Sustainable Investment Report

Q3 2018

Marketing material
Contents

1
Introduction
8
INfluence

European sustainable finance policy

European corporate governance:

reviewing the landscape

2
INsight
12
Third quarter 2018

Laissez Faire no more: Total company engagement

10 years on from the crisis
Shareholder voting
Cyber:
preparing for the unpredictable Engagement progress

Climate Progress Dashboard:

marking progress one year on
Models on investment risk, such as volatility, have
long looked at the past to inform a view of future risk.
The more time that we spend looking at ESG risks
we realise that “past performance is no guarantee of
future performance.”

Jessica Ground
Global Head of Stewardship, Schroders

This was brought into sharp focus when we revisited This quarter we also assess the proposals put
cyber risk, a topic we first researched and engaged forward by European policymakers to encourage
upon in 2015. We discovered that in a relatively sustainable investment. We have long called for
short period of time our view of best practice greater clarity in the area of sustainable investment,
was frighteningly obsolete. Given the increasing with our own research showing that a lack of
complexity of how technology and data is used and transparency and data is a particular area of concern
how it permeates all aspects of business practice for institutional investors globally. We welcome the
coupled with a tougher regime of fines, the costs of desire to understand clients’ ESG preferences and
getting it wrong have never been higher. Detailed for fund managers to have to articulate how they are
engagement with experts on a company by company addressing this. However we caution about adopting
basis, has proved the only way to navigate the issue. approaches that are too narrow and will stifle
innovation or client expectations for holistic solutions
Climate change is another unchartered area of risk. in this area.
One year on from the launch of our Climate Progress
Dashboard and the evidence is clear; we are not making Finally, we examine some of the themes from
enough progress on tacking this issue and are just the European AGM season. 2018 saw us support
storing up risk for the future. On the current trajectory management more, but this trajectory may not
the potential impact from climate change through continue. We have been clear with a number of
rising sea levels, reduced water supply, and ocean companies on the improvements that they need to
acidification is substantial, and largely unaccounted for make in order for us to support them going forward.
in conventional risk measurement models. We will continue to monitor them closely to see how
effective this engagement is.
We learnt a huge amount about risk in the Global
Financial Crisis of a decade ago, and the crisis in turn As ever, please visit our Schroders Sustainability
changed the risk landscape itself. We observe that website for more content from the team.
ten years after the crisis companies are under more
scrutiny and regulatory pressure than ever before,
and this shows little sign of abating. Those companies
that embrace the breadth of claims on their business
will be more resilient for future challenges, and those
that assume it is business as usual will flounder.

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 INsight

Laissez faire no more: 10 years on from the crisis

In the depths of the financial crisis, the cost/benefit analysis of accepting government
equity or participating in a liquidity scheme was easy for a bank: acceptance or death.
For policymakers, the reality was equally stark; banks were too big to fail. Going to
taxpayers and central banks for a bail-out, rather than to shareholders, shattered any
illusions industry leaders, investors or policymakers might have held that business
could operate ring-fenced from the rest of society. Questions were asked if companies
and the financial system had placed too much focus on short-term profits at the
expense of longer-term value creation, and calls for a more sustainable form of
capitalism grew louder.
The cost of providing a backstop has been a seat at Profits can no longer be sole purpose
the table for all stakeholders alongside, and at times None of these are just one-off initiatives. The current
above, shareholders. The state of government’s consultation for the UK Corporate Governance Code,
finances and the toll on economies and public welfare, the grandfather of similar codes around the world,
neither of which has recovered from the shock of 2008 states that a company’s function is to “generate value
and 2009, has only provided more urgency. Ten years for shareholders and contribute to wider society.”
after the crisis companies are under more scrutiny and Profits can no longer be the sole purpose of a
regulatory pressure than ever before, and this shows company. The same consultation urges all companies
little sign of abating. Those companies that embrace to take action on diversity and climate change, issues
the breadth of claims on their business will be more of undoubted importance to a large part of society,
resilient for future challenges, and those that assume but which corporates often considered a goodwill
it is business as usual will flounder. effort rather than core strategy.

Banks have had to transform Further evidence of the erosion of trust between
This can be seen most starkly in the banking sector. companies and other stakeholders can be seen in
There has been a predictable focus on risk reduction the increasing demands for non-financial disclosure.
with higher capital requirements and ring fencing, Today 50% of exchanges have some type of ESG
especially for the so called “casino” like investment reporting guidance, up from just 1% in 2006. Annual
banking activities. But beyond that, regulators’ views reports around the world have ballooned and
of the industry have fundamentally shifted to prioritise there have never been more companies publishing
consumer protection and the industry’s social role. corporate responsibility reports (see Figure 1).
In order to avoid the hugely penal fines of the past,
banks have had to change their business practices, The end of laissez faire capitalism
grow their compliance departments, and demonstrate Capitalism has always relied on creative destruction
cultural integrity. and while banks certainly got creative with financial
instruments, their vital role as the plumbing of
Banks were at the epicentre of the crisis and bore the economy prevented their destruction.
the brunt of reactions to it, but the challenges spread Governments frequently step in where market
far wider. The OECD (Organisation for Economic forces fail, and the period post the financial crisis
Co-operation and Development) base erosion and has been no exception. The net result has been the
profit shifting (BEPS) project, which focuses on end of laissez faire capitalism and more intervention
addressing tax avoidance strategies that exploit gaps for all corporates.
and mismatches in tax rules to artificially shift profits
to low or no-tax locations where this is little or no Successful companies have always been aware of
economic activity, has limited the ability of companies the need to maintain their licences to operate, and
to exploit mismatches in tax rules. Living wages have engaged stakeholders accordingly. The difference is
been introduced from Britain to California. Corporate that in an area of rising expectations and increasing
pressure to help make progress on the UN Sustainable transparency, unsustainable business models have
Development Goals is accelerating. nowhere to hide. We as investors need to ensure that
our future valuations and forecasts explicitly take into
account this very real backdrop.

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Figure 1: Growth in corporate responsibility reporting
160
The financial crisis marked a turning point Sustainable
in the challenges companies face investing news1
140
CSR reports2 Avg holding
120 period3

100 Govt debt/GDP4

80

60

40

20

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

1 Source: Highbeam. Based on number of search results for “sustainable investment” as proportion of all articles referring to “investment”
2 Source: GRI. Number of CSR reports identified globally
3 Source: Thomson Reuters. Based on comparison of value of shares traded and the market value of all companies. This represents a measure of
turnover by all market participants not institutional investors specifically.
4 Source: IMF World Economic Outlook

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 INsight

Cyber: preparing for the unpredictable

Cyber crime continues to create significant costs for companies globally, but
understanding the risk means going beyond a formulaic assessment of policies.

A growing issue What does cyber risk mean?

Digital data has grown exponentially in recent years, Cyber risk is a broad term. For most people,
spurred by increased penetration of mobile devices it represents the risk of loss or harm from
and consumption of online services. The rapid breaches or attacks on information systems.
expansion in the volume of data companies store, That loss can take many forms, including direct
many of which are relatively new to data management financial costs, reputational damage or operational
and security, has attracted cyber criminals employing continuity. Recent high profile breaches (WannaCry,
increasingly sophisticated tools and techniques. Petya, Equifax etc.) have served to further raise
awareness on the issue, in turn attracting regulatory
Cyber crime costs global companies around scrutiny. Data privacy is commonly associated with
60% more than it did only five years ago, whilst cyber risk, and is a centrepiece of the EU’s General
in the US, that number has risen by over 80% Data Protection Regulation (GDPR) regulation,
(see Figure 2). No company can afford to ignore the which came into force in May 2018. That law has
threat, and regulators such as the UK’s Information become a defacto global standard; it clarifies and
Commissioner’s Office (ICO) are stepping up expands upon what sensitive data entails, who has
enforcement actions. Their response represents the usage rights, and assigns the responsibility to
the tip of the iceberg the problem represents. companies to keep customer data safe, with high
fines5 if they fail to do so.
5 4% of revenues, or $20 million

Figure 2: Cyber costs are increasing

10,000 120 25

9,000
100
20
8,000

7,000 80
15
6,000
60
5,000
10
4,000 40

3,000
20 5
2,000

1,000 0 0
2013 2014 2015 2016 2017

UKICO: nb all enforcement actions (LHS) US avg cost of cyber per company ($mn, RHS)
Global cost of cyber per company ($mn,RHS) Total global data center traffic (EB, LHS)

Source: ico.org.uk, Accenture & Ponemon Institute’s 2017 Cost of Cyber Crime Study, Cisco Global Cloud Index

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Why should investors care? Main findings: expertise and board
Cyber is an increasingly critical source of business risk, responsibility
especially for companies with important intangible Our direct and detailed engagements have allowed
assets such as brands, customer relationships or us to identify where the material information lies,
technology. The negative impact a data breach and to better understand the strength and weakness
can have on a brand link straight to companies’ at a company level. We believe the key areas are:
competitiveness, future revenues and future cash
flows. Data breaches often uncover poor governance ȂȂ Expertise: it is critical that the company has a
practices and weak management; changing people well-resourced and specialised cyber security team,
or policies is quick but re-establishing market and managed by a CISO/DPO, reporting preferably to
customer trust take much longer. the CEO or the board. The security team should also
leverage specialised external expertise on a regular
An engagement approach basis to stay on top of new threats and security
tools. Internally, the team should have direct
In our view, investors should focus on understanding
ownership of specific technological tasks such as
how well a company prepares for cyber events.
penetration testing, security patches etc.
The depth of its approach should give confidence
that when (not if) a breach occurs, processes and ȂȂ Board level responsibility: the board should have
resources are in place to minimise the impact on specific expertise to evaluate whether the company
operations and ability to create value. has the appropriate operational and managerial
resources to mitigate cyber risk.
Building that understanding means going beyond a
formulaic assessment of policies. We believe direct The analysis of a company’s level of expertise and
company engagements are the best way to gain board responsibility provides our analysts and fund
insights. We have delved into the topic focusing on managers with a basis on which to structure their
a few main areas: questions of management teams, and to benchmark
responses against peers.
ȂȂ Governance: how well is cyber risk understood
by the board? In addition, the engagements have changed our
understanding of a few areas usually thought of as
ȂȂ Expertise: does the company have the internal
important, but which most companies disregard.
capabilities to manage cyber risk? Is it drawing on
For instance, our discussions highlighted the
specialist skills from outside the organisation?
weaknesses of focusing on ISO27001 (an IT standard
ȂȂ Technological: has the company adopted best that best-in-class companies implement internally),
practices from a technical standpoint? cyber insurance (current products offer limited
coverage) and policies on cyber/data protection (while
Recognising that cyber risk is relevant to many important for compliance purposes, they appear less
business models, we engaged with Chief Information helpful in actually managing cyber risk).
Security Officers (CISO) or Data Protection Officers
(DPOs) at ten Schroders holdings, across sectors such Targeted engagement the most effective way
as financial services, technology and telecoms. to gain insights
Cyber is an increasingly important risk for every
organisation. As investors, we need to gain a deeper
understanding into how well companies held in our
clients’ portfolios are prepared to manage this risk.
We believe targeted company engagement is the
most effective way to gain insights into key areas such
as top-level risk governance and technical expertise,
where investors might be able to identify unsuitable
practices before they materialise.

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 INsight

Climate Progress Dashboard: marking progress

one year on
One year after Schroders launched the Climate Progress Dashboard, we take a look at
the advances made in curbing global temperature rises.
The Climate Progress Dashboard was created to help One step forward, one step back?
Schroders’ analysts, fund managers and clients track Stepping back to review the last twelve months,
climate action. Meeting global leaders’ commitments Figure 3 below plots the changes in the temperature
to limit temperature rises to 2°C will require action rises implied by each indicator since first publication.
across a range of areas, by a range of stakeholders. While moves in the wrong direction (toward higher
temperatures) equal the number pointing to
The dashboard plots the long-run rise in temperatures
improvements, there are reasons for optimism in
implied by efforts in each area, providing a bird’s
the overall picture.
eye view of the speed and scale of climate action
across the spectrum of areas that will need to change.
It provides a more complete view than any indicator
in isolation.

When we launched it a year ago, the Climate Progress

Dashboard pointed to a 4.1 degree temperature rise.
Since then, it has fallen slightly to 4 degrees. Indicators
are moving in the right direction, and there are
reasons for optimism looking at individual indicators,
but it is also clear that far faster action is needed and
far more disruption lies ahead.

Figure 3: Absolute change in temperature rise implied by each indicator since mid-2017
(degrees Celsius)

1.5

1.2 Imply higher Imply lower

termperature rises termperature rises
0.9 than a year ago than a year ago

0.6

0.3

0.0

-0.3

-0.6

-0.9

-1.2

-1.5
Climate finance

Political ambition

Oil & gas production

Coal production

Public concern

Corporate planning

Renewable capacity

Political action

Electric vehicles

Oil & gas investment

Carbon prices
CCS capacity

Source: Schroders Climate Progress Dashboard. Note: compares the absolute change in temperature rise implied by each indicator, comparing the
most recent values to those published when we introduced the dashboard. The terms in the chart are explained here.

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On the negative side, in January we highlighted Revisiting the indicators
a global slowdown in financial flows into climate In this annual update, we have introduced some
solutions such as clean energy. Yet despite setbacks changes to the dashboard. Under the “Entrenched
in the US, where the political backdrop is doing little Industry” category, we have created new categories
to encourage investment, other regions seem for “Fossil Fuel Production” and “Fossil Fuel Reserves”.
committed to promoting action. For example, the
European Union (EU) has unveiled a package of new The first combines global production of oil, gas & coal,
policy proposals aimed at mobilising capital markets based on the energy content of each hydrocarbon, and
to help meet the €180 billion annual investment in replaces two measures we used previously examining
climate solutions it targets. oil & gas and coal production separately. While the
data behind the calculations is the same, we think
Fossil fuel production also rose further than looking at the aggregate provides a clearer picture
more ambitious climate scenarios implied. of the state of progress. Meeting long-term emission
After falling for the previous three years, global coal reduction goals requires a decline in consumption
production rose in 2017, according to the most recent of all three fuels, and the mix of those fuels used in
BP Statistical Review. Political ambition also saw a International Energy Agency (IEA) projections for
setback over the last year, though we note that the different climate scenarios is somewhat arbitrary.
revision was affected by methodology changes in
its calculation. The dashboard showed coal production – which has
dropped close to 1% per annum over the last five
On the positive side, average global carbon prices years – almost in line with the IEA’s 2 degree scenario.
have more than doubled since the middle of last year, On the other hand, oil and gas production – which
following reforms announced to the EU Emissions has risen at twice that pace – pointed to a far higher
Trading Scheme. China’s plans for a nationwide carbon temperature rise. Insofar as both outcomes depend
trading scheme, also announced in late 2017, adds to on the IEA’s assumptions over the future fuel mix,
our confidence that more widespread and material looking at the combination provides a picture that
carbon prices will provide impetus for further action. is less sensitive to the vagaries of IEA modelling.
The new, combined measure points to a 5.6 degree
While fossil fuel production rose more quickly
temperature rise, which is unchanged from the value
than environmental groups hoped, there is some
implied by considering the fuels separately.
encouragement from declining investment in that
industry. Tracking capital investment and where it is The new Fossil Fuel Reserves measure gauges
made - relative to the industry’s current assets - helps the pace of increase in new fossil fuel reserves.
us gauge the pace of future demand growth. Amid It compares the volume of fossil fuel reserves
lower prices and pressure on the industry to show added annually to the long-term pace of demand
restraint, investment in new capacity has fallen in growth in each temperature scenario. It’s well
recent years. The test of that resolve will become understood that the volume of fossil reserves
clearer in coming quarters, as the traditional stimulus discovered already far exceeds the amount which
of higher oil prices feeds into decision making. could be burnt while meeting global leaders’
commitments to keep temperature rises under
Finally, continued rapid growth in both electric vehicle
2 degrees.
sales and renewable energy capacity highlight the
pace of change in those technologies, where declining As a result, exploration spending to grow reserves
costs are redefining economics in power generation more quickly than demand will rise points to
and road transport. The World Economic Forum has over-optimism by the industry. We calculate the
concluded that renewable energy is already lower temperature rise implied by reserve growth by
cost than fossil fuels in over 30 countries and will be comparing the level of new reserves added to long
cheaper globally by 2020. Electric vehicles similarly run fossil fuel demand growth in each temperature
benefit from rapid cost declines, which autonomous scenario. Currently, that analysis implies fossil fuel
driving will accelerate. In short, technology advances reserves are growing at a pace consistent with a 4.6
in key areas are driving change even without tougher degree long run temperature rise.
political intervention.

In summary, the 2018 scorecard shows a mixed

picture, with a small move in the right direction
overall. However, we believe the overall picture is a
little more positive than the headline figure suggests.
In particular, growing use of electric vehicles and clean
energy technologies underline the falling reliance on
politicians to drive climate action, which given their
limited impact to date should prove positive.

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 INfluence

European sustainable finance policy

In May, the EU Commission announced four policy proposals linked to its
Sustainable Finance goals:
ȂȂ A unified classification system (‘taxonomy’) on what can be considered an
environmentally sustainable economic activity
ȂȂ Disclosure obligations on how institutional investors and asset managers integrate
ESG factors in their risk processes
ȂȂ A new category of sustainability benchmarks with firmer standards as to how they
may be defined and constructed
ȂȂ Amendments to delegated acts to include ESG considerations into the advice
investment firms and insurance distributors offer to individual clients
The policies reflect the Commission’s intention to strengthen the role of ESG factors in
Europe’s financial system and capital markets6.

The danger of misplaced policy approaches, such as through much-needed

We applaud the Commission’s ambitions. It is very innovation in climate risk analysis7. Using the draft
clear European and global economies face huge and taxonomy guidelines published along with the
growing challenges across a range of environmental original EU High-Level Expert Group on Sustainable
and social dimensions. It is also clear that reshaping Finance (HLEG) document, we estimate that 5-10% of
those economies in a sustainable mould will require global equities might be considered permissible for
significant capital re-allocation and that the finance sustainable funds, dramatically limiting the choice
industry has an important role to play. available to consumers.
ȂȂ Risk creating distortions in capital markets
However, we are equally certain that misplaced policy which could hurt well-meaning investors:
would both do little to address those challenges, and The Commission has identified the potential
introduce new risks and imbalances. In our view, to attract capital into “sustainable activities”
many features of the current proposals could fall into as a key benefit of its plans. However, without
this trap and caution that well-intended action can accompanying economic or industrial policy
create more problems than it solves if misdirected. We changes, the result would be to influence capital
have directly and indirectly shared our concerns with flows and valuations in detachment from hard
European policymakers since those policy proposals economic logic, creating bubbles in valuations of
were announced and will continue to do so, with the selected companies. Opportunistic investors would
aim of ensuring the Commission’s initiative has a see chances to take opposing positions to benefit
positive impact on reshaping economies. from their over-valuation, transferring wealth away
from well-meaning investors.
Our concerns
ȂȂ De-emphasise investors’ responsibilities to
Specifically, we are concerned that the proposals will: hold companies to account: The role of investment
managers spreads far further than the selection of
ȂȂ Limit consumer choice and stifle innovation:
companies, on which the proposed policies focus. In
By creating firm and restrictive definitions by which
particular, managers are delegated responsibilities
investment products can be considered sustainable,
to oversee investee companies and opportunities to
consumers will be less able to find the products
influence their behaviour and strategies. European
that match their personal convictions. Investment
companies invest over EUR500 billion annually,
managers will have less incentive to deepen their
understanding of sustainability challenges or to 7 For example, we developed the Carbon VAR model which
develop new investment solutions if “permitted” provides robust measures of risk which bear little relationship to
conventional carbon measures. See https://www.schroders.com/
funds are narrowly defined and preclude alternative en/ch/asset-management/literature/climate-change-dashboard/
6 The full text of that announcement is available here: https://eur-lex. carbon-var/
europa.eu/legal-content/EN/TXT/?uri=CELEX:52018DC0097

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 dwarfing the EUR 180billion annual spending the ȂȂ Requirements to include ESG considerations in
Commission has identified is needed to address the advice firms provide should focus on
the region’s climate challenges8. By leaving understanding investors’ specific views and
stewardship commitments largely absent from its expectations of sustainable investments, rather
policy proposals, the EU Commission risks reducing than relying on a one-size-fits all solution based
investors’ acceptance of that role and ignores the on the taxonomy which will be developed.
biggest role financial institutions could play in
ȂȂ Proposed disclosures on investor duties should
redirecting capital. At Schroders, we engaged over
also be far more demanding of companies to
1,000 investee companies on ESG topics last year,
articulate evidence of their actions if they are to
and other large investors have also made significant
avoid creating rhetoric and boilerplate responses
commitments in this area. Without that regular and
that add little to either investors’ understanding or
often forceful dialogue and oversight, we believe
institutional action.
public companies would not have stepped forward
as far in areas like climate planning and disclosure, Expanding the scope of activities included in
supply chain oversight, or gender equality. sustainable investment

Our recommendations ȂȂ The definition of sustainable investment should

be broadened from activities in which sustainable
Of the four proposals, the taxonomy defining fund managers invest, to also include managers’
“sustainable investment” lies at the heart of many actions as owners of the companies in which they
of our concerns. It focuses on the activities have invested, e.g. through stewardship. Similarly,
compliant companies can engage in, initially defined disclosures on how institutional investors integrate
on narrow climate grounds. It makes no mention ESG factors into their processes should reflect the
of – and in many ways undermines – the investment role of those issues throughout the investment
industry’s role in educating consumers, developing lifecycle, including their roles as engaged and
more robust investment strategies and, critically, active owners.
exerting influence over investee companies through
engagement and voting. We appreciate that those changes are in some
instances achievable through rewording of the current
As a result, we consider the policy proposals would proposals, but in others would require a reframing
be more effective if their focus was redirected by: of their goals and boundaries. However, we consider
it vital that those policy proposals are designed to
Recognising the breadth of topics included in have the best chance possible of helping address the
sustainable investment challenges the EU clearly and rightfully identifies.
ȂȂ The taxonomy proposals currently call for a
climate focus in the initial phase, with other
aspects to follow later. It would be better to
widen that definition and tackle all aspects of
sustainable corporate behaviour in parallel,
deepening the analysis over time from a broad
beginning, rather than broadening it from a
deep starting point in a specific area.

Increasing transparency and choice through the

investment chain
ȂȂ Changing the taxonomy from a list of permitted
activities with which funds should comply, to a
list of areas in which funds should disclose
performance to investors (for instance the average
gender pay discrepancy of portfolio companies).
Doing so would promote transparency, choice
and innovation; in our view transparency is a
more effective solution to the current challenge
of inconsistencies between marketing messages
and fund practices, rather than imposing narrow
criteria on managers selecting assets.
8 European capital investment calculating using data from
Thomson Reuters

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 INfluence

European 2018 AGM season review:

more support for management
In 2017, we voted against 11.3% of resolutions at European annual general meetings
(AGMs) but this was reduced to 9.4% in 2018. This decrease in votes against
management reflected what we see as improvements in governance practices across
the region.

Figure 4: Schroders voting practices in Remuneration disclosure needs an

2017 and 2018 industry push
Disclosure around remuneration remains a concern.
2018 2017
There are few companies or markets willing to lead the
Total no. of resolutions 10,975 10,745 way and break the deadlock of the currently poor level
of disclosure which is seen as ‘market practice’. We are
Total no. of meetings 710 697 actively voting against companies that do not disclose
the performance metrics used in their annual bonus
With management 87.8% 78.0% and long-term incentive plan (LTIP), or do not disclose
the cap attached to these awards. As a minimum
Against management 9.4% 11.3% requirement, we would expect companies to disclose
the performance targets of their annual bonus on a
Do Not Vote 2.8% 10.7%
one-year retrospective basis so that we can accurately
determine pay-for-performance alignment. We do not
Independence is becoming less of a concern believe that this creates any commercial sensitivities.
In general, independence levels and consequent
shareholder satisfaction increased in 2018. In Q2 of Crackdown needed on capital issuances
last year, we voted against the appointment of 243
A number of companies, particularly in Germany
individuals to either the board or a key committee due
and Austria are asking shareholders to approve
to independence concerns. In 2018, this number was
capital issuances without pre-emptive rights up to
reduced to 169.
a limit of 20%. Often these issuances are not for a
That said, the blurred line around independence specific purpose and subject investors to the risk
classification remains an issue. It is often the case of high dilution.
that factors such as tenure or controlling shareholder
In its aim to facilitate access and increase the depth
representatives are overlooked by issuers. This can
and liquidity of the European capital markets, the New
lead to companies thinking their board is more
Prospectus Regulation issued by the EU in June 2017,
independent than investors. This quarter, we engaged
has increased the capital issuance threshold from 10%
individually with 14 companies in eight different
to 20%, without pre-emptive rights. Despite this, we
markets about our concerns with their independence
have a strongly held view that in order to preserve
and highlighted our internal policy on independence
shareholder rights, non pre-emptive issues should
classification.
be limited to 10% globally. We can understand that
companies like the flexibility of raising capital without
extraordinary general meetings (EGMs), but still
believe that 10% gives them adequate room to do this.

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Voting restrictions continue to be addressed Leaders of the pack?
In 2017, we placed a Do Not Vote (DNV) instruction It is hard to pinpoint one or two European markets
at 10.7% of European meetings due to market that stand head and shoulders above the others in
restrictions such as shareblocking and the terms of their overall governance practices, with
requirement for re-registration into the name of specific markets better or worse on certain issues.
the beneficial owner, which poses both timing and
logistical issues as well as confidentiality concerns. In France, disclosure around remuneration is generally
Shareblocking prohibits investors from trading or good. The occasional joint CEO/Chair role with no lead
loaning shares that they have voted on, or intend independent director is more problematic. Similarly,
to vote on, for a period of time leading up to and the Scandinavian markets are leaders in creating
including the AGM date. In these instances the diverse boards, but the depth of the agenda topics
benefits of voting need to be weighed up against that are put to shareholder vote is limited.
the benefits of being able to freely trade the stock
during this period. The number of these Do Not Vote Companies must be willing to engage
instructions was significantly smaller in 2018 due to What is most important to us as investors is that
a number of Schroder funds being transferred from companies are willing to improve their practices and
Euroclear (where shareblocking applies) to the UK. in doing so are receptive to shareholder engagement.
The progress seen in the last couple of years is
The European Commission’s Shareholder Rights
promising but there is still work to be done. The
Directive, adopted in 2007, requires all member states
tricky part for investors is determining a balance of
to eliminate shareblocking. However, it remains in effect
acknowledging the improvements made by companies
in some EU countries where local custodians have not
but also recognising that there is still a way to go.
amended their rules. This mainly affects Iceland and
Luxembourg. As non-members of the EU, Norway and 2018 saw us support management more, but this
Switzerland are not obliged to restrict shareblocking. In trajectory may not continue. Following this year’s
2017, Schroders placed a DNV instruction on over 450 AGM season, we have been clear with a number of
resolutions in Norway. In 2018, this number stood at companies on the improvements that they need to
176; significant progress but still an area where Norway make in order for us to support them going forward.
lag behind the rest of the world. We will continue to monitor them closely to see how
effective this engagement is.
Whilst shareblocking continues, investors are forced to
either trade freely or voice their opinion by voting on
agenda items at the AGM. Ideally, they should have the
ability to do both.

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Q3 2018
Third quarter 2018
Total company engagement
Our ESG team had 1,139 engagements this quarter with
1,119 companies, on a broad range of topics categorised under
“environmental”, “social” and “governance”. They included one-to-one
meetings, joint investor meetings, conferences, teleconferences,
written correspondence and collaborative engagements.

Company E S G Company E S G

Consumer Discretionary J Sainsbury ✔ ✔

Aisin Seiki ✔ Koninklijke Ahold Delhaize NV ✔ ✔

Amazon.Com ✔ ✔ ✔ Nestle SA ✔ ✔ ✔

AutoLiv ✔ Pilgrim’s Pride ✔

BMW ✔ ✔ ✔ Tesco PLC ✔ ✔ ✔

Cavco Industries, Inc. ✔ Unilever PLC ✔ ✔ ✔

Continental ✔ Usana Health ✔

Flight Centre ✔ Warpaint London PLC ✔

Genting Bhd ✔ Wesfarmers Ltd ✔ ✔

Loomis AB ✔ Wm. Morrison ✔ ✔ ✔

Marks and Spencer plc ✔ ✔ Energy

Michaels Companies Inc ✔ Borr Drilling Ltd ✔

Pantaflix AG ✔ Diamond Offshore ✔

Pearson PLC ✔ Dril-Quip Inc ✔

Red Rock Resorts ✔ Royal Dutch Shell PLC ✔ ✔

Rush Enterprises ✔ World Fuel ✔

Stamps.com ✔ Financials

Taptica International Ltd ✔ American Assets ✔

Volkswagen AG ✔ Aviva ✔

Consumer Staples Bank Central Asia ✔

Anheuser Busch Inbev SA ✔ ✔ ✔ BM&F Bovespa ✔ ✔

Britvic ✔ ✔ Caretrust REIT ✔

Clorox Company ✔ ✔ Chatham Lodging ✔

Danone ✔ Clipper Realty ✔

General Mills Inc ✔ ✔ Close Brothers Group plc ✔

Hershey Foods Corpn ✔ ✔ CNA Financial Corp ✔

Source: Schroders as at 30 September 2018.

The companies and sectors mentioned herein are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

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Q3 2018
Third quarter 2018
Total company engagement

Company E S G Company E S G

Direct Line Insurance Group PLC ✔ ✔ Novartis AG ✔ ✔

FBL Financial Group ✔ Puma Biotechnology ✔

FCB Financial ✔ West Pharmaceutical Services Inc. ✔

FirstRand Bank ✔ Industrials

Gaming and Leisure Properties ✔ ABB AG ✔

Getty Realty ✔ Allison Transmission ✔

Kenya Commercial Bank ✔ AP Moller-Maersk ✔ ✔

National Bank of Greece ✔ Avon Rubber ✔

Nexpoint Residential ✔ Caterpillar Inc ✔

One Liberty Properties ✔ Copart Inc ✔

Preferred Apartment Communities ✔ Deere & Co ✔ ✔

Inc
DMCI Holdings ✔
Oritani Financial ✔
Emerson Electric Co ✔
Tier REIT Inc ✔
Ennis Inc ✔
Royal Bank of Scotland Group ✔
Esco Tech Inc ✔
Sabra Health Care REIT ✔
EVERGREEN MARINE Co ✔
Safestore Holdings PLC ✔
General Electric Co ✔
Standard Chartered plc ✔
GlobalTrans ✔ ✔ ✔
Tier REIT ✔
Hapag Lloyd AG ✔
Health Care
Honeywell Inc ✔
Atrion Corp ✔
Leonardo ✔ ✔
BTG plc ✔
Mitsui O.S.K ✔
Elekta AB ✔
Nidec ✔
ESSILOR INTL ✔
Rev Group ✔
K2M Group ✔
Rockwell Automation Inc ✔
Lonza Group ✔
Ryanair Holdings plc ✔
Masimo Corp ✔
Schneider Electric SA ✔
Medidata Solution ✔
Siemens AG ✔
Nektar Therapeut ✔

Source: Schroders as at 30 September 2018.

The companies and sectors mentioned herein are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

Sustainable Investment Report

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Q3 2018
Third quarter 2018
Total company engagement

Company E S G Company E S G

TT Electronics plc ✔ Sandfire Resources ✔

WARTSILA OYJ ABP ✔ South32 Ltd ✔

Information Technology Syrah Resources ✔

Albert Technologies Ltd ✔ Vedanta ✔

Alphabet Inc ✔ ✔ ✔ Western Areas ✔

Atos SA ✔ Yamato Kogyo ✔

ESI Group SA ✔ Telecoms

Facebook ✔ AT&T ✔

Monolithic Power ✔ BT Group ✔

NetApp ✔ China Mobile ✔

Novanta Inc ✔ China Unicom ✔

Sophos Group ✔ Sinclair Broadcast Group ✔

Synaptics ✔ Utilities

Syntel, Inc. ✔ CMS Energy ✔

Texas Instruments Inc ✔ Contact Energy ✔

Ultimate Software ✔ Edison International ✔

Materials Entergy ✔

Air Product and Chemicals ✔ Fortum Oyj ✔

Anhui Conch Cement Company Idacorp ✔

✔ ✔
Limited
Nisource ✔
BASF ✔
PG&E ✔
Cemex ✔
Pinnacle West ✔
Clariant ✔
Spark Infrastructure ✔
CRH ✔
Torrent Power ✔
D&L Industries ✔
VA Tech WABAG ✔
DuluxGroup Ltd ✔ ✔
Xcel Energy ✔
Fortescue Metals ✔

Impala Platinum ✔

Norsk Hydro ASA ✔

Rayonier Advanced Materials ✔

Source: Schroders as at 30 September 2018.

The companies and sectors mentioned herein are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

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14
Q3 2018
Key
E – Environment
S – Social
G – Governance

We also wrote to 966 companies across Europe and Asia to

communicate our expectations around the issuance of capital
without pre-emptive rights. Pre-emptive rights give shareholders
the rights to purchase additional shares in a company before they
are made available more widely. These rights enable shareholders
to maintain their proportional ownership in a company and to
avoid involuntary dilution.

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Q3 2018
Third quarter 2018
Engagement in numbers

Regional engagement

26
23
30

10
2

Europe (ex-UK) 30
UK 26
2
North America 23
Asia Pacific 10
Middle East and Africa 2
Latin America 2

Source: Schroders as at 30 September 2018.

Engagement type Engagement by sector

3% 1% 17%
4%
61% 12% 10%

10%
24%
5%
22%
7%
2% 3%
6%
13%
Group call Group meeting
Consumer Discretionary Industrials
Collaborative engagement One to one meeting Consumer Staples Information Technology
(e.g. joint investor letter) Other (e.g. letter) Energy Materials
One to one call Financials Utilities
Email
Health Care

Source: Schroders as at 30 September 2018.

Source: Schroders as at 30 September 2018.

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Q3 2018
Third quarter 2018
Shareholder voting
We believe we have a responsibility to exercise our voting This quarter we voted on 539 meetings and approximately
rights. We therefore evaluate voting issues on our investments 99% of all our holdings. We voted on 25 ESG-related
and vote on them in line with our fiduciary responsibilities to shareholder resolutions, voting with management on 9.
clients. We vote on all resolutions unless we are restricted from
The charts below provide a breakdown of our voting activity from
doing so (e.g. as a result of shareblocking).
this quarter. Our UK voting decisions are all available on our
website at http://www.schroders.com/en/about-us/corporate-
responsibility/sustainability/influence/.

Company meetings voted

45%
10%
15%

19%
8%

UK 45%
Asia Pacific 19%
3%
Europe (ex-UK) 15%
North America 10%
Middle East and Africa 8%
Latin America 3%

Source: Schroders as at 30 September 2018.

Direction of votes this quarter Reasons for votes against this quarter
1% 4%
10%
3%
14%
90%
2% 38%
19%

19%

For Against Director Related Allocation of Capital

Routine Business Reorganisation & Mergers
Source: Schroders as at 30 September 2018. Remuneration Anti-takeover
Shareholder Proposals Other

Source: Schroders as at 30 September 2018.

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Q3 2018
Third quarter 2018
Engagement progress
This section reviews any progress on suggestions for change we made a year ago, in this case the
third quarter of 2017. There are four possible results: “Achieved”, “Almost”, “Some Change” and “No
Change”. Of a total number of 180 “change facilitation” requests made, we recorded 11 as Achieved,
14 as Almost, 65 as Some Change and 90 as No Change.

6%
8%

Engagement
50% progress

36%

Achieved Almost Some Change No Change

The chart below shows the effectiveness of our engagement over a five-year period. We recognise
that any changes we have requested will take time to be implemented into a company’s business
process. We therefore usually review requests for change 12 months after they have been made,
and also review progress at a later date. This explains why there is a higher number of engagement
successes from previous years.

Effectiveness of requests for change – 5 year period

Success level of company engagement (%)
100

80

60

40

20

0
2014 2015 2016 2017 2018

Achieved Almost Some change No change No further change required

Source: Schroders as at 30 September 2018

Sustainable Investment Report

18
Q3 2018
Schroder Investment Management Limited
1 London Wall Place, London EC2Y 5AU, United Kingdom
T +44 (0) 20 7658 6000

schroders.com
@schroders
Important Information: The views and opinions contained herein are those of from third parties, and this data may change with market conditions. This does not
the Sustainable Investment team, and may not necessarily represent views exclude any duty or liability that Schroders has to its customers under any regulatory
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