ESG – Why is it important and how does it make a difference? November 2017 For professional investors and advisers only. Environmental, Social and Governance is referred to as ESG throughout the presentation.
What is ESG? Companies don’t operate in a vacuum Impact of social & environmental trends on companies & investments Impact of companies on social & environmental challenges Source: Schroders
ESG matters to investors Global Investor Study highlights importance of sustainability 22,000 investors, in 30 countries with at least €10,000 in investable assets The standout results were… 78% of investors 64% have increased 75% of millennials felt sustainable their sustainable have increased their investing was more investments over the sustainable important than 5 past 5 years investments over the years ago past 5 years Source: Schroders Global Investor Study, conducted between 1–30 June 2017. 3
ESG measures how companies make money… …rather than just how much money they make Inputs Outcomes How companies How much Business model The assets they Investment are run money they and strategy own performance make Long term Market’s drivers focus Source: Schroders 4
New challenges to making money Companies face change on a bigger scale and faster pace than ever Source: Schroders, World Bank, BP Statistical Review, UN, IEA, Thomson Reuters, Pew Center 5
This is not an academic exercise Winners are making more money, for longer, than laggards 20% 6 Top quintile (sector-relative) ROIC / Top – bottom quintile average ROIC Average years in top ROPIC quintile average ROIC 18% Avg years of top quintile ROIC prior to year shown 16% 5 14% 12% 10% 4 1995 1999 2003 2007 2011 2015 Source: Thomson Reuters, Schroders 6
Linking theory to practice Stakeholder lens translates ESG concepts to tangible analysis Source: Schroders 7
ESG factors important through investment processes Social and environmental views are important across activities Investment Company Portfolio Measurement Stewardship strategy analysis construction & reporting Where The factors Construction Active Tracking and investors look that drive and ownership and explaining for investment maintenance influence performance performance returns of portfolios against goals 8
Climate Challenge: Accelerating toward a cliff Economics, demographics and environment are entangled Temperature increase vs. GHG concentration (ppm) 1850–70 avg 1,200 1.0 410 Population, GDP, Energy use, GHG emissions, all 390 1,000 0.8 indexed, 1950=100 370 800 0.6 GHG concentration Population 350 GDP 600 0.4 Energy use GHG Emissions 330 Temperature increase 400 0.2 310 200 0.0 290 0 -0.2 270 1750 1800 1850 1900 1950 2000 Source: Maddison, EU Europa, UK Met Office, NOAA, Vaclav Smil, BP Statistical Review. 9
Complex challenge requires comprehensive view Tying together a range of climate analyses The Climate Portfolio analysis Growth opportunities Tougher policies will Progress across the range of will emerge impact profit pools Dashboard tracks climate impacts will the speed and become scale of progress increasingly key to Carbon value-at-risk Measures the proportion of cash earnings at risk if carbon prices rise to $100/t, towards based on our proprietary modelling. % of current EBITDA at risk Individual company exposures are -120% -100% -80% -60% -40% -20% 0% 20% 40% 60% weighted by their importance to the portfolio or benchmark risk management decarbonisation Climate growth theme exposure Measures the extent to which portfolio companies are exposed to markets likely to benefit from faster growth resulting from a low carbon transition. Industries Indexed exposure (-2 to +2) are assigned scores -2 (strong headwind) -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 to +2 (strong tailwind) and combined with Impacts companies' market exposures to determine company scores. Aggregate temperature rise Carbon footprint impllied across all areas Schroders Climate Progress Dashboard Measures the carbon emissions of 4.2° portfolio companies relative to their sales. Divides companies' reported or estimated scope one and two carbon emissions by t/US$ mn sales Physical climate sales and combines those intensities with Political Business & Technology Entrenched 400 300 200 100 0 -100 -200 change finance solutions industry weights to determine portfolio footprints Political ambition Corporate planning Electric vehicles Oil & gas investment Fossil divestment is 7 6 70 12 6 5 60 10 5 4 50 8 Aspiration Physical climate risk exposure 40 impacts will 4 2.8° 3.6° 4.2° 5.5° 3 6 Measures the extent to which the 3 30 2 4 company's assets are exposed to risks of 2 20 physical disruption. Combines companies' 1 1 10 2 too limited 0 0 0 0 reported assets in each geographic region Indexed (0 to +1) 2010 2015 2020 2025 2010 2015 2020 2025 2010 2015 2020 2025 2010 2015 2020 2025 with GermanWatch measures of national 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 -20.00 -40.00 -60.00 Public concern Climate finance Renewable capacity Coal production climate risk exposure. Higher values accelerate 45,000 250,000 indicate more risk 100 1,800 1,600 40,000 200,000 80 1,400 35,000 1,200 30,000 150,000 60 3.3° 1,000 3.3° 25,000 2.8° 2.2° Potential emissions exposure 800 20,000 100,000 40 600 15,000 Measures the level of fossil fuel reserves 400 10,000 20 50,000 200 5,000 held by portfolio companies. Divides the 0 0 0 0 carbon contained each company's 2010 2015 2020 2025 2010 2015 2020 2025 2010 2015 2020 2025 2010 2015 2020 2025 reported fossil fuel reserves by its sales. tCO2/US$mn sales Political action Carbon prices CCS capacity Oil & gas production Portfolio values are calculated by 35 30 25 20 15 10 5 0 -5 -10 -15 7 70 600 400,000 combining companies according to their 350,000 6 60 500 weights 300,000 5 50 400 5.0° 250,000 4 3.6° 40 5.4° 9.4° 300 200,000 Action 3 30 200 150,000 2 20 100,000 Weaker Stronger 1 10 100 50,000 0 0 0 0 2010 2015 2020 2025 2010 2015 2020 2025 2010 2015 2020 2025 2010 2015 2020 2025 Individual portfolio Portfolio aggregate Benchmark aggregate holdings position position Source: Schroders 10
Climate Progress Dashboard Focusing on what is likely, rather than what we would like to see The Climate Progress Dashboard provides a birds eye view of the pace of change and scale of ambition across key aspects of climate progress Source: Schroders analysis based on industry sources. Based on data available in September 2017. For further details please visit: http://www.schroders.com/en/sysglobalassets/digital/insights/2017/pdf/sustainable/climate-change-dashboard/climatedashboard-july2017.pdf 11
Examining the implications of tougher policies Taking an investment lens to climate impacts 4,144 -10.5% 3,710 decrease in profits 35,624 36,452 39,768 40,162 Profits Costs After CO2 pricing Before CO2 pricing Sales Source: Schroders, All numbers in $mn. Sales, Costs, EBITDA values are averages over 2013-16. Assumption: CO2 prices increase to $100t/tonne. 12
Common tools are not a shortcut to thorough analysis Little relation between carbon footprints & Carbon VAR -100% -50% Carbon VaR (%) 0% Based on estimates Based on reported emissions Linear (Based on estimates) 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Carbon footprint (t/$mn) Source: Schroders Investment Management Note: Based on global universe of ~10,000 listed companies 13
Sustainability at Schroders Our experience and expertise A+ 20 years + 760+ UN PRI annual assessment 2 Firm wide ESG integration ESG engagements in 2016 11 #1 Across 34 Dedicated ESG 2017 ShareAction Responsible specialists Investment Survey of European asset Countries globally managers 3 With 100 years+ Top 5 With 5,160+ Combined investment 2017 AODP Global Climate Index 4 experience $41 bn Tier 1 signatory Company meetings voted on Ethically screened mandates UK Stewardship Code 5 (8.6% of total assets) 1 Source: Schroders, as at 30 September 2017 unless otherwise stated. 1 As at 31 December 2016. 2 PRI, 2015, 2016 and 2017 Assessment Reports. 3 ShareAction, "Lifting the Lid: Responsible Investment Performance of European Asset Managers", March 2017. 4 Asset Owners Disclosure Project, "Global Climate Index 2017“, April 2017 . 5 Financial Reporting Council 2016 Assessment 14
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