Responsible investing webinar – 26 October 2022

A financial plan that doesn’t cost the earth

Our mission has always been to achieve the best outcomes for our clients.

We want to improve the way financial advice is offered, to make it more affordable and more accessible for more people in the UK.

Importantly, we believe that over the longer term, a responsible investment approach can have a positive impact on the financial outcomes of our clients, as well as on the health of our planet and society.

Our responsible investment approach does not change our ambition; we are not changing the affordability or accessibility of our advice.

We want to provide financial advice that doesn’t cost the earth.

Putting this into context

We have already started our journey as a company to become a responsible, diverse and inclusive business. Our ambition to promote wellbeing for our colleagues and to positively contribute to the communities that we operate in has been recognised through our accreditation by the Good Business Charter.

The Good Business Charter is an accreditation that organisations in the UK can sign up to in recognition of responsible business practices. An organisation must meet 10 commitments to receive accreditation, including: real living wage, paying fair tax, employee wellbeing, committing to net-zero carbon operations by 2030, among others.

This directly affects our clients; if we don’t look after our colleagues and communities, we will not be able to operate to our fullest potential, and we will not be able to attract the talent we need to best service our clients’ needs.

Responsible in the way we do business and the way we manage money

For us, the next logical step in our journey is to become responsible in the way we manage your money. Any additional factors we can include in our investment decision-making process that help to better identify possible risks have the potential to enhance our longer-term strategy.

That is why we believe that taking a responsible investment approach is an enhancement to our current investment model.

Not only can we identify risks, we can also engage with investee companies to encourage them to adopt more sustainable business practices. We don’t believe clients should have to pay more for investing responsibly, so our fees are not changing.

What is responsible investing?

In its broadest sense, responsible investment typically refers to the consideration of ethical, social and governance (ESG) factors in the investment process.

Environmental factors look at how a company impacts the environment in which they operate, such as climate change, pollution, waste and recycling.

Social criteria examine how a company manages its impact on communities, such as human rights, child labour, modern slavery, equality and diversity, and conditions of employment.

Governance factors consider how well the company is managed, such as executive pay, setting wages, anti-fraud policies, board diversity, and shareholder rights.

There are many types of funds under the ‘responsible investment’ gamut: sustainable, responsible, ethical, green, impact, and many more. Within these labels, there can be further focus – funds that focus on companies producing renewable energy, or tackling child poverty.

It is important to understand that there are differences, and to be confident that your funds are delivering what their labels promise. Failing to do this can result in being accused of what the industry calls “greenwashing”.

What does responsible investment mean for Schroders Personal Wealth (SPW)?

Unlike funds labelled “Sustainable”, we will not be pursuing specific sustainability targets – meaning that none of our funds’ objectives are changing.

We will be applying responsible investment criteria into our decision-making process for our discretionary managed portfolios in four key ways:

1. Fund manager ESG assessment – we assess how well our investment managers are integrating ESG factors into their decision-making processes and culture.

2. Revenue-based exclusions – we will not apply a blanket exclusion policy to certain industries or product, e.g., oil or defence. Instead, we make assessments on a company-by-company basis, and companies that derive more than a set limit of their revenue from harmful activities will be excluded. These activities are: controversial weapons, civilian assault-style weapons, tobacco production and components, thermal coal extraction, and tar sands mining.

3. Engagement – our preferred approach is to engage with companies that need improvement in their ESG credentials. If they already have plans in place to address any issues, or are open to working with us to improve, then we will stay invested and continue to engage with them to work towards more responsible business practices.

4. Avoid ESG “repeat offenders” – our approach prohibits investment in a company deemed to have unresolved controversies or unaddressed material ESG risks and that demonstrates no intention to improve (no response to attempts of engagement).

How will the current portfolios need to change to meet the new responsible approach?

Due to the new responsible criteria, there will be a relatively small number of companies that we will no longer be able to invest in. On analysis undertaken in August this year, the SPW Multi-Manager funds, which account for most of your portfolio assets, already do not invest in the majority of these newly prohibited companies.

Overall, there is a very limited amount of companies that we will need to sell out of in order to implement the responsible investment approach.

Our primary responsibility remains helping you reach your financial goals

Your portfolios’ objectives, risk profiles and our ambitions as a company, have not changed.

Clients remain at the centre of everything we do; our aim is to help you reach your financial goals in the most effective way. If we identify areas in our investment process that can be enhanced, then we have a duty as stewards of your capital to make those improvements. That is why we are implementing a responsible investment approach; we fundamentally believe this is the right thing to do for our clients’ financial outcomes and for our planet.

We are on a journey, and we will continue to listen to our clients.

Your questions answered

Q – What is going to be the impact on performance?

A – Client returns remain our priority. The responsible investment approach is an extra lens through which we can assess risk. The approach results in a very small amount of exclusions. In the main, the fund managers that pick the individual companies for our portfolios are able to invest in companies that may not score well on ESG metrics today, but have demonstrable plans in place to improve the situation. We are not placing wholesale sector restrictions, instead we want fund managers to include potential ESG risks when they assess an individual company. For example, we acknowledge that large integrated oil companies have a part to play in the transition to clean energy as fossil fuels cannot be ‘turned off’ overnight. But we want the ESG risks of each individual oil company to be assessed through each fund manager’s investment process. This enhances the risk management of the portfolios.

Q – How well resourced are you to undertake this approach?

A – SPW has around 780 employees, all UK-based. Our investment partner, Schroders Investment Management, has 5,750 employees in 37 locations globally. So, we are very well resourced to implement this approach.

Q – How affected are SPW funds by Liability Driven Investments (LDI)?

A - None of our funds have exposure to LDI, so your portfolios have not suffered from the falls covered in the press recently, which mainly affect final salary pension schemes.

Q – What about the cost to clients of implementing this approach?

A – The ongoing charges of the portfolios will not change. The cost of monitoring the implementations will be borne by us. There may be very small transactional costs; these will be borne by the funds in your portfolios but we estimate that these will be less than 1%. The cost of the new annual report and the stewardship report will not be passed onto clients.

Q – If investee companies cross any ‘red lines’ for ESG investment, how will SPW manage this?

A – For any of the specific revenue-based limits, we have risk systems in place that will immediately flag any breaches. We will immediately follow up with our investment partners to check that they follow our divestment process.

For company-specific issues, which will be more qualitatively measured, managers will assess these on a case-by-case basis. The managers will check if are there are plans in place to rectify the issue; whether the issue may impact the future performance of the company, including factors such as potential fines being imposed that would impact profits, or any reputational damage that would negatively impact the future potential returns of the company. We meet with Schroders, the delegated investment manager, regularly to assess how they are managing any such breaches. We will also use third-party ESG data tools to help us assess companies so that we can effectively challenge Schroders to explain any poor ESG performance and how it is being addressed.

Q – China is a huge producer of thermal coal – will this effectively exclude Chinese companies from your portfolios?

A – No, as China is an extremely diverse market, covering many sectors.

Q – How skilled are the managers you delegate to?

A – As part of our responsible investing approach, any delegated fund managers will receive two questionnaires that they must complete as part of the selection process. The first focuses on firm-wide areas, such as resources dedicated to ESG analysis, firm culture, alignment of executive remuneration to ESG integration. The second takes a more detailed look at the strategy, such as has the manager had specific ESG training, what experience in ESG do they have, how effectively is the manager integrating ESG in their process to identify and assess ESG risks. Our investment partner Schroders also has a proprietary system, SustainEx, which helps to quantify these assessments.

Q – If SPW doesn’t exclude all oil companies, can it be accused of greenwashing?

A – This comes down to being transparent about what we are, and are not, doing. Our responsible investment approach is founded on the incorporation of ESG information in our investment process to help manage risks; and the belief that we can effect more positive change through engagement as an owner of a company than if we sell out of it, so we do not claim to exclude whole sectors.

Q – Who is ultimately responsible for the successful implementation of this approach?

A – SPW. The buck stops with us to ensure that the approach is implemented and we remain in charge of managing your investments. SPW’s investment team’s job is to hold Schroders to account for the investments they manage on our behalf. It is worth noting that as it stands, the portfolios are already fairly well aligned with the responsible investing approach we are implementing, we are in essence just formalising a structure and process to ensure that client assets are consistently managed in the most suitable fashion in the future.