Schroders understands the value of a long-term view of the businesses it invests in and the importance of social and environmental trends on long-term success. The Embankment Project provided a unique opportunity to collaborate with leading stakeholders through the investment value chain, from corporates through asset owners.
Bringing the stakeholders’ different perspectives together has provided insights into their respective views of long-term value creation. Triangulating the views of companies charged with creating that value, the asset managers responsible for identifying it and asset owners seeking to track it has challenged Schroders’ views and strengthened our understanding. The lack of precise, single answers in many areas is as important as the concrete answers the company has taken away. Value drivers are complex and nuanced. Their measurement and communication is even harder. Even where simple solutions do not exist, identifying the key questions and the challenges in quantifying answers to them has been very valuable.
For example, the work on culture — bringing together perspectives from firms such as Unilever at the forefront of cultural awareness and asset owners including Vanguard with a unique view across the investment industry — went beyond the reaches of any individual organization. That work led Schroders to a deeper understanding of the dimensions of culture, the aspects of performance and the potential measures, as well as the challenges everyone faces in examining those areas. Schroders’ analysis of companies and engagement with management teams will be stronger as a result.
Going forward, the entire value chain faces the continuation of small steps. More disclosure allows more analysis, which creates more questions and so on. That journey has just begun. It is incumbent on Schroders and others in the industry to remain focused on assessing companies’ long-term health and continue pressing for more information while making use of the information that is available.
Schroders has focused on deepening its understanding of the relationship between structural social and environmental trends, corporate profitability and investment returns. Every actor in the value chain has articulated the importance of social and environmental challenges, but less attention has been paid to the linkages and value implications of those trends. Schroders has focused its sustainability research on examining that relationship. Doing so ensures that the company’s sustainability efforts are channeled toward clients’ goals and focuses analysis and engagement on areas of performance aligned to companies’ strategic goals.
For example, Schroders has committed a lot of time and resources to examining the investment implications of climate change, a topic that is much discussed but under-analyzed. In the company’s view, the investment industry has focused too much attention on marketing credentials and too little on examining the investment implications of a challenge that will reshape global industries and redefine value drivers in many industries.
Rigorous strategies are needed for investors to manage risks and take opportunities during the expected transition to a decarbonized world. Schroders has focused its research and tools on providing new thinking and solutions to help guide investors as the impact of climate change unfolds.
The company breaks its climate analysis into two components. First, how and when will the environmental threat become a financial impact, through accelerating technology change, tougher policy action and strategic realignment across sectors? And second, what are the implications of that change for the value of individual companies, sectors and portfolios?
Climate Progress Dashboard tracks the pace and scale of climate action
Climate risk toolkit provides insight into the investment implications of tougher action
Schroders developed the Climate Progress Dashboard to answer the first question, and a toolkit of analyses to examine different climate impacts and tackle the second. For instance, higher carbon prices could put 10%–15% of the cash flows of global companies at risk. Rising physical damage will cost up to 5% of the value of many companies. Changes in industry growth will raise the values of 1 in 10 companies by 10% or more and hurt a similar proportion by a similar magnitude. Schroders has described its research on its public website. That work helps the company’s analysts, fund managers and clients better understand the risks they face and ensure that they are reflected in investment decisions.
Schroders’ work on climate change reflects its approach to examining a wide range of environmental and social topics. Focusing its efforts on analysis that supports tangible changes in investment decisions required the company to both make personnel changes to its sustainable investment team as well as emphasize coordination with investment desks across the firm. Individuals with a background in investment rather than purely environmental or social topics lead the Schroders sustainable investment team. The company’s emphasis is firmly on informing decisions and equipping colleagues, rather than dictating actions. Creating meaningful change at scale requires compromise and collaboration