outperform a bespoke, index-based asset classes, regions, themes and opportunity sets to spread risk benchmark. efficiently. We would expect to own: 2. Illustrative risk and return features • Up to 100 bond positions. Maximum exposure to non- investment grade bonds is 20% of the total fixed interest Trend Total Neutral Return Asset Class Allocation weighting p.a. % % • Up to 100 equities, diversified by theme, sector and geography 1.3 Gilts 9.0 • Property and alternative assets will predominantly be owned via specialist 3rd party funds 3.0 Corporate Bonds 8.5 5. Ethical Restrictions 6.0 Equities 70.0

5.0 Property 7.5 The Fund will operate a negative screening policy as follows:

4.5 Alternative 5.0 • No investment in companies with 5% or more of their turnover involved in the mining of thermal coal or tar sands 2.0 Cash 0.0 • Following engagement, no investment in companies that Total Fund 100 needlessly emit significant quantities of carbon into the atmosphere, or which do not take seriously the transition to a low carbon economy Income Yield 3.1 • Qualitative judgments to be considered on a regular basis by Projected Trend Annual Return 5.2 Returns the Climate Active Advisory Panel Trend Annual ‘Real’ Return 3.1 • Zero tolerance on tobacco production and manufacturing of tobacco related products Maximum Annual Draw-down* -28.9 • No investment in companies that generate significant Key Risk 5% Value at Risk (VaR)* -12.0 turnover from the manfacture of arms, alcohol, gambling and Metrics pornography Annualised Volatility* 10.4 6. Derivatives Please note: there are no guarantees that the projected returns will be The fund uses derivatives for investment purposes and is not achieved limited to their use for Efficient Portfolio Management only. Source: Sarasin & Partners LLP. * Data since 31.12.05. As at 30.09.17. However, the fund does not target market exposure of above 100%. VaR is the statistical measure of ‘minimum’ anticipated loss over a given period. Our calculations are based on historical observations since 1st January 2000. For example a 95% 1 year VaR of -12.0 means that you could expect to lose at least 12.0% 1 in 20 years (5% of the time).

8 The Sarasin & Partners Climate Active Endowment Fund 7. Costs The investment management fee within the Fund is 0.75% per annum. For investors with over £3m to invest, the following sliding fee scale will apply, with rebates being paid quarterly in arrears: • 0.750% on the first £3m • 0.625% on the next £2m • 0.425% on the next £15m • 0.375% on the next £15m • 0.300% above £35m The other operational costs of managing the CAIF are expected to amount to 0.07% per annum. In addition, we expect between 7.5% and 17.5% of the Fund to be invested in specialist property and alternative investment funds which will have other costs imbedded within them. 8. Benchmark The benchmark and tactical operating parameters are set out below:

Strategic Allocation Ranges Asset Class Benchmark Index (%) (%)

Government Bonds ICE BofAML UK Gilts All Stocks 9.0 7.5 – 35 Corporate Bonds ML Sterling Corporate Bond 8.5 Cash 1 Month LIBOR - 0 – 10

Total Bonds & Cash 17.5 7.5 – 35

UK Equities FTSE All-Share Index (5% Capped) 20.0 10 – 30

International Equities (£ Hedged) MSCI All Countries World ex UK (Local Currency) 25.0 20 – 60

International Equities MSCI All Countries World ex UK 25.0 20 – 60

Total Equities 70.0 50 – 80

UK Property IPD All Balanced Property Fund Index 4.0 0 – 15 International Property S&P Developed Property 3.5

Total Property 7.5 0 – 15 Total Alternatives 1 Month LIBOR 5.0 0 - 15 Total 100.0 Sterling Weighting 71.5 50 - 100

The Fund will also seek to outperform the ARC Steady Growth Charity Index.

9 The Sarasin & Partners Climate Active Endowment Fund Appendix

The Oxford Martin School ‘Investment and Engagement Principles’

1. Commitment to net zero emissions by a specific date or at a temperature increase cap (e.g. “well below 2C”), including supply chains and products sold (i.e. Scope 3 emissions)

2. A profitable net zero emission business model: to demonstrate viability & credibility of strategy

3. Quantitative mid-term targets: to enable verification of progress towards net- zero emissions

The Climate Active investment philosophy can also be accessed at Sarasin & Partners via segregated portfolios and can be offered as a multi-asset solution, or as a single asset class portfolio of equities or bonds for charities, pension funds and other investors.

10 The Sarasin & Partners Climate Active Endowment Fund Important Information The Climate Endowment Fund is designed for registered charities only. This document has been approved by Sarasin & Partners LLP of Juxon House, 100 St Paul’s Churchyard, London, EC4M 8BU, a limited liability partnership registered in England & Wales with registered number OC329859 which is authorised and regulated by the Financial Conduct Authority with firm reference number 475111 and passported under MiFID to provide investment services in Republic of Ireland. The investments of the fund are subject to normal market fluctuations.The value of the investments of the fund and the income from them can fall as well as rise and investors may not get back the amount originally invested. If investing in foreign currencies, the return in the investor’s reference currency may increase or decrease as a result of currency fluctuations.Past performance is not a guide to future returns and may not be repeated. There is no minimum investment period, though we would recommend that you view your investment as a medium to long term one (i.e. 5 to 10 years). Frequent political and social unrest in Emerging Markets, and the high inflation and interest rates this tends to encourage, may lead to sharp swings in foreign currency markets and stock markets. There is also an inherent risk in the smaller size of many Emerging Markets, especially since this means restricted liquidity. Further risks to bear in mind are restrictions on foreigners making currency transactions or investments. For efficient portfolio management the Fund may invest in derivatives. The value of these investments may fluctuate significantly, but the overall intention of the use of derivative techniques is to reduce volatility of returns. The Fund may also invest in derivatives for investment purposes. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect of any such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct. indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data and no party may rely on any FTSE indices, ratings and / or data underlying data contained in this communication. No further distribution of FTSE Data is permitted without FTSE’s express written consent. FTSE does not promote, sponsor or endorse the content of this communication. All details in this document are provided for information purposes only and should not be misinterpreted as investment or taxation advice. This document is not an offer or recommendation to buy or sell shares in the fund. You should not act or rely on this document but should seek independent advice and verification in relation to its contents. Sarasin & Partners LLP and/or any other member of the J. Safra Sarasin Group accepts no liability or responsibility whatsoever for any consequential loss of any kind arising out of the use of this document or any part of its contents. The views expressed in this document are those of Sarasin & Partners LLP and these are subject to change without notice. This document does not explain all the risks involved in investing in the fund and therefore you should ensure that you read the prospectus and the KIID which will contain further information including the applicable risk warnings. The prospectus, the KIID as well as the annual and semi-annual reports are available free of charge from www.sarasinandpartners.com or from Sarasin & Partners LLP, Juxon House, 100 St Paul’s Churchyard, London, EC4M 8BU, Telephone +44 (0)20 7038 7000, Telefax +44 (0)20 7038 6850. For your protection, telephone calls may be recorded. Where the data in this document comes partially from third party sources the accuracy, completeness or correctness of the information contained in this publication is not guaranteed, and third party data is provided without any warranties of any kind. Sarasin & Partners LLP shall have no liability in connection with third party data. Persons domiciled in the USA or US nationals are not permitted to hold shares in the fund and shares may not be publicly sold, offered or issued to anyone residing in the USA or to US nationals. This publication is intended for investors in the . © 2018 Sarasin & Partners LLP – all rights reserved. This document can only be distributed or reproduced with permission from Sarasin & Partners LLP. Please contact [email protected]

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12 The Sarasin & Partners Climate Active Endowment Fund