Schroder Oriental Income | ESG

The Company delegates to the Manager (Schroder Investment Management Limited) the responsibility for taking environmental, social and governance (“ESG”) issues into account when assessing the selection, retention and realisation of investments. The Board expects the Manager to engage with investee companies on social, environmental and business ethics issues and to promote best practice. The Board expects the Manager to exercise the Company’s voting rights in consideration of these issues.

A description of the Manager’s policy on these matters can be found on the Schroders website at https://www.schroders.com/en/sustainability/corporate-responsibility. The Board notes that Schroders believes that companies with good ESG management often perform better and deliver superior returns over time. Engaging with companies to understand how they approach ESG management is an integral part of the investment process. Schroders is compliant with the UK Stewardship Code and its compliance with the principles therein is reported on its website. In 2019 Schroders retained its A+ rating from the UN Principles for Responsible Investment (PRI) for its overall ESG approach.

The Board agrees with Schroders view that companies with good ESG management often perform better and deliver superior returns over time. Engaging with companies to understand how they approach ESG management is an integral part of the investment process. Schroders is compliant with the UK Stewardship Code and its compliance with the principles therein is reported on its website.

The Board has received reporting from the Manager on the application of its policy and reviews the Manager’s ESG engagement activities at each quarterly board meeting.

The Manager has always actively engaged with companies, and direct company contact is an important component of the initial due diligence and ongoing monitoring process. The Asia Context template provides a clearer, and broader, roadmap on the issues requiring engagement. It has also helped refresh the Manager’s focus on Return on Invested Capital (“ROIC”) and enhances appreciation of the downside and upside risks to a company’s business model. The analysts have the option to apply an explicit discount or premium to their fair value estimate as a result of their ESG analysis.

Our portfolio manager works closely with the analysts in the region when selecting stocks, debating assumptions and scenarios, and stress testing valuations to increase conviction within the team about the recommendations. In addition to the merits of an individual stock idea, the portfolio manager takes into consideration the overall balance of the portfolio when selecting stocks and sizing positions – looking at overall sector and country weights.

A company’s ESG characteristics may influence how the portfolio manager sizes positions within the portfolio. The manager may elect to limit, or even rule out, exposure to a particular stock in view of a specific ESG concern We assess each situation on its merits, focusing on the materiality of ESG factors on a stock’s valuation and risk profile.

While much of the portfolio construction is founded on the portfolio manager’s skill and experience, he also harnesses the Manager’s risk management system, to provide a quantitative view of the characteristics of the portfolio. The portfolio manager also sets, in conjunction with the board, the gearing of the portfolio.

Schroders has been considering Environmental, Social and Governance (“ESG”) issues, and sustainability generally, for over 20 years, as detailed in the timeline below.

Schroders has a team of over 20 dedicated ESG analysts in London. They analyse long-term trends and implications around sustainability and how this is likely to affect different industries and stakeholders. The team operates as a central resource to both disseminate trends and analysis to the rest of the group and also provides training and input to the Manager’s Asian analysts when they are undertaking their sustainability work as part of their industry and company research. Schroders uses research on sustainability to make more complete and informed investment decisions.