Stewardship & Responsible Investing Annual Report · Stewardship & Responsible Investing 3 Contents Our year in ESG 4 Highlights from our events 5 Voting and engagement record 6 The

Stewardship & Responsible Investing Annual Report

Stewardship & Responsible Investing2

Far from being the ‘root of all evil’, investors are increasingly waking up to the good their money can do. With this increased focus on purpose as well as profit, responsible investment has seen phenomenal growth. Responsible investment is based on the six principles established by the United Nations-supported Principles for Responsible Investment (PRI). At Smith & Williamson, sustainability principles have long been embedded in our risk and investment culture and we work hard to keep on top of a rapidly-changing industry.

The past two to three years have seen responsible investment take hold. At least $30 trillion* is held in sustainable investments globally, up 34% since 2016. It now accounts for around one-third of tracked assets under management and in Europe, it is almost half. Increasingly, this is influencing asset pricing, with a notable discount applied to ‘sin’ stocks.

The past year has seen an acceleration and proliferation of initiatives related to stewardship and responsible investment from regulators and industry bodies. The PRA and FCA have been leading the way in the UK, with help from the Sustainable Action Plan in Europe which has a particular focus on climate change - their draft environmental taxonomy was published during the year.

In the area of stewardship and engagement, SRD II set the new minimum standards expected for financial firms, while the revised Stewardship Code 2020 sets the aspiration for much higher standards. In the pensions area IORP II set new rules requiring reporting on climate change factors. The Taskforce on Climate-related Financial Disclosure (TCFD) published their implementation guide to accelerate adoption of new standardised reporting codes in this area. It is perhaps unsurprising that companies have started to take notice.

However, sustainable investment is far more than simply meeting the regulations. It is also about getting ahead of a social and cultural revolution, plus proper management of risk. Society’s attitudes are changing, and investment markets will reflect this.

Our experience suggests that there can be unintended consequences to building a responsible investment strategy. However, we are well-versed in the nuances of sustainable investment, ensuring that an overlay does not compromise an investor’s risk profile or long-term financial goals. We incorporate the Environmental, Social and Governance (ESG) considerations alongside financial considerations when building a portfolio and we use stewardship (active ownership including voting) to encourage firms to improve their ESG reporting and strategic thinking. We are making good progress with our third party fund activities too.

We are delighted to introduce our first annual Stewardship and Responsible Investment Report and hope that you find it helpful. This report seeks to highlight our approach and thinking, giving real life examples of our engagement activity, plus thought leadership in areas such as climate change and plastics. The world of responsible investment is constantly moving, but Smith & Williamson are always on hand to help guide you through this process.

* Bloomberg 2019

Introduction


Stewardship & Responsible Investing 3

Contents

Our year in ESG 4

Highlights from our events 5

Voting and engagement record 6

The evolution of ethical investing 8

Our process in action: fossil fuel divestment 10

Understanding the theme: plastics in portfolios 12

Understanding the theme: the climate for investing 14

Emissions trading schemes 16

Our principles, policies and guidelines 18

Integration of ESG factors in our process 20

Public policy 24

Our providers and memberships 25

Looking forward 26


UK Stewardship Code - Tier 1 StatusSmith & Williamson are committed long term responsible investors and good stewards of our clients’ assets, and as such believe that it is important to commit to the UK Stewardship Code. After publishing our statement to the 2012 UK Stewardship Code, in June 2019, we were awarded Tier 1 status.

UN-supported Principles of Responsible Investment (UN PRI)Smith & Williamson became signatories to the UN PRI in 2018, with our first cycle of reporting completed in March 2019. For our first report we were awarded a score of B. While this first cycle was voluntary to participate and report on, we decided to be fully transparent and allow the UN PRI to publish our report.

Proxy Voting & Engagement As part of our commitment to both the UK Stewardship Code and the UN PRI we began proxy voting in November 2018 (using Glass Lewis as our proxy provider). Since this time we have voted on over 700 company meetings and actively engaged with over 100 companies. We have also worked closely with Glass Lewis to develop our own Voting Policy. Our end of year voting report can be found later in this report and on our website.

MSCI ESG ManagerIn August this year we signed up to MSCI ESG Manager as a replacement ESG and ethical screening provider. The MSCI system enables us to screen all aspects of a portfolio including funds and investment trusts, with all data coming directly though the MSCI online portal. We have access to the traditional inclusionary and exclusionary screening criteria, as well as more complicated sustainable impact and carbon footprint reports.

Collaborative EngagementThrough our membership of the UN PRI, we have access to their Collaborative Engagement Platform. This provides us with a private forum to pool resources, share information, enhance influence and engage with companies, policymakers and other actors in the investment value chain on ESG issues across asset classes, sectors and regions. We have also just become members of the Investor Forum, a UK-based collaborative engagement organisation designed to enable shareholders and companies to engage though their collective engagement framework.

Our year in ESG This past year, Smith & Williamson’s responsible investment team has achieved a number of milestones, with important collaborative efforts in key areas, plus recognition from responsible investing organisations.



Ethical & ESG

Highlights from our events

Nick Murphy, head of charities at Smith & Williamson

A large number of our clients have an ethical and ESG policy. We’ve incorporated those considerations in the fundamental analysis of stocks because those things will have an impact on the fundamental value of a share and we need to be aware of that. There’s more and more invested in that space and that will have a bigger impact on the fundamentals and what people are prepared to pay. But I am intrigued as to how trustees are interpreting it and what rules they are using to measure it.

Susan Wood of Portfolio Review Services

“When you think about an ethical policy, as a trustee, you have to disregard your personal prejudice and think about the best long-term interests of the charity. And you shouldn’t put in ethical restrictions unless they are relevant to your charity. The problem for a lot of trustees is that they think the opposite of ethical is unethical. And therefore, you have to have an ethical policy. You don’t! You need to say in your annual report and accounts that you’ve considered the matter and you don’t think it’s relevant for your

charity and its stakeholders to impose restrictions on the investment portfolio. The Charity Commission’s guidance for trustees is very clear on this.”

Andrew Wimble of Owl Private Office

Most charities I’ve come across have some kind of policy, but it’s always very much their own. I sometimes ask, why do you have no tobacco? If you’re a cancer charity there’s a very black and white reason why you wouldn’t have tobacco. But with other charities, are people more likely to give you money because you have a tobacco exclusionary policy? Probably not. But then maybe it affects your donor base or your beneficiaries. A lot depends on the charity. And then, is exclusion the right way to be ethical? Personally, if you don’t like tobacco, and for all the right reasons, go and buy shares in it and then use the vote and actually be active. It can be a positive step and I do know a lot of people who take that stance.

Grant Wilson of Asset Risk Consultants:

“Ethical is a moral view and everyone has different moral views. Pro-life and pro-choice are diametrically opposite, but they are still ethically held views. I would suggest that people with money have always put their values and character into their policy. ESG, on the other hand, is a measure. There are at least 86 measurable factors.”

Susan Wood of Portfolio Review Services

The biggest surprise has been the speed with which fossil fuel exclusions have taken hold, from absolutely nothing six to seven years ago. But I think a great deal of that activism has been driven by young people and the student bodies. It’s an extremely interesting phenomenon. But then I think, if you exclude fossil fuels and tobacco, where’s your ability to make income? Every decision we take has consequences. This underlines the importance of taking care when developing each charity’s investment strategy.

Agree

Strongly agree

Neither agree/disagree

Disagree

Strongly disagree

Don’t know

To what extent do you believe that ethical and ESG considerations are essential for your charity?

35%

30%

24%

7%3%

1%

Our events bring together some of the leading thinkers and practitioners in responsible investing to discuss the most pressing issues. Here, we highlight the key takeaways from a recent roundtable discussion on the results of a Smith & Williamson industry survey* and the link to our upcoming events calendar.

Visit our events page for more informationsmithandwilliamson.com/en/events/

* Smith & Williamson conducted an online survey, which comprised a total of 102 respondents, in 2018 in partnership with Charity Times.


Voting & engagement record

Voting & engagement in 2019

Management proposals - votes cast

Shareholders proposals - votes cast

Voting in actionBT - We decided to vote against the directors’ remuneration package. We recognise that some discretion may be required to attract and motivate a new CEO, but the aggregate size and timing of the awards ran contrary to best practice.

Workspace Group - We abstained from voting for the authority to issue treasury shares without pre-emptive rights, which would have diluted the power and influence of shareholders. At the very least, we considered that the board needed to state an upper limit.

Alphabet Inc – We backed a shareholder proposal fighting inequitable employment practices at the company. This proposal mitigated certain legal, reputational and human capital-related risks associated with existing employment practices.

Iomart Group Plc – There had been concerns over the directors’ remuneration with influential shareholder advisory groups opting to vote against the pay awards. We took the decision to vote in line with the board, but are closely monitoring the situation going forward.

10,134 resolutions

500 company meetings

Meetings by region and vote status

United Kingdom

Canada & United

States

Latin American

& Caribbean

0

200

100

300

400

500

50

250

150

350

450

Europe ex-UK

Oceania Japan Asia ex-Japan

Voted

Unvoted

Mixed

Take no action

For - 85.9%

Against - 1.7%

Abstain - 0.6%

Mixed - 5.3%

Take No Action - 4.1%

Unvoted - 2.4%

1 year - 0.0%

For - 24.6%

Against - 58.7%

Abstain - 0.0%

Mixed - 2.4%

Take No Action - 7.1%

Unvoted - 7.1%

1 year - 0.0%

772 AGMsEngagement with companies to improve governance

is a vital part of our responsible investment process. This is our voting record in 2019 with case studies.


Votes vs management

Our in-house voting policy can be found on our website

Glass Lewis (GL) are our proxy voting service provider. We use their policy to provide voting research which we incorporate into our own voting policy. Both policies focus on transparency and communications; corporate culture; strategy; financial disciplines, structure and management; stakeholders, environmental and social issues; and governance.

Proposal Category Type For Against Abstain Take no action

Unvoted Mixed 1 year Total

Audit/Financial 1864 1 7 69 17 106 0 2064

Board Related 3698 74 30 231 198 215 0 4446

Capital Management 1694 24 14 24 2 121 0 1879

Changes to Company Statuses 380 1 3 8 4 23 0 419

Compensation 756 64 4 62 20 53 5 964

M&A 48 1 3 0 0 1 0 53

Meeting Administration 53 1 0 19 0 2 0 75

Other 101 0 0 0 1 6 0 108

SHP: Compensation 0 19 0 0 2 0 0 21

SHP: Environment 2 15 0 4 1 1 0 23

SHP: Governance 20 22 0 5 5 1 0 53

SHP: Social 9 18 0 0 1 1 0 29

Totals 8625 240 61 422 251 530 5 10134

The polices are influenced by what is considered to be best practice in each country taking into account local guidelines and governance codes. We have great respect for the Glass Lewis policy, where we differ tends to be in the detail rather than the broad principle. In particular S&W is able to make use of the detailed understanding its sector analysts have of its investments which can allow a more nuanced and less rules based approach. In most cases, we vote with management. Where we vote against management, the Stewardship & Responsible Investment Group (SRIG) assess the vote and pass it to the relevant direct/ collective analyst where necessary for advice. The SRIG includes amongst others, Head of Charities, Head of Investment Risk and responsible investment (RI) specialists.

The chart shows that in the majority of cases we have voted in line with management. Most of our votes against management have been either board structure or compensation related. On nearly 100 occasions our view differed from that of GL, mainly on board related issues. Our in-house sector specialists conduct in-depth research by holding over 500 meetings with companies’ management each year. We believe that our specialist knowledge can put us in a superior position, especially when it comes to AIM, investment trusts and UK stocks and therefore we are better placed to make decisions.

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Case Study Voting & engagement

Who?HSBC

The backgoundNew executive pay guidelines were introduced in the Corporate Governance code in 2018. These pushed companies to adopt new pay ratio reporting requirements, as well as limiting director pension contributions to the rate given to the remainder of the workforce.

HSBC came under fire after it emerged that chief executive John Flint’s remuneration package would include a cash payment of £372,000 in lieu of a pension contribution. This was equivalent to 30% of his salary at the same time as most other staff received just 16%. The remuneration committee had also proposed similarly disproportionate contributions for other senior executives.

Our engagementWe wrote to the chair of the board, Mr Mark Tucker, saying we would be voting against the remuneration report at the AGM on 12 April 2019, outlining our concerns on the pension contributions for senior executives. To our mind, the remuneration proposals clearly flouted the new executive pay guidelines under the UK corporate governance code, which said executive pension contributions should be in line with those of a company’s workforce or explain why they are not.

The responseWe received a response from HSBC confirming that the executive director pension contribution level would be reduced to 10% - for both future and current directors “demonstrating a closer alignment between the level of pension contribution provision available for UK employees and executive directors alike”.

As a result of HSBC’s response, we were able to change our vote in favour of the new resolution. This was an example of collective pressure in action, curbing excesses on executive pay.

For illustrative purposes only

Ethical investors need to be pragmatic and patient and work closely with an experienced investment manager to reflect their ethical views in their portfolios. It can be a long, but ultimately rewarding journey.There are many different ways of expressing an ethical position in investments. Traditionally this has been achieved by negative screening, such as excluding tobacco manufacturers, which reflect the individual investor’s views. But in the last few years ‘ethical investors’ have started to embrace the idea of positive screening where only the companies that score the highest marks for specific attributes are eligible for inclusion in their portfolio. More recently we have seen the emergence of ‘impact investing’. Originally this was about the use of shareholder power to influence how companies behave and invest. However, it now includes investing in companies and projects that actively promote a desired outcome. Examples of this include investing in companies developing battery technology for those concerned about carbon emissions, or in social projects that aim to reduce convict re-offender rates through a social justice agenda.

Bespoke active management solutionsEvery ethical investor will have different ethical requirements, requiring a bespoke ethical portfolio. This in turn will need access to one of the leading ethical screening services. These typically screen at least around 5,000 companies with at least 100 different criteria. The resources necessary to effectively screen so many companies and their subsidiaries in so many countries and languages are material. There are many grey areas in ethical investing and the challenge is to find the right balance or trade-off. If you’re an ethical investor, it’s likely that there are some investment areas you won’t even go near, some where you will only consider the best-in-class companies from an ethical perspective and others where you are prepared to engage actively with the companies concerned. You may also wish to add tolerances; for example, a client may screen out tobacco companies, but allow a tolerance of say, 10% revenues from tobacco sales. This allows them to hold supermarket shares.

Whilst remaining aware that Environmental, Social & Governance (ESG) ratings are subjective and inconsistent between agencies, we do use the MSCI ESG Manager screening system as a starting point for positive screening, combined with a Reuters overview

The evolution of ethical investing



and have incorporated ESG specialist Sustainalytics with our voting policy. We are also aware that data and scoring is very backward looking, while investment management has to be based on future expectations, and so we embrace companies whose historic ESG scores may be low, but whose behaviour is demonstrably changing for the better.

You may therefore want to use a series of negative screens for ‘will not touch’ investments and positive screens for ‘best-in-class’ investments in your portfolio. It’s important to look at the number of companies excluded from your potential investment universe and their market capitalisation.

Meeting your objectivesThe impact of restrictions on your portfolio can be mitigated in a number of ways:

Global investing

Look at global investments to increase opportunities.

Finding substitutes

If tobacco companies are restricted, investments in consumer durables may be good substitutes with close correlations. Similarly, if pharmaceuticals are restricted, then a mix of consumer durables, services and technology companies can act as substitutes, and so on.

Positive screening

Positive screening can help maintain diversification. For example, an investor might be very concerned by the damage done to the environment and local communities by mining, but accept that mineral resources will always be mined by someone. It may therefore be best to support companies that use the very best practices to protect local communities, ground water and limit damage, rather than excluding mining companies altogether.

Active engagement

Some ethical investors adopt a policy of engaging with companies to encourage change, only excluding them if they fail to deliver the required change. Of course, this can mean investing in companies whose ESG rating is still low, but can be expected to improve.

Ethical investing vs returnLonger-term studies show a mix of results. But more recently, the evidence suggests that ethical investing over shorter time periods may be enhancing returns. This perhaps reflects the increasing amount of money being invested in this way and/or perhaps it is due to ESG considerations becoming more ‘mainstream’ for more companies. Whatever the reason, there are certainly many ‘ethical’ themes with attractive growth prospects that you’d expect to see even in portfolios not subject to screening. Ethical investors need to be pragmatic and patient and work closely with an experienced investment manager to reflect their ethical views in their portfolios. It can be a long, but ultimately rewarding journey.

9


Addressing the issue of fossil fuel divestmentMany organisations are under increasing pressure to apply greater scrutiny to the investments they hold. They want to ensure that funds are not inadvertently supporting activities that run counter to their goals and ethics, and that they support investments with a positive impact on the environment or society.

Bringing these factors into the investment process has its challenges and needs to be balanced against a fund’s long-term investment goals. A recent case study illustrates how, at Smith & Williamson, we have built a process to meet these challenges and ensure that clients can balance their investment and ethical goals.

A long-standing educational client, structured as a charity, wanted to reduce the carbon footprint of its investments. While it already had loose ethical investment policies in place, focused mainly on reputation damage, it had come under pressure from its student body to review its Investment Policy Statement (IPS) and in particular, to bring down its carbon footprint.

The trustees worked closely with Smith & Williamson’s investment team to devise and implement an environmental, social and governance (ESG) overlay that allowed it to meet the requirements of the student body, but also preserve its investment strategy. The ESG strategy had five main armaments;

a) No direct investment in companies with more than 5% of turnover derived from tobacco production or from armaments

b) Reduce existing direct investment in oil & gas and mining to nil over the 3 years from 1 December 2018;

c) Build up investment in companies developing and/or using renewable energy to a maximum of 15% of the portfolio, excluding direct investments noted at b) above;

d) Screen out the bottom 20% of companies, based on sustainable screening scores, in each sector. These screens are also applied to fixed income and cash;

e) Hold a minimum of 35% of the value of the investments in fixed interest or cash.

The student body was passionate about climate change, and the impact that responsible investors can have. The institution initially wanted to remove all companies involved in oil & gas and mining with immediate effect. However, it was agreed that given these companies provided valuable dividend income, the reduction and exit would be a gradual three year process.

Positive screenThe institution wanted to go one step further to achieve the objectives of its stakeholders. With this in mind, it added a positive screen aiming to target alternative energy providers. This fulfilled the institution’s ambition to have a positive impact on climate change solutions.

This also posed a challenge, as many energy firms are both the problem and the solution. BP, for example, has renewable energy operations, while still operating in the pollution-heavy oil drilling market. We decided to caveat the policy with negative restrictions overriding the positive impact mandate where appropriate.

As with many charity clients, a threshold proportion of 10% of revenue was applied to the tobacco and armaments sectors. We have found that a blanket negative restriction in these areas can have unintended consequences; an energy company supplying the MoD or a supermarket with a tobacco counter, for example, may be excluded which wasn’t the intention.

Practical aspectsWhile the myth that an ESG screen automatically leads to weaker investment returns has been laid to rest, introducing negative screens, exclusions and steering the portfolio towards certain sectors inevitably leads to certain biases. It is important to recognise that taking out up to one-fifth of the benchmark has an impact and the portfolio needs to be adjusted for the unintended risks this introduces.

For example, if the Middle East becomes unstable, the oil price tends to rise. Holding oil stocks can give investors some protection against a fall in stock markets. With these stocks stripped out of a portfolio, we have to find alternative solutions. Gold can be an equally good diversifier in this instance for example.

Our process in action


DemonstrabilityThis is a good example of Smith & Williamson being able to use its bespoke expertise to assist a client in responding to the needs of its stakeholders. However, this can be diluted if the positive impact it has can’t be demonstrated. Good reporting is essential in helping show the progress being made to key stakeholders.

Measuring impact isn’t straightforward. It means reporting on performance and non-performance issues. We need to be clear on the impact and do it consistently and effectively. The first thing is to establish the carbon footprint of the portfolio at the start of the process. This also helps identify the scale of the problem and then targets the companies for exclusion or where engagement might be effective.

With this in mind, we devised a system that allowed us to demonstrate that a positive skew on allowable investments produces a portfolio that is biased to highly rated companies over the universe. We also make full use of our external screen services to provide more granular reporting.

EvolutionIt was agreed that any new funds would be allocated pro-rata over the existing investments thereby maintaining each individual position. Interestingly, this meant increasing the nominal value in oil & gas stocks during the three year transition period. This was deemed acceptable as long as the proportional holding was maintained as flat (not increasing) and was reducing annually.

ConclusionsWe believe more and more clients are adapting their investment policies to fit specific ESG criteria.

Drafting an IPS or investing ethically can be a daunting prospect for a client. Having an an advisor who can support a client through this process, as part of the overall service, can offer peace of mind. Investing ethically throws up interesting debates of how money is invested with restrictions in mind and it pays to have an advisor experienced enough to explain the implications, leading to an approach that best reflects a client’s values.

Implementation of ESG goals is likely to become increasingly commonplace. This can be done without compromising long-term financial goals but needs to be handled with care. At Smith & Williamson we have the expertise to help guide our clients into building a portfolio that best reflects their values.

11


On 3 June 2018, rescuers lost a five-day battle to save the life of a sick male pilot whale. The subsequent autopsy discovered plastic waste weighing 8kg in its stomach, including 80 bags.1 Worldwide searches for plastic pollution spiked to all-time highs and the war on plastics began.

98% of plastic produced is from virgin feedstock

Every day approximately eight million pieces of plastic pollution find their way into our oceans, finds research from the Ellen MacArthur Foundation. Only 2% of single-use plastics enter into closed-loop recycling (where waste is collected, recycled and used to make new products).

This has led to a backlash from consumers - and increased government scrutiny. Over 60 countries have passed regulations to reduce plastic waste. In 2015, the European Commission proposed the ambitious goal that, by 2025, at least 55% of all plastics packaging in the EU should be recycled. This poses numerous risks, and opportunities, for individual companies.

In the direct line of fire are those sectors where single-use plastics are most in the public eye: plastic bags, bottles, straws and disposable cutlery – these products are ubiquitous, but also largely unnecessary. However, beyond this, we see shifting consumer preferences, regulatory pressure and falling demand reverberating through the value chain, from the oil & gas producers who provide the feedstock, to the manufacturers, and the end consumer brand.

Consumer brands and plastics manufacturers have an opportunity here if they remain ahead of the curve, investing in new technologies and finding ways to reduce packaging. These companies will be on the front foot in meeting regulatory targets and will have more appeal to ESG investors. The oil & gas producers, who supply the raw materials, are likely to suffer the most from this shift, with less demand for their products.

Not all solutions are created equalPlastics, of course, have their uses. In supermarkets, they play a vital role in preventing food waste. Shrink-wrapping a cucumber allows it to stay fresh for 14 days, rather than just 32. This is an important consideration, with food waste a far larger contributor to climate change than plastic waste. Replacing glass milk bottles with plastic or paper/plastic carton significantly reduces the carbon impact due to the lighter weight, particularly if these products are recycled3.

Equally, alternative solutions such as bioplastics or paper are not panaceas. Bioplastics have a number of flaws that can make them an inappropriate replacement for traditional plastics. They can be more expensive to manufacture, with higher agricultural land use for the raw materials (and associated fertiliser and pesticide treatments) counterbalancing the fossil fuel emissions used in traditional plastic manufacturing. Most will not completely decompose when composted, requiring industrial processes to break them down.

Understanding the theme: Plastics in portfolios

1 https://www.nbcnews.com/news/world/dead-whale-found-thailand-17-pounds-plastic-its-stomach-n8795812 https://www.bbc.co.uk/news/business-471613793 https://www.ft.com/content/8128f782-ce54-11e9-b018-ca4456540ea64 https://environmentalpaper.org/wp-content/uploads/2017/08/carbon-neutral-paper.pdf

Plastic pollution (worldwide)

0

31/0

8/20

14

31/0

8/20

15

31/0

8/20

17

31/0

8/20

16

31/0

8/20

18

10

30

60

90

20

50

80

40

70

100


Similarly, paper products require vast resources and energy. In fact, they have a higher lifecycle carbon footprint than plastics4, even if they are more environmentally-friendly on disposal.

Amid this complexity, how can investors tell a sustainable solution from a well-intentioned but misguided fad?

For example, Tomra is a Norwegian company at the forefront of collection and sorting technologies and has become a darling for ESG investors. They provide reverse vending machines, that pay consumers for each plastic bottle they return. The company also leads in sorting technologies, using lasers to identify different types of plastic and separate for the recycling process.

Other waste management companies leading the way in recycling include Suez and Veolia. Suez currently returns 4.3 million tons of secondary raw materials (paper, cardboard, glass, metal, plastic, wood) to the market. Veolia achieved €4.3 billion in circular economy-related revenues in 2018. Demand for these services will grow as governments seek to ensure that waste is better managed.

Consumer brands also recognise the reputational boost associated with taking action on plastics. Adidas is committed to making all products with recycled plastic by 2025. The fashion industry has come under significant scrutiny for its environmental footprint, and this push towards sustainability will likely improve the brand in consumers’ minds. This is important for an athleisure brand where, let’s be frank, few people want to buy second hand!

The risks to companies on the wrong side of the plastics problem are clearly evident. Information is more readily available, prompting growing environmental awareness and understanding. This makes the reputational hit far greater. Regulators are imposing increasingly significant fines on companies that break environmental rules.

This area is constantly evolving: countries in South East Asia now refuse to take waste from developed markets, while the Dyson award was recently given to a UK student who has created a new plastic made from fish scales. Plastic pollution is undoubtedly a crisis, but innovative solutions are emerging. We can help ensure you stay on the right side of this shift.

13


Climate change has become a global emergency, with individuals, corporations, charities and policymakers increasingly recognising the urgency of tackling carbon emissions. More and more clients believe that they have an important role to play in addressing the problem, with a growing amount of capital now invested within a climate change framework. This term implies some sort of awareness or restriction based on climate change metrics/concerns.

Clients are increasingly looking to demonstrate that their investments reflect their values. This has led to a greater emphasis on measuring a portfolio’s ESG (environmental, social and governance) impact. This in turn feeds into the current interest in proactively investing using a climate change framework.

Organisations with a poor carbon footprint are increasingly paying the price. Recent analysis by Citi* estimates that borrowing costs for European integrated oil companies are 2% higher than for their US equivalents (where there is less concern on climate change), a huge difference at the current level of interest rates. Growing political attention, combined with the rapid fall in the cost of fossil fuel alternatives, shows investors cannot remain agnostic.

The potential impact goes well beyond oil exploration and production companies. Electricity, resource, chemical, manufacturing and transport sectors face significant disruption, plus a huge potential write down of previous investment and massive capital expenditure requirements to adapt, survive and take advantage of the opportunities. These changes are already happening and having a growing impact now – witness the car manufacturers’ investment in electric vehicles or the fall-off in demand for huge turbines at GE.

Political momentumThe Paris Agreement, which seeks to limit the global temperature rise this century to below 2 degrees Celsius and to drive efforts to limit the temperature increase even further to 1.5 degrees above pre-industrial levels, sets the global framework. This agreement has broad global support (even in the USA) and has set five key focus areas:

• Mitigation by reducing emissions

• Implementation of a transparency system to account for climate action

• Adaptation to climate impacts

• Strengthening countries’ ability to recover from climate related impacts

• Providing support, including financial, for climate resilience

The UK and Continental Europe have led the charge. The European Union has committed to a 40% cut in greenhouse gas emissions by 2030 and to improve energy efficiency by 27%. In the UK, the 2008 Climate Change Act created the basis for tackling and responding to climate change. The Act provides the UK with a legal framework including a 2050 target for emissions reductions, five-yearly ‘carbon budgets’ (limits on emissions over a set time period which act as stepping stones towards the 2050 target), and the development of a climate change adaptation plan.

The Task Force on Climate Related Financial Disclosure (TCFD) and the Financial Stability Board now recognise climate change as a major systemic risk to investment which can alter the risk return profile of organisations exposed to fossil fuels.

Understanding the theme: The climate for investing

14


Risk management and positive impactThe motivation of clients to invest through a climate change framework may be a desire to save the planet, but it also makes sound investment sense. The financial risk is a combination of several factors: if global warming is to be restricted to 2 degrees Celsius, many of the fossil fuel reserves can never be used and have no value – they will become ‘stranded assets’. This applies to infrastructure such as power stations, pipelines, chemical plants, cement and transport technology as well.

Increased legislation is another risk. This might include carbon taxes to make carbon producers pay for the societal costs of generating carbon dioxide, redirect demand and tilt the competitive landscape in favour of cleaner technologies. Another risk, already acknowledged, is that the sheer weight of money invested in this area changes valuations and the cost of capital for companies in many areas.

Managing risk is just one part: equally important is to identify the beneficiaries from these structural changes in areas such as energy efficiency or alternative energy technologies, plus changes in food consumption, animal feeds and alternatives to plastic.

Portfolio constructionFrom an investment point of view, climate change implies meaningful changes in portfolio construction, which may in turn influence portfolio performance under differing scenarios. This brings some challenges to traditional risk assessment frameworks. Excluding major sectors from a portfolio will have an impact in terms of returns timing, income generation, risk, cross-correlation, investment style and performance through the investment cycle relative to the main indices.

Another major challenge is to integrate conflicting objectives and achieve a balance. Tie this in with other social and governance objectives, plus all the usual factors in running a portfolio - extraordinary monetary policy, the rapid pace of technological disruption and geopolitical risk - and it is easy to be somewhat daunted. Good information and good communication between clients and the investment managers making the decisions is key.

It is relatively straightforward to assess the long-term outcome of the Paris Accord if governments follow through on their commitments. How this plays out in the shorter term is harder to call. In the long-term, fossil fuels might be going the same way as the horse and cart, but this doesn’t mean that the oil sector is an immediate sell. In the dotcom bubble, markets correctly predicted that the internet would have a

material impact on high street retail, but it has taken until now for this to flow through.

More investors are under pressure to explicitly sell some or all of their fossil fuel extraction holdings, to look beyond fossil fuel extraction to companies generating revenues from fossil fuels and, more broadly, to engage actively with their investments. In short, they are under pressure to integrate climate change risk across their entire investment process. This needs a high level of quality information as it relies on being able to identify fossil fuel reserves, fossil fuel related revenues, carbon emissions, intensity and efficiency, plus climate change leaders and laggards company by company and sector for each portfolio.

Data problemsThe starting point is always to establish the carbon footprint for each portfolio so that progress over time can be established. The information allows the portfolio to be compared to standard indices and helps identification of climate related risks. It also prioritises areas for future action and engagement and gives a framework for communication with other stakeholders and donors.

The quality of the data remains a major issue. Disclosure levels differ between companies, countries and regions. Definitions vary widely and much of the analysis is subjective. Some issues are black and white, but there are more grey areas that require discussion with clients. Different screening services each have their own methodologies and so the same data can be interpreted differently, depending on the service used.

Developed world companies have much higher disclosure levels than emerging market companies so they naturally score better. European companies tend to score better than US companies because there is greater focus on these issues in Europe. The European Union is putting together a taxonomy of definitions and there are other initiatives on disclosure standards, but this will take time.

The evolution will continue. This is a rapidly developing area, with many learning as they go. Good communication between clients and advisors is key, while taking a steady step by step approach will ensure that all the stakeholders are comfortable and fully understand the implications of each step.

* The Changing Investment Climate – Navigating the uneven ESG playing field in the oil industry. Alastair R. Syme, Kate O’Sullivan, Oliver G. Connor, Prashant Rao. (Citi Research 27 June 2019)


For many years polluting gases such as carbon dioxide and methane have been disseminated into the atmosphere without any cost to the industries producing them. These gases take many years to leave our atmosphere and contribute to what is called ‘the greenhouse effect’. This is where the surface temperature of the Earth rises, eroding Arctic sea ice, causing sea levels to rise, reducing biodiversity and putting human and natural habitats alike at risk. Governments, policymakers and researchers around the world are increasingly striving to find solutions to the problem of global warming, encourage all economies to reduce their reliance on carbon, and cause fewer emissions.

There have been a number of solutions posed, including putting a price on carbon – whether through a government-imposed tax or a market-based solution. Whoever pollutes the most must pay the most. Emissions trading schemes have attracted the most attention. These are an attempt to charge companies for the cost of their greenhouse gas emissions, allowing market forces to encourage companies to lessen their reliance on carbon and invest in cleaner, greener technologies.

Climate Change Current research shows that not enough is being done fast enough to counter the effects of global warming. Data jointly produced by Climate Analytics and New Climate Institute shows that with no action, projected emissions will cause temperatures to rise by 4.1-4.8 degrees Celsius by 2100, and that current policies are on track for 2.8-3.2 degrees Celsius average global temperature rise.

Global warming has been linked* to an increasing number of extreme weather effects such as droughts and flooding, as well as a rise in sea levels. These events have a knock-on effect around the globe, potentially causing migration crises as displaced citizens from coastal regions are forced to leave their homes.

With limited time left to rectify the problem, climate change is now at the forefront of the public’s concerns, and activists such as Greta Thunberg and Extinction Rebellion continue to pressure governments and multinational partnerships to take swift and effective action.

The Paris Agreement at COP21, the name of the annual UN climate change summit, is a historic agreement signed and ratified by 187 state parties. Its main goal is a unified response by nations to keep the global temperature rise beneath 2 degrees Celsius above pre-industrial levels. This is the level which has been determined to mitigate the effects of climate change the most.

One crucial area the Paris Agreement proposes is voluntary cooperation in market and non-market-based approaches. One of the visions for a market-based approach to reducing greenhouse gas emissions is the establishment of international carbon markets. Around 50* already exist on a regional and national level, including for the UK and more are scheduled. So what are they, and how do they work?

Emissions trading schemes: are they the answer to cutting carbon emissions?

* Source 2018: www.edf.org/worlds-carbon-markets

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The role of emission trading schemes Emissions Trading Schemes (ETS) are also known as ‘cap-and-trade’ schemes. The country or region under the scheme will set a cap on overall emissions, and then create a number of permits equalling that cap. Permits are then distributed to companies, either for free or bought at auction. Companies then have the choice to match their emissions to the number of permits they own, or to trade permits on the market.

Companies which emit less may sell their excess permits, and those businesses who increase their emissions must buy more permits. In this way, the carbon emissions are assigned a market price. As each year passes, the total number of permits issued by the governing body is decreased which ensures that the total emissions are reduced. This will increase the cost of permits in the market due to scarcity, and therefore the price of carbon emissions.

In the future, the cost of carbon will one day exceed the cost of acquiring and using clean technology or renewable energy and companies will further invest in those solutions. In this way, there is a strong financial incentive for businesses to adopt low-carbon strategies.

AlternativesETS are not the only proposed solution to reduce emissions. Some countries have implemented a carbon tax, preferring a predictable and fixed price-per-ton of emissions that is regularly reviewed. A tax is simpler to understand than a trading scheme as well. However, it lacks the environmental certainty of an ETS, where it is known that overall emissions will decrease on a yearly basis. Under a carbon tax, some companies may just pay more to emit more and emissions could stay constant or increase.

Other proposals include Results Based Climate Finance, where entities are rewarded with funds when they meet climate related goals, internal carbon pricing where companies make investment

decisions which incorporate a shadow price of carbon, and offset mechanisms where companies fund projects which negate their greenhouse gas emitting activity.

There are currently 58 carbon pricing initiatives in the world implemented or scheduled, which includes both ETS and taxes. Geographies with an ETS include the EU and countries such as the UK, New Zealand and South Korea as well as multiple regional schemes in China and the USA. In 2019, those initiatives were estimated to cover 20.1% of global greenhouse gas emissions. While that proportion continues to increase, the price of carbon is currently not high enough to dent the rate of global emissions significantly. Half of emissions are priced below $10 per ton, whereas a report by the Carbon Pricing Leadership Coalition estimates the price should be $40-80 per ton to meet the goals of the Paris Agreement.

The future and conclusionThe public’s demands for action on climate change means they are more likely to support companies who are tackling their contribution to global warming. Along the same lines, investors will prefer to invest in companies they see as being proactive and prepared for lower-carbon economies. It’s not an instant solution, but assigning a price to carbon is nevertheless useful for encouraging businesses to monitor and reduce their greenhouse gas emissions. Its effectiveness will grow as programs become more widespread. As the race to reverse climate change becomes more and more urgent, carbon pricing will be important in enabling economies to stay one step ahead.

* Source: www.wwf.org.uk/learn/effects-of/climate-change

For more information see our carbon pricing primer documentsmithandwilliamson.com/en/stewardship-responsible-investment

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Responsible investment policyOur responsible investment policy outlines our commitment to generating superior risk adjusted returns for our clients, by investing in companies that will create long-term value for all stakeholders. As part of this we recognise how environmental, social and corporate governance (ESG) factors and voting and engagement activity can influence the prospects and financial performance of our investments and play a key part in our responsibility to society, stakeholders and our clients.

Stewardship codeSmith & Williamson are committed long term responsible investors and good stewards of our clients’ assets. As such we are signatories to the UK Stewardship Code, for which we were awarded Tier 1 status.

An updated version of the UK Stewardship Code was released in October 2019. We are currently working on updating our response to the new code in line with the new 12 principles, prior to our first report which will be due in 2021.

Proxy votingAs part of our commitment to both the UK Stewardship Code and the UN PRI we began proxy voting in November 2018 (using Glass Lewis as our proxy provider), and since then we have voted on over 700 company meetings and actively engaged with over 100 companies.

Over the last year, following on from using Glass Lewis’s policy guidelines, we have developed our own voting policy. This policy builds on the research from Glass Lewis as well as taking into account our own in-house analyst knowledge and showing our continued commitment to the UK Stewardship Code and UN PRI, with a focus on leadership, accountability and remuneration.

SRD II & engagementThe revised Shareholder Rights Directive (SRD II) took effect in the UK on 10 June 2019. Firms that provide investment management services to certain types of institutional investors are required to publish a shareholder engagement policy explaining how they engage with the companies in which they invest, and annual information about how the policy has been implemented.

UN PRISmith & Williamson became signatories to the UN PRI in 2018, with our first cycle of reporting being completed in March 2019. Whilst this first cycle was voluntary to participate in and report on, we decided to be fully transparent and allow the UN PRI to publish our report – a full copy of this report can be found on both their website and ours.

Our principles, policies & guidelines

Responsible Investment Policy

Policy IntroductionAt Smith & Williamson, we are committed to generating superior risk adjusted returns for our clients, by investing in companies that will create long-term value for all stakeholders. As part of this we recognise how environmental, social and corporate governance (ESG) factors and voting and engagement activity can influence the prospects and financial performance of our investments, and play a key part in our responsibility to society, stakeholders and our clients.

This policy will complement our existing investment process including strategic and tactical asset allocation and direct and collective security selection and links to our separate voting and engagement policies. Smith & Williamson is a signatory to the UK stewardship code and a signatory of the United Nations supported Principles for Responsible Investment.

DefinitionsWe recognise that ‘responsible investing’ means different things to different people and has no unified definition. However, we believe that a responsible investing policy should take into consideration the following areas: integration of ESG issues and CSR (Corporate Social Responsibility) factors into the investment process and acting as responsible stewards on behalf of clients, including through voting and active engagement with investee companies.

Purpose and ScopeSmith & Williamson is committed to delivering the best possible risk-adjusted returns for our clients and we believe responsible investment supports this aim.

This policy is intended to focus on our direct equity, fixed interest and collective investments held within portfolios managed by Smith & Williamson Investment Management LLP.

We integrate ESG factors into our fundamental investment analysis of directly held securities and monitor the responsible investment activity of third-party funds, in order to protect and enhance long term returns. We are dedicated to providing a bespoke investment management service to match the requirements of our clients, rather than impose our views on them. Accordingly, additional exclusionary or inclusionary solutions are only instigated at the behest of our clients.

External data providersWe use MSCI to provide ESG data, screening and reporting, we use Glass Lewis for proxy voting advice and Broadridge for electronic voting.

Roles and ResponsibilitiesOur responsible investment policy has been established by the Corporate Responsibility and Charities Committee (CRCC) which reports directly to the main Board of Smith & Williamson. Day to day implementation is the responsibility of the Stewardship and Responsible Investment Group (SRIG), working with the Direct Investment Group (DIG) and the Collectives Investment Group (CIG), all under the overall supervision of the Investment Process Committee (IPC). The Stewardship and Responsible Investment Team are responsible for co-ordinating & reporting on activity, liaising with third party data providers and providing support to all the supervisory groups and underlying analyst teams.

Active Ownership and EngagementOur client base is a mix of private client portfolios, trusts, charities, pensions and companies. As such, there is a long tail of smaller holdings, held for various reasons, and it would be impractical to vote on every holding. Therefore, we have chosen to impose a materiality screen: we exercise the voting rights for all investments held on a discretionary basis for charity and public benefit clients (as well as for all other discretionary holdings of the same investments) plus any position where we have discretionary authority over more than 1% of the outstanding share capital. This amounts to around 700 companies and investment trusts on a world-wide basis.

Smith & Williamson’s voting policy is detailed separately. Broadly, we will focus on:

• transparency and communication

• corporate culture

• strategy

• financial disciplines, structure and risk management

• stakeholders, environmental and social issues

• governance

smithandwilliamson.com

The UK Stewardship Code

LeadershipCompanies should have a talented board with a proven record of protecting and delivering value,

where individuals have a diverse background, record of positive performance and a breadth

and depth of experience. We believe in routine director evaluation, including independent external reviews, and periodic board refreshment to foster the sharing of diverse perspectives in the boardroom and the generation of new ideas and business strategies.

The board will most effectively perform the oversight necessary to protect the interests of shareholders if it is significantly independent. Only independent directors should serve on a company’s audit and remuneration committees.

EffectivenessThere should be a clear division of responsibilities at the head of the company between the running

of the board and the executive responsibility for the running of the company’s business. No one

individual should have unfettered powers of decision. The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.

The Committee Chair maintains primary responsibility for the actions of his or her respective committee. There should be a clear disclosure of which director is charged with overseeing each committee.

The audit committee should act independently from the executive, to ensure that the interests of shareholders are properly protected in relation to financial reporting and internal control. We assess audit committees based on the decisions they make with respect to their monitoring role, and the level of disclosure provided to shareholders. We believe that the committee requires a minimum of three members — or two for smaller companies.

Remuneration committees have a critical role in determining the remuneration of executives. We believe overall remuneration levels should be reflective of the company’s size, relevant peer group and recent performance.

Nomination committees are responsible for ensuring that the board contains the right balance of skills, experience, independence and knowledge to effectively oversee the company on shareholders’ behalf. This process includes

managing the terms and disclosure of board appointments, both in initial recruitment and on an ongoing basis, with an emphasis on progressive refreshment. The committee must set out the board’s policy on diversity, with specific reference to gender, including details of any internal objectives and progress against them.

AccountabilityEach company should be headed by an effective board which is collectively responsible for the

long-term success of the company. To achieve good governance requires continuing and high quality effort.

The Board should promote the interests of shareholders, should consist of mostly independent directors those of which should be held accountable for actions and results related to their responsibility.

The board should establish a formal and transparent process to review the company’s corporate reporting, risk management and internal control principles.

A director’s history is often indicative of future conduct and as such we typically vote against directors who have served on boards or as executives of companies with a track record of poor performance, over-remuneration, audit- or accounting-related issues and/or other indicators of mismanagement, poor oversight or actions against the interests of shareholders.

We take note of any significant losses or write-downs on financial assets and/or structured transactions. Where we find that the company’s board-level risk committee contributed to the loss through poor oversight, we would vote against such committee members on that basis.

RemunerationWe believe executive remuneration should be linked directly with the performance of the business

that the executive is charged with managing. The Policy should provide clear disclosure of an appropriate

framework for managing executive remuneration. We expect remuneration policy to comply with best practice. When a company’s executive remuneration policy deviates from these guidelines, we expect a clear and compelling rationale for why the proposed structure or practice is appropriate for the company. If the company has failed to sufficiently disclose the terms of its policy, we may vote against the proposal solely on this basis.


S&W Voting Policy

S&W Engagement & SRD II Policy

This document should be read in conjunction with our Responsible Investment Policy which is the over-arching document, together with the connected voting policy and the S&W Investment Strategy Policy documents. Other relevant documents include the S&W Stewardship Code and UN PRI submissions, plus our regular reports on voting and engagement activity all publicly available on our website.

1. Integrates shareholder engagement in its investment strategy.As a responsible investor and as a signatory to both the UK Stewardship Code and the United Nations Principles of Responsible Investment (UN PRI), S&W are committed to ensuring that we monitor and engage with investee companies on behalf of our clients. As part of this we are committed to improving the transparency of our reporting with the aim of enhancing and demonstrating value for our clients.

Our Responsible Investment Policy is set by the Corporate Responsibility and Charity Committee (CRCC) which reports to the main Board of S&W. The Stewardship and Responsible Investment Group (SRIG) is responsible for coordination and the practical implementation of our policy. The Direct Investment Group (DIG) and the Collectives Investment Group (CIG) are responsible for fully integrating our responsible investment policy within our fundamental analysis process of securities and collectives. All aspects of our investment strategy are under the oversight of the Investment Process Committee (IPC).

We use MSCI ESG Research (MSCI), an external company, for all Environmental Social & Governance (ESG) and ethical screening services. Voting plays an integral role in active engagement. We use Glass Lewis to provide voting research which we incorporate into our voting policy. The UN PRI and other bodies provide opportunities for industry wide engagement initiatives.

ESG factors are incorporated into our fundamental research process for direct investments as these can have a signifi cant impact on the long-term valuations. Our in-house sector specialists conduct in-depth research into UK and overseas equities, including holding over 500 meetings with companies’ management each year as well as undertaking media and other desk-based research.

All third party collective managers are screened for their membership of the UK Stewardship Code and/or UN PRI. Implementation of these principles is monitored for all third-party managers. There is a specialist ethical collectives team that researches specialist ethical, ESG and related thematic funds and another specialist team that covers renewable infrastructure and related funds.

2. Monitors investee companies on relevant matters including:

a) Strategy

b) Financial and Non-fi nancial performance and risk

c) Capital Structure

d) Social and environmental impact and corporate governance

Our investment process is an assessment of client risk and objectives, global economic strategy and outlook, asset allocation process, security selection and portfolio construction.

We receive a great deal of information and macro-guidance from our team of strategists and analysts.

The Direct Investment Group (DIG) is responsible for the development of S&W’s investment process for direct investment in equities and fi xed interest.

DIG appoints and oversees Sector Specialists who are responsible for:

DIG appoints and oversees Sector Specialists who are responsible for:

• identifying a set of direct equity and fi xed interest investments capable of forming core holdings for the majority of our clients;

• maintaining and summarising relevant third party research;

For direct equities, the core of our security selection will focus on businesses that are:

• Growing

• Attractively valued

• Sustainable

• Proven

This framework (GASP) has a pronounced similarity to the better known GARP (Growth at a Reasonable Price). Our framework does not seek to de-emphasise valuation as an important determinant of future returns, but rather to emphasise that understanding the persistence of an underlying business is of particular signifi cance given the long timeframes over which we seek to invest for clients.

Full details of direct investment process are available on request. We show an extract of the Sustainable section immediately below.

SustainableWe include Environment, Social and Governance (ESG) data from MSCI right from start of our investment process (as well as using it in portfolio construction to comply with client restrictions). We do not set fi lters at the Sector Specialist level but we do include ESG measures as a factor in analysis, and seek to understand any poor scores. This is a fundamental part of understanding the sustainability of the businesses we seek to invest in from a holistic standpoint.

We look for returns that are likely to be persistent, for example where a business has a degree of protection from competitive pressure, and the structural position of the wider sector is sustainable. We favour (not exclusively) businesses with relatively predictable returns, supported by moderate levels of fi nancial and operating leverage and either steady sales or an extensive order book.

It is important to understand the nature of growth in a business. Is it tied to the economic cycle; if so what is the sensitivity to that cycle? Does it earn the same returns through diff erent cycles (a mean reverting cyclical) or has it managed to improve through each cycle (a cyclical compounder)?

Is growth driven by secular factors? What has historical growth looked like, and is this sustainable looking forward? Can the company adapt its products to meet new demands? Has growth been driven by increasing prices or volumes?

What is underpinning the growth – a fantastic product or a commoditised one? A brand? A consistent track record of innovation?

3. Conducts Dialogues with investee companies.Over 50 sector specialists conduct in-depth research into UK and overseas equities by holding over 500 company meetings each year as well as undertaking media and other desk-based research. This work is complemented by our geographic specialists.

Collectives analysts currently cover around 480 funds across 16 sectors, including open ended funds, investment trusts and off shore specifi c funds. The analysts regularly meet with fund managers and closely monitor the performance of covered




An overview of our stewardship actions in 2019

Principle Update for 2019

Publicly disclose their policy on how they will discharge their stewardship responsibilities

We have completed our first UN PRI report.

We have employed MSCI as our ethical and ESG screening tool – we are working to embed their research further into our investment process.

Over the last year we have voted at over 700 company meetings and engaged with over 100 companies on various issues.

Have a robust policy on managing conflicts of interest in relation to stewardship which should be publicly disclosed

We continue to take all reasonable steps to identify conflicts of interest arising and to manage potential conflicts in a way that is fair to our clients and in accordance with our written policy.

Monitor their investee companies

We have more in-depth research including carbon footprint analysis and access to sustainable impact reporting. We also now have the ability to screen funds enabling fund managers to screen whole portfolios.

Establish clear guidelines on when and how they will escalate their stewardship activities

We continue to monitor our investee companies. A full copy of how we have voted and which companies we have engaged with is available on our website.

Be willing to act collectively with other investors where appropriate

In December 2019 we joined the Investor Forum, this is a collaborative engagement platform which is designed to enable shareholders and companies to engage though their collective engagement framework.

We are looking to join Climate Action 100+, a 5 year investor-led initiative to engage more than 100 of the world’s largest corporate greenhouse gas emitters.

Have a clear policy on voting and disclosure of voting activity

Having used the Glass Lewis policy for our first year of Proxy Voting, we have now developed our own policy. Full details of this can be found on our website, along with details of how we have voted.

Report periodically on their stewardship and voting activities

Our voting and engagement activity reports can be found on our website, along with an annual report. A copy of our annual UN PRI Transparency report can also be found on our website.



ESG is integrated throughout our investment process. We have recently adopted MSCI ESG Manager as our screening service. This not only allows us to perform exclusionary screening, but also gives us more information and the ability to perform inclusionary integration. We are also able to analyse sustainable impact, climate and carbon foot-printing.

The tool also allows us to analyse the data on over 7,000 direct and 33,000 indirect securities, which our analysts can then use with their specialist knowledge of industries and companies, to take a holistic look at a company’s risks and opportunities.

Integration of ESG factors

Tools to deliver a bespoke solution - direct investment

20

Source: MSCI ESG Manager


ESG due diligence on all funds• 565 covered funds

• Ensure membership of UN PRI and Stewardship Code

• Monitor published Responsible Investment reports

Specialist ethical collectives team• A list across asset classes

• ‘Dark’ and ‘light green’ funds

• Positive impact

• Thematic funds including water and environmental technologies

MSCI fund screening service• 33,000 mutual funds/ETFs

• Can screen across positive and negative criteria, carbon and impact

• Both absolute and relative to peer group

Specialist renewable infrastructure team• Due diligence and expertise

• Allows fund managers to make informed investments in specialist and diversified closed ended funds

We also have specific solutions for funds, which tend to be more complicated due to their lack of transparency. We perform ESG due diligence on all the funds we cover (565). We ensure that they are signatories to the UN PRI and/or the UK Stewardship Code and engage if this is not the case. The MSCI screening service allows us to screen funds across negative and positive criteria and carbon and impact, both on an absolute basis and relative to the peer group.

Tools to deliver a bespoke solution - funds

21


Source: MSCI ESG Research

The UN sustainable development goals were launched in 2015 and aim to provide a blueprint for creating peace and prosperity for the people and planet. However translating these into investment can prove to be challenging. We use MSCI’s actionable impact themes as a guide to help navigate these. This allows us to map a portfolio’s impacts against the sustainable development goals and ensures we better align our portfolios to these sustainable development goals - which are now becoming an industry standard.

Tools to deliver a bespoke solution - impact measurement

The MSCI platform allows us to map portfolio impacts to the UN sustainable development goals. This is fast becoming an industry-wide method to report on impact.

22


Quite a number of investors have decided to divest from fossil fuel extractors and we have been able to help them make this transition. However, we believe that engagement with these companies can be an important and powerful tool for effecting change. Smith & Williamson is now a member of Climate Action 100+ a global collaberative engagement initiative supported by the UN PRI and representing over $40trillion of assets under management. This targets the world’s 100 worst Green House Gas emitters and a further 60 systemically important companies.

Tools to deliver a bespoke solution - climate change

Measurement

Identifying assets that are especially carbon-intensive or those most likely to be stranded

Engagement

Identify transformative and disruptive clean tech and energy innovations

Reducing carbon

exposure

2 4

5

1 3

Opportunities

Demonstrate

Divestment

Measure the portfolio’s carbon footprint so that you

can understand portfolio exposure, establish a

baseline and set goals

Vote and engage with companies based on

their carbon activity and climate goals

Demonstrate progress over time to key stakeholders

23


“Climate change is a global problem, which requires global solutions, in which the whole financial sector has a central role to play.” Mark Carney

In October 2014, the European Commission (EC) set an ambitious economy-wide domestic target of at least 40% greenhouse gas emission reduction for 2030 (as compared to the levels in 1990), as well as renewable energy and energy efficiency targets of at least 27% (2030 Framework).

• After setting this target, two landmark international agreements were reached – the Paris Climate Agreement and the UN 2030 Agenda and Sustainable Development Goals. In particular, the Paris Climate Agreement includes a commitment to align financial flows toward low-carbon and climate-resilient development.

• In January 2018, a High-Level Expert Group on Sustainable Finance (HLEG) appointed by the EU, published a report offering a sustainable finance strategy for the EU. Their recommendations formed the basis of the ‘action plan on sustainable finance’ adopted by the EC which was published in March 2018. The action plan has three main objectives:

1) To reorient capital flows towards sustainable investment in order to ensure sustainable and inclusive growth;

2) To manage financial risks stemming from climate change, environmental degradation and social issues; and

3) To foster transparency and long termism in financial and economic activity.

The Investment Association (IA) launched an industry-wide framework in November 2019, aiming to categorise definitions relating to responsible investment. The IA’s responsible investment framework categorises, and provides standard definitions for, the different components of responsible investment.

The IA encourages investment managers to adopt the framework and definitions to provide clarity and consistency to investors on the approaches they take to responsible investment.

The IA states that from 2020 it will ask members to identify which funds should be classified as having responsible investment characteristics to help bring further clarity to the market. The IA will publish statistics on funds with responsible investment characteristics later in 2020.

• In October 2019 the Council of the EU adopted the Disclosure and Benchmark Regulations. Both came into force on the twentieth day following its publication in the Official Journal of the EU (November 2019) and will apply from 15 months following that date.

• With respect to the Taxonomy Regulation, according to the European Council, they expect the taxonomy to be established by the end of 2021 to ensure its full application by the end of 2022.

Public policy

Dec 2015

Paris Agreement

High-Level Expert Group on Sustainable Finance (HLEG)

HLEG Interim report

One Planet Summit

HLEG Final report

Action Plan Financing

Sustainable Growth

Legislative proposal

Technical Expert Group (TEG) starts their work

Delegated acts

Jul 2017

Jan 2018

May 2018

2019 - 2022

Dec 2016

Dec 2017

Mar 2018

Jul 2018


MSCI ESG Manager is an online ESG research and analytics platform designed to provide asset managers and owners with an integrated suite of tools to efficiently manage research, analysis and compliance tasks across the spectrum of environmental, social and governance (ESG) factors.

Providers

Memberships

Trade associations

As the leading independent provider of global governance services, Glass Lewis helps institutional investors understand and connect with the companies in which they invest.

We provide advanced technology and operations, communications, data and analytics solutions for the financial services industry and businesses.

A leading independent global provider of ESG and corporate governance research and ratings to investors.

These logos are property of the relevant company


Looking forwardResponsible investing is not a fad or a fashion. We anticipate growing momentum in the years ahead. At Smith & Williamson, we are striving to stay ahead at a time when the science, the regulation and the investment ambitions of our clients are changing rapidly. We believe we are at a clear advantage: we are always looking at the sustainability of the companies in which we invest, and incorporating ESG factors and screening into our analysis is just an extension of this.

Responsible investment does not seek to impose values on our clients, just make better investment decisions. We recognise that everyone has their own ethical values, and our bespoke approach enables us to reflect those values in your investment portfolio. As ever, we are always here to guide you through this rapidly evolving area.



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Our offices



Our offices: London, Belfast, Birmingham, Bristol, Cheltenham, Dublin (City and Sandyford), Glasgow, Guildford, Jersey, Salisbury and Southampton. Smith & Williamson International Limited is regulated by the Jersey Financial Services Commission. Smith & Williamson Investment Management LLP is authorised and regulated in the UK by the Financial Conduct Authority. Smith & Williamson Investment Management (Europe) Limited regulated by the Central Bank of Ireland.We have taken great care to ensure the accuracy of this publication. However, the publication is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Ltd 2020. Code: 43620lw. exp: 30/06/2021

Please remember the value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.

ContactStewardship and Responsible Investment Smith & Williamson Investment management

e: [email protected]

Documents

Stewardship & Responsible Investing Annual Report · Stewardship & Responsible Investing 3 Contents Our year in ESG 4 Highlights from our events 5 Voting and engagement record 6 The