Schroder British Opportunities | ESG

The Company delegates to its Manager 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.

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 application with the principles therein is reported on its website www.schroders.com/en/about-us/corporate-responsibility/sustainability/interpret/.

The Board has received reporting from the Manager on the application of its policy.

We believe that companies do not operate in a vacuum; rather, their long-term success is directly tied to their ability to adapt to social and environmental trends shaping their industries. For instance, the ability to attract and retain talent, to build strong customer relationships or to adapt to changing regulations are vital to their competitiveness. All are complicated by workers’ growing expectations that their employers’ values match their own, the growing importance consumers attach to environmental features or product sustainability and the growing pressures governments face to reign back corporate excesses. The challenges vary from company to company and industry to industry, as do the features we look for in companies, but the principles and the importance they attach to them are consistent. The same structural trends are also reshaping industries, driving growth in some markets and shrinking others, as capital moves to industries and technol ogies that will help solve social and environmental challenges.

We focus on companies that are considered to be sustainable in terms of both the longevity and durability of their businesses, as well as their environmental, social and governance behaviours. We achieve this through SDG alignment and adoption of best ESG practices.

The pre investment process uses a three step process when appraising a potential investment along ESG lines.

1.Ethical Screening - From the outset we immediately screen out companies operating in ‘sin’ industries such as fossil fuels, tobacco, alcohol, weapons and gambling.

2.Sustainable investing - We intend to seek companies whose business models are aligned with at least one of the UN SDGs or one of the sub-goals. However not every attractive investment will meet this criteria. For such companies in particular, if we believe the fundamental and structural drivers of the business are sound, we would then invest with the intention to contribute to the development of the firms ESG credentials. For example we may believe there is scope to encourage management teams to improve reporting on areas such as diversity or greenhouse gas emissions.

3.ESG integration - Following this, we assess companies’ ESG risks and opportunities, identify gaps in their awareness or management of ESG factors, and examine their external ratings. In doing so, we are able to determine how we could add value were we to be shareholders.

The core of our ESG evaluation stems from a number of Schroders’ proprietary quantitative research tools, such as CONTEXT, SustainEx and World-Check.

CONTEXT provides a systematic framework for analysing a company’s relationship with its key stakeholders, thus assessing the sustainability of its business model.

SustainEx quantifies the positive and negative impacts on the environment and society.

World-Check is a service that conducts contracting party risk assessment.

The post investment process we carry out the below as shareholders of the business.

Active stewardship - We seek to influence corporate behaviour through direct engagement and/or proxy voting. We will engage and vote on any issue affecting the long-term sustainable value of our portfolio companies. See ‘Engagement and Stewardship’ section in the recent annual report and accounts, to see how we voted during the period.

Monitoring - We monitor the ESG performance of our investments throughout our tie as shareholders, and assess if companies have responded to our requests for change.

If we feel we do not have enough information, or have identified gaps in companies’ awareness or management of their ESG risks and opportunities, we establish dialogue with that firm.

We also undertake re-active engagement as a result of any negative incident involving one of out investments, in order to understand why it may have occurred, the actions the company is taking as a result, and what the current and future risks may be.

Finally, to ensure that we consider all potential ESG concerns, where available, we examine the external ESG ratings for our portfolio companies on an annual basis. Companies with a downward trend in ratings may indicate potentially higher ESG risk and therefore be flagged up for further engagement.

Going forward, as we manage the portfolio, we aim to continue with the good progress made so far on ESG matters. Specifically, we intend to actively encourage companies to become more environmentally responsible; determine how management teams are creating diverse, inclusive and equitable organisations; understand how our investee companies are impacting society positively, and hold the boards of companies in our portfolio to high corporate governance standards.

Extensive engagement with portfolio companies As part of our process, we meet with company management teams in advance of investing. We maintain this engagement throughout the life of our investment. Our work here is aided by our internal resource of 17 dedicated ESG analysts. We take pride in our level of engagement with companies. Our brand, as well as extensive analytical resource affords us the ability to regularly engage with companies on all aspects of corporate strategy, including ESG matters.

From an engagement standpoint, as Portfolio Managers, we wrote to a number of our public equity portfolio companies, with the focus being a variety of topics involving environmental, social and governance matters.

Three engagement topics for each category were then focused on. For environmental matters the focus areas were disclosure of environmental data, commitment to net-zero emissions and setting science-based emissions targets. For social this was diversity and inclusion, organisational policies and practices and employee engagement. For governance the emphasis was on board diversity, executive remuneration and ESG accountability.

We were pleased to see a number of our investments make progress with their ESG efforts during the fiscal period. Volution Group reported in April 2021 that it had been awarded ‘The Green Economy Mark’ by the London Stock Exchange, which is given to companies that drive more than 50% of their revenue from environmental solutions. The firm joined our other investments, Invinity Energy Systems, National Express and Genuit Group as a holder of this accreditation. Keywords Studios, Ascential and Breedon Group improved the diversity of their boards with various appointments of female Non Executive Directors, whilst Euromoney Institutional Investors appointed a female Independent Non Executive Director from an ethnic minority background.

We aim to continue engaging with our portfolio companies on all matters regarding ESG to ensure that the management teams are committed to responsible business practices. We use our power as shareholders to vote and register our approval or disapproval of management’s actions. During the fiscal period, the Company voted at 19 AGM meetings and 3 EGM meetings; voted with management on 333 out of 341 resolutions, or c.98% of all resolutions; voted against management on 8 out of 341 resolutions, or c.2% of all resolutions. Topics that we ruled against included the reappointment of over boarded directors, management remuneration policies with no clawback provisions, as well as other poor remuneration practices.