q3 2018 Schroders Sustainable Investment Report
q3 2018 Schroders Sustainable Investment Report
Q3 2018
Marketing material
Contents
1
Introduction
8
INfluence
2
INsight
12
Third quarter 2018
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.
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.
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
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
Figure 3: Absolute change in temperature rise implied by each indicator since mid-2017
(degrees Celsius)
1.5
0.6
0.3
0.0
-0.3
-0.6
-0.9
-1.2
-1.5
Climate finance
Political ambition
Coal production
Public concern
Corporate planning
Renewable capacity
Political action
Electric vehicles
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.
Company E S G Company E S G
Amazon.Com ✔ ✔ ✔ Nestle SA ✔ ✔ ✔
Stamps.com ✔ Financials
Volkswagen AG ✔ Aviva ✔
Company E S G Company E S G
Company E S G Company E S G
Facebook ✔ AT&T ✔
Synaptics ✔ Utilities
Materials Entergy ✔
Impala Platinum ✔
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
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
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%
Direction of votes this quarter Reasons for votes against this quarter
1% 4%
10%
3%
14%
90%
2% 38%
19%
19%
6%
8%
Engagement
50% progress
36%
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.
80
60
40
20
0
2014 2015 2016 2017 2018
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