Responsible Investment

Ownership

As owners, shareholders have certain rights and powers, including the right to vote and an ability to engage with the companies in which they hold shares. Schroders has, for many years, used these powers. We believe it is in the interests of our clients to be responsible owners, seeking enhanced returns and lower risk in respect of the companies in which our client funds are invested. Accordingly, we exercise voting powers and actively engage with companies on, amongst other things, strategy, risk, performance and governance.

Our policy regarding the governance of the companies in which client funds are invested is described in our Investment and Corporate Governance policy. In The RI and corporate governance policies detail our approach to engagement, voting and integration, they cover, amongst other things, our approach to voting, our views on the structure of governance at companies and board compensation. It is central to our investment process to consider each company’s ability to create and sustain value. It is essential to this process to question and challenge companies about issues that we perceive may affect their value. Engagement and actively voting shares we manage on behalf of our clients is integral to our investment process.

Stewardship/Engagement

We comply with the UK Stewardship Code and is addressed further in our UK Stewardship Code Statement.

Voting

It is our policy to vote at all companies in which we have equity holdings, unless there are material impediments to voting (for example, share blocking which prevents the trading of shares which are voted). To maintain the necessary flexibility to meet client needs, Schroders' offices may determine a voting policy which addresses local market issues and client preferences.

The combination of numerous factors such as globalisation, changing political landscapes, ecosystem depletion, urbanisation, resource utilisation, demographics, climatic patterns, employee attitudes and consumer preferences creates challenging and changing markets in which companies operate. The assessment of how a company, and its management, generates long-term value through adapting to these changes and capturing the opportunities is enhanced through the analysis of corporate ESG disclosure and performance; as these will help inform on how a company’s strategy aligns with these macro issues.

There is increasing need for fund managers to explicitly demonstrate how these issues are integrated into the stock valuation and selection process. However this is still an embryonic area within RI and, at present, there is no standard definition of what integration should look, or be, like. We have identified three ways in which ESG data can be integrated in the investment process (though acknowledge that there are undoubtedly others):

1. As a proxy for the quality of management
2. As a financial metric within valuation models (e.g. carbon price)
3. As an input into a thematic fund (e.g. Climate change funds)

We utilise specialist research to help develop investment universes that reflect our clients' values. Typically these would exclude companies based on certain moral criteria, for example tobacco or alcohol. However we are also able to develop screens for clients that reflect a company's material exposure to a particular issue or that focus on breaches of international standards.

Association of British Insurers - we are members and currently sit on the Investment Committee at the ABI.

Carbon Disclosure Project - This project was established to encourage the world's largest companies to improve their transparency on their exposure to climate change. Schroders is a signatory and special adviser to the Carbon Disclosure Project.

Institutional Investors group on Climate Change - The IIGCC was established to increase awareness about the risks and opportunities of climate change to investments within the investment industry and to encourage companies to provide more information on this. Schroders was a founding member of this group and lead the engagement work stream for two years.

UK Sustainable Investment and Finance Association - UKSIF was established to promote responsible investment in the UK. Schroders is a member of UKSIF.

European Social Investment Forum - EUROSIF was established to promote responsible investment in Europe. Schroders is a member of EUROSIF.

UN Principles of Responsible Investment - The UNPRI were developed to encourage the continued development and adoption of responsible investment practices within the investment industry. Schroders is a signatory to the UNPRI.

Corporate Governance Forum - we are members of an informal group of UK institutions that takes the opportunity to discuss and share experiences on corporate governance issues and policies.

Access to Medicine Index - we support this research program which aims to provide a tool for investors and other stakeholders to assess and evaluate pharmaceutical access to medicine programs.

We regard corporate engagement as integral to our investment process. It is essential to understanding the sustainable value of the companies in which we hold equity on behalf of our clients.

Our approach to governance is set out in a formal policy document, ‘Investment and Corporate Governance: Schroders’ Policy’, which sets out our approach to the governance of companies in which we hold equity investments. This note develops on that global policy and explains our compliance with the UK Stewardship Code.

Ownership and the UK Stewardship Code

The UK Stewardship Code is overseen and published by the Financial Reporting Council, the independent regulator overseeing financial reporting, accounting and auditing and corporate governance. The Code, published in 2010, sets the benchmark in the UK for institutional investors to meet ownership obligations in respect of their holdings of UK equities.

Schroders complies with the Code in the UK. Taking account of local practice and law, the Code sets the standard for engagement for Schroders' international businesses.

Policy on operation of stewardship responsibilities

It is central to our investment process to consider each company's ability to create and sustain value. It is essential to this process to question and challenge companies about issues that we perceive may affect their value. Engagement and actively voting the shares we manage on behalf of clients should therefore be seen as integral to our investment process.

As appropriate, Schroders will engage and vote on any issue affecting the long-term sustainable value of a company in which it is invested. Issues may include, but are not limited to, financing and capital allocation, management, governance, remuneration, corporate and social responsibility, business strategy, acquisitions and disposals, operations, internal controls and risk management.

Schroders' resources used for each engagement will be managed according to the circumstances and potential impact of each case.

Where the holding in funds controlled and voted by Schroders is a small fraction of a company's capital, there will be proportionately less resource applied to engagement, if only to recognise that shareholders with a small fraction of a company's share capital are less likely to have a material influence.

Intervention will generally begin with a process of enhancing our understanding of the company and helping the company to understand our position. The extent to which we would expect to effect change will depend on the specific situation. Our focus will primarily be on issues material to the value of the company's shares.

Implementation

Engagement will normally be conducted through regular meetings with company management. It may include further contact with executives, meeting or otherwise communicating with non-executive directors or the chairman, voting, communicating via the company's advisers, submitting resolutions at general meetings or requisitioning extraordinary general meetings. We may conduct these additional engagements in connection with specific issues or as part of the general, regular contact with companies. Thus, for example, it is common to meet company directors outside the regular 1-to-1 meetings, particularly when the directors are first appointed.

If there are issues relating to the company which the executives of a company cannot answer, alternative methods, depending on the issue, may be employed.

Monitoring is naturally periodic. Typically, it will occur around financial reporting, general meetings, in connection with news and announcements and when, for whatever reason, Schroders might be conducting research into investment ideas.

Voting

It is the policy of Schroders' UK equity business to vote all shares at all meetings except were there are onerous restrictions – for example, where trading is restricted prior to a meeting in shares committed to vote (share blocking), we will usually only vote in cases where the benefit of voting outweighs the ability to trade.

In determining how to vote, Schroders will apply the voting policy set out in Investment and Corporate Governance: Schroders’ Policy. In applying the policy, we consider a range of factors, including the circumstances of each company, performance, governance, strategy and personnel. We may also take advice from third parties and in particular whoever may be appointed to provide voting services (at present ISS).

We generally look to support the management of the companies. Where proposals are not consistent with the interests of shareholders we will vote against resolutions. We may abstain where mitigating circumstances apply, for example where a company has taken steps to address shareholder issues.

Reporting

The voting record of Schroders' own funds will be published on this website for periods covered by the Code, after a suitable period has elapsed between voting and publication. A delay is considered appropriate to ensure that the publication of voting will not influence the outcome of discussions with companies.

For institutional clients, voting reports are usually provided quarterly and notes on engagement are also available.

It is Schroders' view that effective engagement must sometimes be confidential, with public exposure more likely to entrench positions than resolve issues.

Schroders intends seeking an audit opinion on engagement (in addition to the opinions already obtained for voting processes) having regard to standards in AAF 01/06.

Working with other shareholders

There are occasions when it is better to work with other shareholders to effect change. This may involve sharing views and ideas with other institutions. It may also involve meeting companies jointly with other shareholders or using the services of third-party membership organisations or other collaborative or informal groups).

The few institutional shareholders which have not yet had contact with Schroders regarding stewardship of investee companies are encouraged, in the first instance, to contact our Head of Corporate Governance.

Conflicts of interest

Schroders' policy regarding conflicts of interest is set out in Investment and Corporate Governance: Schroders’ Policy. Schroders will normally vote in the interest of its clients. Where there is a conflict of interest between a client and Schroders, we will either a) take advice from our voting service or b) obtain approval from the client or c) obtain approval, with written justification, from the Head of Investment.

Where the director of an investee company is also a director of Schroders plc, we will vote in accordance with the recommendation of the voting service.

UK Corporate Governance Code

For companies in the UK, it is not intended that our policies conflict with or materially add to the 2010 UK Corporate Governance Code (the Code, also overseen by the FRC, formerly the Combined Code). Any UK company which in our opinion meets the spirit of the UK Corporate Governance Code should, in the absence of other factors, expect to be supported on corporate governance issues covered by the Code. Where a company does not comply with the spirit of the Code, we will consider the company's explanation and react accordingly. This may lead to further engagement with the company or, potentially, a vote against management prosposals. If the company provides a convincing justification and/or the issue is not material to the value of its shares, we would expect to support the company.

September 2010