Schroder Asian Total Return | 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.

In addition to the description of the Manager’s integration of ESG into the investment process and the details in the Managers’ Review, a description of the Manager’s policy on these matters can be found on the Schroders website at 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.

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 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.

The reason Schroders places such a high importance on its own research is that from our experience third-party ESG ratings are often backward-looking, opaque and adopt inconsistent methodology. These have led to these third-party ESG ratings usually having poor track records and generating inconsistent results that contradict each other.

Sustainability and ESG analysis in Asia is, in Schroders’ view, of greater importance when making investment decisions than perhaps any other region in the world. Firstly, there are risks of poor corporate governance and fraud owing to family and/or state shareholder structures and poor minority investor protection. Secondly, Asia is the biggest greenhouse gas emitter in the world and the region that faces the biggest environmental and economic costs of global warming. Finally, environmental degradation and the social costs of industrialisation and malpractice is widespread in Asia. How does ESG analysis embed itself into the investment process for the Company?

The first section of all Asian research reports covers governance – the management, their background and track record, whether they treated minority shareholders poorly in the past, and if they are credible and professional. The Manager only invests in companies where it is believed management is trustworthy, where interests are aligned and where there is no historic record of misdemeanours. This screens out a significant part of the Asian universe. In order to capture broader ESG considerations Schroders’ Asian Equity analysts are expected to provide additional written ESG analysis for all companies under coverage. In order for this to be more robust and integrated, the Manager’s research team has also drawn upon the Schroders CONTEXT framework and adapted it to an Asian version using a broader stakeholder-based approach to ESG analysis.

The Asia Context template captures the Manager’s ESG analysis in one template and is a key step in the overall assessment of a company. In addition the Asia Context analysis provides a clear and broad roadmap on the issues requiring engagement, and enhances the appreciation of the downside and upside risks to a company’s business model. The Asia Context report generates separate rankings for “E”, “S” & “G” and provides an overall numerical ESG score for each company. The analysts also have the ability to apply an explicit discount or premium to their fair value estimates for companies as a result of their ESG analysis within the Asia Context analysis. The final part of the ESG process in Asia is the Manager’s SustainEx reporting which uses a variety of data feeds to consider environmental and sustainability factors. Combined with the Governance and Asia Context analysis this gives the Manager a complete overview of the ESG characteristics of the Company’s holdings.

In summary, the Manager looks for companies with sustainable business models that are doing the right thing for broader stakeholders in order to generate the best performance for the Company.