Schroder AsiaPacific Fund | 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 requires the Manager to exercise the Company’s voting rights in consideration of these issues, and receive reporting on them. 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.

Given the Manager’s focus on companies with sustainable business models over the longer-term, the assessment of non financial (Environmental, Governance and Social, or “ESG”) factors is an essential part of the research process and stock appraisal. The Manager has a disciplined, long-term focused valuation framework to determine fair value estimates for the companies covered and owned, and ESG is integral in this analysis.

Schroders’ Asian equity analysts are expected to provide written ESG analysis for all companies under coverage. This identifies and assesses the potential effect of ESG issues on the investment case. For ESG analysis to be more robust and more integrated, they have adopted a broader stakeholder-based approach to ESG analysis. Drawing upon the CONTEXT framework and other proprietary tools developed by Schroders, the resulting analysis provides a detailed evaluation of all the material aspects of ESG for a company. The Manager’s Asian analysts use the CONTEXT framework in the Asia CONTEXT template, which captures the ESG analysis in one template and is a key step in the overall assessment of a company. In addition to separate rankings for ‘E’, ‘S’ & ‘G’, the process generates an overall absolute numerical score for each company’s ESG rating.

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. Following the pandemic restrictions, the Manager has greatly increased use of videoconferencing for Company meetings. 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 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 intuition, 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 level of the Company.

Schroders has been considering ESG issues, and sustainability generally, for over 20 years. 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.