Schroder International Selection Fund – Sustainable US Dollar High Yield
Schroder International Selection Fund – Sustainable US Dollar High Yield
Sammanfattning
Fonden har ett högre totalt hållbarhetsbetyg än Bloomberg US High Yield Index, baserat på investeringsförvaltarens betygsystem. Detta jämförelseindex (som är ett brett marknadsindex) tar inte hänsyn till de miljörelaterade och sociala egenskaper som fonden främjar. Inget jämförelseindex har valts i syfte att uppnå de miljörelaterade eller sociala egenskaper som den finansiella produkten främjar. Fondens hållbarhetsbetyg mäts av SustainEx™, Schroders egenutvecklade verktyg som ger en uppskattning av de potentiella konsekvenserna för samhället eller miljön som en emittent kan skapa.
Fonden är aktivt förvaltad och investerar minst två tredjedelar av tillgångarna i värdepapper med fast och rörlig ränta som har låga kreditbetyg (enligt Standard & Poor's eller motsvarande betyg från andra kreditvärderingsinstitut) emitterade av stater, statliga organ, överstatliga organisationer och företag i hela världen som är denominerade i USD eller andra valutor som är säkrare mot USD, inklusive i tillväxtmarknadsländer.
Fonden kan också tillämpa vissa uteslutningar. Mer information om alla av fondens uteslutningar finns nedan i
avsnittet ”övervakning av miljörelaterade eller sociala egenskaper”.
För att bedöma praxis för god styrning används ett centralt test för god styrning. Detta test baseras på ett datadrivet kvantitativt ramverk, som använder ett styrkort för att bedöma företag över kategorierna sunda förvaltningsstrukturer, anställningsförhållanden, ersättning till personal och skatteefterlevnad. Xxxxxxxxx har definierat ett antal kriterier över dessa grunder. Efterlevnaden av testet övervakas centralt och företag som inte klarar detta test kan inte innehas av fonden, såvida inte investeringsförvaltaren har godkänt att emittenten uppvisar god styrning, baserat på ytterligare insikter utöver den kvantitativa analysen.
Minimiandelen av fondens tillgångar som används för att uppnå miljörelaterade eller sociala egenskaper motsvarar 80 %. Fonden kommer även investera minst 40 % av sina tillgångar i hållbara investeringar. Med undantag för alla gröna eller sociala obligationer, som klassificeras som miljörelaterade eller sociala, har en hållbar investering ett miljömål eller socialt mål, beroende på om den relevanta emittenten har ett högre betyg i Schroders egenutvecklade verktyg i förhållande till sin tillämpliga referensgrupp för sina miljömässiga eller sociala indikatorer. I varje enskilt fall består indikatorerna av både ”kostnader” och ”förmåner”. Fonden inkluderar investeringar som behandlas som neutrala för hållbarhetsändamål. Det omfattar investeringar som inte betygsätts med Schroders interna hållbarhetsverktyg och bidrar därför inte till fondens hållbarhetsbetyg.
Fondens urval av investeringar och tillgångar har granskats och godkänts av förvaltarens produktutvecklingskommitté där det ingår representanter från funktionerna för juridik, regelefterlevnad, produkt och hållbarhet. Kontinuerlig efterlevnad av överenskomna hållbarhetsegenskaper övervakas av teamet för portföljefterlevnad. Det finns inga externa kontroller av denna due diligence.
Förvaltarens investeringsprocess baseras på en egenutvecklad bottom-up-strategi för grundläggande urval av olika ränteinstrument. Expertis från både investeringsteamet och hållbarhetsteamet innebär en bredd vad
gäller idégenerering och hög grad av analys avseende den förväntade utvecklingen av långsiktig tillväxt, ESG- och hållbarhetsegenskaper.
Exkluderingen av vissa verksamheter, branscher eller grupper av emittenter listas under avsnittet ”Övervakning av miljörelaterade eller sociala egenskaper”, liksom de investeringsgränser som gäller för fonden, kommer att mätas inom förvaltarens ramverk för portföljefterlevnad.
Förvaltaren hämtar information om relevanta ränteinstrument från allmänt tillgänglig bolagsinformation och företagsmöten, mäklarrapporter och resultat från branschorgan, forskningsorganisationer, tankesmedjor, lagstiftare, konsulter, icke-statliga organisationer och universitet.
Tredjepartsanalys kan användas, men våra interna analytiker bildar sin egen uppfattning om alla företag vi analyserar.
Förvaltaren anlitar externa ESG-leverantörer, inklusive MSCI ESG-analys, Bloomberg, Refintitiv, Sustainalytics och Morningstar, som är föremål för regelbunden översyn och förändring.
Även om de tredje parter som levererar den stora majoriteten av de data som används har valts ut noggrant, kan datafel uppstå. För att åtgärda detta utför ett dedikerat ESG Data Governance-team proaktiv övervakning för att söka efter fel och lösa datafrågor. Det innebär ett nära samarbete med tredjepartsleverantörer av data samt hantering och utsökning av datakorrigeringar.
Begränsningar i investeringsförvaltarens metodik och data beror främst på datafel, datatillgänglighet, specifikt genom brist på rapporterade uppgifter från bolagen i vissa fall samt uppgifter som uppskattas enligt beskrivningen i avsnittet ”datakällor och behandling”.
Om data inte finns tillgängliga samarbetar Xxxxxxxxx med bolagen för att uppmuntra dem att lämna ut de datapunkter som saknas.
Några av våra egenutvecklade verktyg lägger in uppskattade värden där det är tillämpligt. Våra modeller använder vanligtvis en rad tekniker för uppskattning av saknade värden där det är tillämpligt och rimligt.
Om data för en analys inte är tillräckligt tillgängliga för att ge tillförlitliga slutsatser, inkluderar vi inte den analysen i våra verktyg.
Förvaltarens team för portföljefterlevnad ansvarar för kodning och övervakning av riskbegränsningar för enskilda fond- och kundmandat inom den oberoende riskfunktionen.
Uppgifterna i ramverket för portföljefterlevnad utgör grunden för övervakning av riskbegränsningar och indikatorer, samt den senaste informationen om portföljstruktur (såsom tillgångsallokering, sektor- och geografisk allokering) samt riskstatistik är lätt tillgänglig för våra investeringsrisk-, portföljefterlevnads- och investeringsteam.
Xx anser att aktiv ägarstyrning ger oss det inflytande där vi kan påverka ledningsgrupper för att säkerställa hållbarhet i de tillgångar vi investerar i. Vi strävar efter att driva förändring som skyddar och öka värdet av våra investeringar och vi är fast beslutna att utnyttja vårt företags starka position och inflytande för att ändra bolagens verksamhet till det bättre. Vi anser att detta är en viktig aspekt av vår roll som förvaltare av våra kunders kapital och hur vi hjälper våra kunder att uppfylla sina långsiktiga finansiella mål i linje med vårt förvaltningsansvar.
Mer information om vår strategi för en aktiv ägandepolicy finns allmänt tillgänglig: xxxxx://xxxxxxx.xxxxxxxxx.xxx/x/0000xx0xx00x0x0x/xxxxxxxx/xxxxxxxxx-xxxxxxxxxx-xxxxxxxxx.xxx.
No sustainable investment objective
This financial product promotes environmental or social characteristics, but does not have as its objective sustainable investment.
The Investment Manager’s approach to investing in issuers that do not cause significant harm to any
environmental or social sustainable investment objective includes the following:
- Firm-wide investment exclusions apply to Schroders funds. These relate to international conventions on cluster munitions, anti-personnel mines, and chemical and biological weapons and a list of those companies that are excluded is available at xxxxx://xxx.xxxxxxxxx.xxx/xx/xxxxxxxxxxxxxx/xxxxxx- ownership/group-exclusions/. Firm-wide exclusions also apply to companies generating more than 20% of their revenue from thermal coal mining.
- The Fund excludes companies that derive revenues above certain thresholds from activities related to tobacco and thermal coal.
- The Fund excludes companies that are assessed by Schroders to have breached one or more ‘global norms’ thereby causing significant environmental or social harm; these companies comprise Schroders’ ‘global norms’ breach list. Xxxxxxxxx’ determination of whether a company has been involved in such a breach considers relevant principles such as those contained in the UN Global Compact (UNGC) principles, the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. The ‘global norms’ breach list may be informed by assessments performed by third party providers and by proprietary research, where relevant to a particular situation.
- The Fund may also apply certain other exclusions in addition to those summarised above.
Further information on all of the Fund’s investment exclusions is to be found below in the “Monitoring of environmental or social characteristics” section.
Environmental or social characteristics of the financial product
The Fund maintains a higher overall sustainability score than the Bloomberg US High Yield Index, based on the Investment Manager’s rating system. This benchmark (which is a broad market index) does not take into account the environmental and social characteristics promoted by the Fund.
The Fund invests at least 40% of its assets in sustainable investments, which are investments that the Investment Manager expects to contribute towards the advancement of one or more environmental and/or social objective(s).
For more information on how the sustainability score is measured please refer to the “Methodologies for environmental or social characteristics” section.
Investment strategy
The sustainable investment strategy used by the Investment Manager is as follows:
The Fund is actively managed and invests at least two-thirds of its assets in fixed and floating rate securities that have a below investment grade credit rating (as measured by Standard and Poor’s or any equivalent of other credit rating agencies) issued by governments, government agencies, supra-nationals and companies worldwide denominated in USD, or other currencies hedged to USD, including emerging market countries.
The Fund maintains a higher overall sustainability score than Bloomberg US High Yield index, based on the
Investment Manager’s rating system.
The Fund may also apply certain other exclusions. Further information on all of the Fund’s exclusions is to be found further below in the “Monitoring of environmental or social characteristics” section.
The Fund invests in companies that have good governance practices, as determined by the Investment
Manager’s rating criteria.
In order to assess good governance practices, a central Good Governance Test is applied. This test is based on a data-driven quantitative framework, which uses a scorecard to assess companies across the categories of sound management structures, employee relations, remuneration of staff, and tax compliance. Schroders has defined a number of criteria across these pillars. Compliance with the test is monitored centrally and
companies which do not pass this test cannot be held by the Fund, unless the Investment Manager has agreed that the issuer demonstrates good governance based on additional insights beyond that quantitative analysis.
The Investment Manager may also engage with companies held by the Fund to challenge identified areas of weakness on sustainability issues. More details on the Investment Manager’s approach to sustainability and its engagement with companies are available on the webpage:
xxxxx://xxx.xxxxxxxxx.xxx/xx-xx/xx/xxxxxxxxxx/xxxx-xx-xx/xxxxxxxxxxx-xxxxxxxxx/xxx-xxxxxxxxxxx-xxxxxxxxxx- policies-disclosures-voting-reports/disclosures-and-statements/
The Fund may invest:
up to 20% of its assets in convertible bonds including up to 10% of its assets in contingent convertible bonds; up to 20% of its assets in emerging markets countries; and
up to 10% of its assets in asset-backed securities and mortgage-backed securities.
The Fund may also invest up to one-third of its assets directly or indirectly in other securities (including other asset classes), countries, regions, industries or currencies, investment funds, warrants and money market investments, and hold cash.
The Fund may use derivatives with the aim of achieving investment gains, reducing risk or managing the Fund more efficiently.
The strategy applies structural sustainability themes and screens to combine companies that the Investment Manager considers are best-in-class with investments in issuers demonstrating good or improving sustainability credentials. This is achieved by:
- The exclusion of issuers with certain exposure to specific activities that the Investment Manager considers environmentally destructive or socially damaging, violate human rights and/or have demonstrated gross misconduct.
- The inclusion of issuers that the Investment Manager considers are well placed to deliver stable and improving sustainability trajectories relative to their industry peers. As part of the selection process, the Investment Manager also considers companies’ commitment to sustainable themes such as climate change mitigation, economic inclusion and health and wellbeing.
The Investment Manager may also engage with companies to encourage transparency, the transition to a circular economy with lower carbon emissions intensity and responsible social behaviour that promotes sustainable growth and alpha generation.
The Fund may also strategically invest in green, social and sustainable bonds. The selection of green, social and sustainable bonds entails assessing the overall sustainability of the issuer and analysing the use of proceeds. A green bond is a fixed or floating rate security that finances an environmental objective. A social bond is a fixed or floating rate security that finances a social objective. A sustainable bond is a fixed or floating rate security that finances both environmental and social objectives.
The primary sources of information used to perform the analysis are Schroders’ proprietary sustainability tools and research, and the Investment Manager’s third-party research, NGO reports and expert networks. The Investment Manager also performs its own analysis of information provided by the companies, including information provided in company sustainability reports and other relevant company material.
The Investment Manager ensures that at least 90% of companies in the Fund’s portfolio are rated against the sustainability criteria. As a result of the application of sustainability criteria, at least 20% of the Fund’s potential investment universe is excluded from the selection of investments.
For the purposes of this test, the potential investment universe is the core universe of issuers that the Investment Manager may select for the Fund prior to the application of sustainability criteria, in accordance with the other limitations of the Investment Objective and Policy. This universe is comprised of fixed and
floating rate securities issued by companies worldwide. The universe (for the purpose of this test only) does not include fixed or floating rate securities issued by public or quasi-public issuers.
The investment strategy guides investment decisions based on factors such as investment objectives and risk tolerance.
Proportion of investments
The planned composition of the Fund’s investments that are used to meet its environmental or social
characteristics are summarised below.
#1 Aligned with E/S characteristics includes the investments of the financial product used to attain the environmental or social characteristics promoted by the financial product.
#2 Other includes the remaining investments of the financial product which are neither aligned with the environmental or social characteristics, nor are qualified as sustainable investments.
The category #1 Aligned with E/S characteristics covers:
- The sub-category #1A Sustainable covers sustainable investments with environmental or social objectives.
- The sub-category #1B Other E/S characteristics covers investments aligned with the environmental or social characteristics that do not qualify as sustainable investments.
#2 Other
20.00%
Social 1.00%
#1B Other E/S characteristics 40.00%
Investments
#1 Aligned with E/S characteristics 80.00%
Other environmental 1.00%
#1A Sustainable 40.00%
Taxonomy-aligned 0.00%
#1 Aligned with E/S characteristics includes the minimum proportion of the Fund’s assets used to attain the environmental or social characteristics, which is equal to 80%. The Fund commits to maintain a higher overall sustainability score than the Bloomberg US High Yield Index, and so the Fund’s investments that are scored by Schroders’ proprietary sustainability tool are included within the minimum proportion stated in #1 on the basis that they will contribute to the Fund’s sustainability score (whether such individual investment has a positive or a negative score). Also included within #1 are any green, social or sustainability bonds that are not scored by Schroders’ proprietary sustainability tool. The minimum proportion of assets that are invested in sustainable investments is indicated in #1A. The minimum proportions stated apply in normal market conditions. The actual proportion stated in #1 is expected to be higher.
For more information on how the sustainability score is measured please refer to the “Methodologies for environmental or social characteristics” section.
#2 Other includes cash which is treated as neutral for sustainability purposes. #2 also includes other investments that are not scored by Schroders’ proprietary sustainability tool and so do not contribute towards the Fund’s sustainability score. As #1 states a minimum proportion that is in practice expected to be higher, the proportion stated in #2 is expected to be lower.
Minimum safeguards are applied where relevant to investments by restricting (as appropriate) investments in counterparties where there are ownership links or exposure to higher risk countries (for the purpose of money laundering, terrorist financing, bribery, corruption, tax evasion and sanctions risks). A firm-wide risk assessment considers the risk rating of each jurisdiction; which includes reference to a number of public statements, indices and world governance indicators issued by the UN, the European Union, the UK
Government, the Financial Action Task Force and several Non-Government Organisations (NGOs), such as Transparency International and the Basel Committee.
In addition, new counterparties are reviewed by Xxxxxxxxx’ credit risk team and approval of a new counterparty is based on a holistic review of the various sources of information available, including, but not limited to, quality of management, ownership structure, location, regulatory and social environment to which each counterparty is subject, and the degree of development of the local banking system and its regulatory framework. Ongoing monitoring is performed through a Schroders’ proprietary tool, which supports the analysis of a counterparty’s management of environmental, social and governance trends and challenges. Any significant deterioration in the profile of the counterparty in Schroders’ proprietary tool would lead to further analysis and potential exclusion by Xxxxxxxxx’ credit risk team.
Monitoring of environmental or social characteristics
The sustainability score of the Fund is measured by SustainEx™, Schroders’ proprietary tool that provides an
estimate of the societal or environmental impact that an issuer may create.
The exclusion of certain activities, industries or groups of issuers listed below, as well as the investment limits applicable to the Fund, will be measured within the Investment Manager’s portfolio compliance framework. Exclusions and limits are coded into this framework to seek to ensure that pre-trade compliance correctly flags the securities that should not enter the portfolio. Securities excluded based on revenue thresholds are evaluated quarterly by the Sustainable Investment team using MSCI’s revenue data.
The coding and monitoring of investment risk restrictions for individual fund and client mandates is the responsibility of the Investment Manager’s Portfolio Compliance team within the independent Investment Risk function.
The data in the portfolio compliance framework forms the basis for monitoring of risk limits and indicators, and the latest information on portfolio structure (such as asset allocation, sector and country positions) and risk metrics is easily available to our investment risk, portfolio compliance and investment teams.
Excluded Activity | Criteria |
Thermal Coal Mining Maximum Percentage of Revenue | 5% |
Unconventional Oil and Gas Extraction & Production Maximum Percentage of Revenue | 5% |
Thermal Coal Power Generation Maximum Percentage of Revenue1 | 10% |
30% | |
5% | |
Nuclear Power Uranium Mining Maximum Percentage of Revenue | 5% |
Nuclear Power Activities Maximum Percentage of Revenue | 5% |
Oil Sands Extraction Maximum Percentage of Revenue | 5% |
Exclusion Criteria Environmental exclusions
1 Green bonds, Sustainability bonds, SLB bonds from fossil fuel energy generators are also permitted if one of the criteria (a OR b) below is met:
a) The issuer is listed on the Science Based Target Initiative list
b) The issuer is allocating at least 50% of total generation capex to renewable generation
Social exclusions
Excluded Activity | Criteria |
Tobacco Value Chain Maximum Percentage of Revenue | 5% |
Alcohol Production Maximum Percentage of Revenue | 5% |
Adult Entertainment Maximum Percentage of Revenue | 5% |
Gambling Maximum Percentage of Revenue | 5% |
Conventional Weapons Maximum Percentage of Revenue | 5% |
Nuclear Weapons Maximum Percentage of Revenue | 0% |
Civilian Firearms Maximum Percentage of Revenue | 5% |
Biological/Chemical Weapons Maximum Percentage of Revenue | 0% |
Any Tie to Cluster Munitions | Any tie |
Any Tie to Depleted Uranium Manufacturing | Any tie |
Any Tie to Landmine Manufacturing | Any tie |
Bespoke Schroders exclusions
Excluded Activity | Criteria |
All | |
Schroders’ ‘Global Norms’ Breach List | All |
Controversy/misconduct exclusions
Excluded Activity | Criteria |
Companies Flagged for Severe Business Ethics Failures (Bribery and Fraud) | Red |
Companies Flagged for Violating the International Labour Organisation's Core Labour Standards | Fail |
Companies Flagged for Violating the UN's Global Compact Principles | Fail |
Country/territory exclusions
Excluded Activity |
‘Not free’ classified countries according to Freedom House |
Exposure to sovereigns that have not signed the Paris Agreement |
Country CONTEXT™ score - lowest 20% of universe |
Score based exclusions
Excluded sectors | Criteria |
SustainEx score | Bottom 10% of Universe excluded |
2 Schroders controversial weapons screening covers cluster munitions, anti-personnel mines, and chemical and biological weapons. Full details of the criteria and company names are available via the following link: xxxxx://xxx.xxxxxxxxx.xxx/xx/xxxxxxxxxxxxxx/xxxxxx-xxxxxxxxx/xxxxx-xxxxxxxxxx/
MSCI B/CCC | |
Internal ESG Rating D- / D (=) | Not permitted |
Methodologies for environmental or social characteristics
The Fund promotes the following characteristic: it maintains a higher overall sustainability score than the Bloomberg US High Yield index, based on the Investment Manager’s rating system. As stated above, the sustainability score is measured by SustainEx™, Schroders’ proprietary tool that provides an estimate of the potential societal or environmental impact that an issuer may create. It does this by using certain metrics with respect to that issuer, and quantifying the positive (for example by paying ‘fair wages’) and negative (for example the carbon an issuer emits) impacts of each of those metrics to produce an aggregate measure expressed as a notional percentage of sales of the relevant underlying issuer. The overall sustainability score aggregates the effect of sustainability indicators including but not limited to greenhouse gas emissions, water usage, and salaries compared to the living wage. An issuer may be a company or a sovereign. The Investment Manager monitors compliance with this characteristic by reference to the weighted average sustainability score of the Fund in SustainEx™ over the previous six month period.
As part of the Fund’s investment processes, the SustainEx™ score, and the drivers of that score, are reviewed at the overall fund level. Schroders proprietary tools, including SustainEx™, may not cover all of the Fund’s holdings from time to time, in which case the Investment Manager may use alternative methods to assess relevant holdings in the Fund. In addition, certain types of assets (such as cash and certain equivalent securities such as gilts) are treated as neutral and are therefore not considered by our proprietary tools.
The Fund also invests at least 40% of its assets in sustainable investments, which are investments that the Investment Manager expects to contribute towards the advancement of one or more environmental and/or social objective(s). The Investment Manager monitors compliance with this characteristic by reference to the sustainability score of each asset in Schroders' proprietary tool. Compliance with this is monitored daily via our automated compliance controls.
As part of its broader assessment, the Investment Manager also considers the following:
CONTEXT
Context is a proprietary ESG research tool which provides a systematic framework for analysing a company’s relationship with its stakeholders and the sustainability of its business model. Comprising over 260 metrics across over 13,000 companies, it is designed to support the Investment Manager’s understanding of the sustainability of companies’ business models and profitability, and provides structured, logical and wide- ranging data.
The tool enables analysts to select the most material ESG factors for each sector, weight their importance and apply relevant metrics. Analysts are then able to compare companies based on the metrics selected, their own company assessment scores or adjusted rankings (size, sector or region), with the flexibility to make company specific adjustments to reflect their detailed knowledge. The tool is fully integrated within Schroders’ global research platform, which is readily accessible across investment desks and geographies.
External Research
The Investment Manager uses information from several external ESG research firms, but only ever as one input into the Investment Manager’s own company assessments to be questioned, examined and built on. External data providers are used to challenge or endorse the proprietary view of the Investment Manager.
The Investment Manager’s Sustainable Investment team has extensive networks within its respective field.
Information is drawn from publicly available corporate information and company meetings, from broker
3 MSCI CCC excluded regardless of internal rating, MSCI B excluded if internal rating is D.
reports, industry bodies, and research organisations, think tanks, legislators, consultants, Non-Governmental Organizations and academics; wherever it is felt the information would add value to the Investment Manager’s analysis.
Through this process, the Investment Manager aims to evaluate the relevance and materiality of a range of ESG factors on future earnings growth and as potential risk factors for a company.
Data sources and processing
In order to assess and understand the potential impact of sustainability risks and opportunities, Xxxxxxxxx has developed a range of proprietary tools. These tools rely on data that is available at the level of the underlying investment holdings.
The Investment Manager draws information on investee companies from publicly available corporate information and company meetings, from broker reports, industry bodies, and research organisations, think tanks, legislators, consultants, Non-Governmental Organisations and academics.
Third party research may be used, however our internal analysts form a proprietary view on each of the companies we analyse. Financial analysts may also use third-party research to support their assessment of ESG issues when analysing companies, in addition to consulting with our in-house ESG specialists. Through this process, we aim to evaluate the relevance and materiality of a range of ESG factors on the sustainability of future earnings growth and as potential risk factors for a company.
The Investment Manager subscribes to external ESG research providers including; MSCI ESG research, Bloomberg, Refinitiv, Sustainalytics and Morningstar, which is subject to periodic review and change.
Whilst the third parties that deliver the vast majority of the data used have been chosen carefully, data errors may occur. To address this, a dedicated ESG Data Governance team pro-actively monitors for errors and resolves data queries. This involves close collaboration with the third-party data providers, and managing and tracking data corrections.
Where data is not available, Schroders will engage with companies to encourage them to disclose the missing data points. This additional information will be used alongside data from conventional and unconventional data sources that feed into our proprietary tools.
Some of our proprietary tools infer missing values where applicable. Our models typically employ a range of techniques to estimate missing values where appropriate and reasonably robust. For example, in one tool, where reported values are missing for companies, we fill using metric-specific rules such as filling with the industry peer group 60th percentile where higher values are considered negative and the peer group 40th percentile where higher values are considered beneficial (which is a conservative approach).
Where data for a metric is not sufficiently available to form robust conclusions, we do not include that metric in our tools.
Whilst there may be some data estimation, it tends to be a marginal amount at the portfolio level with regard to our assessment of the sustainability characteristics of each company. The proportion of estimated data may vary over time.
Limitations to methodologies and data
Limitations to the Investment Manager’s methodology and data mainly arise from data errors, data availability, specifically the lack of company reported data in some cases and data estimation as detailed in the section titled “Data sources and processing”. Due to the range of data sources and due to combining both qualitative and quantitative elements involving a degree of subjectivity and judgement from the investment manager, we believe that these data limitations do not in aggregate materially impact our attainment of the environmental or social characteristics of the Fund.
Due diligence
The Fund’s investment and asset selection process has been reviewed and approved by the Investment Manager’s Product Development Committee that includes representatives from the Legal, Compliance, Product and Sustainable Investment functions. Ongoing compliance with the agreed sustainability characteristics is monitored by the Portfolio Compliance Team. There are no external controls on that due diligence.
Engagement policies
We consider active ownership to be the influence we can apply to management teams to seek to ensure sustainable practices where applicable in the assets in which we invest. We aim to drive change that will protect and enhance the value of our investments and we are committed to leveraging the weight of our firm to change how a company is operating for the better.
Our active ownership priorities reflect the combined perspectives of our fund managers, investment analysts and sustainability specialists across the firm, supported centrally by the Sustainable Investment team. As a result, we are able to take a common approach across investment desks.
We focus on sustainability issues which we determine to be material to the long-term value of our investee holdings. When material and relevant, we believe that companies that address these factors, where lacking, will drive improved financial performance for our clients. These issues reflect expectations and trends across a range of stakeholders including employees, customers, and communities, to the environment, suppliers and regulators. By strengthening relationships with that range of stakeholders, business models become more sustainable. The governance structure and management quality that oversee these stakeholder relationships are also a focus for our engagement discussions. In addition, we seek to reflect the priorities of our clients.
Based on this process, we identify six broad themes for our engagement: climate, natural capital & biodiversity, human rights, human capital management, diversity & inclusion and governance.
Our themes are underpinned by additional cross-cutting thematic priorities. We also increasingly recognise the interconnectedness of ESG themes, such as the “just transition”, which recognises the social dimension of the transition to a resilient and low-carbon economy. We seek to reflect this interconnectedness in our engagements with companies.
How we engage
We identify three key methods for practicing active ownership:
1. Dialogue: We speak with companies to understand if and how they are preparing for the long-term sustainability challenges they face.
2. Engagement: We work with companies to help them to recognise the potential impact of these challenges and to help them take action in the areas where change may be required.
3. Voting (where applicable): We use our voice and rights as shareholders to make sure these changes are effected.
These forms of active ownership can take place directly with companies, led by our fund managers, investment analysts and Sustainable Investment team; they can also take place in collaboration with other groups.
Engagement is therefore a component of the portfolio’s investment strategy, both from an environmental and
social perspectives.
We recognise that effective engagement requires continuous monitoring and ongoing dialogue. Where we have engaged repeatedly and seen no meaningful progress, we will escalate our concerns. Decisions on whether and how to escalate are based on the materiality of each issue, its urgency, the extent of our concern and whether the company has demonstrated progress through previous engagements. We identify a number of methods to escalate our engagements, such as meeting or otherwise communicating with non-executive directors or the chair of the Board, publicly stating our concerns, withholding support or voting against management and directors (where applicable) up to divesting partially or fully.
Our approach to active ownership focusses on achieving real-world outcomes and achieving change. When determining when to engage and setting an objective for the engagement, we consider:
1. Materiality: We seek to focus our engagement on the most material sustainability threats and opportunities to the company.
2. Regional context: The materiality of issues and the expectations we have of companies vary by country and region; for example, differing socio-cultural factors, regulatory maturity and resource constraints. Where possible we reference country or regional initiatives, regulations and leading practice from peers in our dialogue with companies.
3. Realistic outcomes: We consider both leading practice and what could realistically be achieved by the company in the next few years, including considering the size of the company.
4. Ability to monitor progress: We use objective, measurable metrics or indicators that can be used to assess company performance on an issue.
5. Length of engagement: We aim to set short- to mid-term objectives – that can often be achieved over a 12- to 24-month period depending on the intensity of the engagement – but with a longer-term vision in mind.
We aim to set pre-defined SMART (specific, measurable, achievable, realistic and time-bound) engagement objectives. We regularly monitor progress against the engagement objectives, at least annually, and at a frequency that is appropriate for the priority of the engagement and materiality of the issue or holding. That said, we recognise that the length of time to achieve an objective will vary depending upon its nature, and that key strategic changes will take time to implement into a company’s business processes. A measurable outcome from our engagement upon completion of an objective could take a range of forms, including additional disclosure by a company, influencing the company strategy on a particular issue, or a change to the governance of an issue.
Further details on our approach to active ownership policy is publicly available: xxxxx://xxxxxxx.xxxxxxxxx.xxx/x/0000xx0xx00x0x0x/xxxxxxxx/xxxxxxxxx-xxxxxxxxxx-xxxxxxxxx.xxx.
Designated reference benchmark
No reference benchmark has been designated for the purpose of meeting the environmental or social characteristics promoted by the financial product.