Sustainable to the Core

In this panel discussion, Stephanie Hukins, Sustainability Investment Director is joined by three of our leading investment experts; Simon Doyle, CIO and Head of Multi-Asset, Australia, Angus Sippe, Portfolio Manager, Multi-Asset and William Wu, Portfolio Manager, Australian Equities to discuss:

  • How we’re applying a sustainability lens to our multi-asset portfolios and embedding sustainability in every layer of portfolio construction to deliver the best outcome for clients, and
  • The award-winning bespoke tools being used to assess the carbon footprint of our funds and new ways we’re tackling climate change through our biodiversity strategy. 

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This is a transcript from the “Sustainable to the Core | An inside look at multi-asset investing” webinar. 

Stephanie Hukins: Good morning everyone, and thanks for joining us at today’s webinar. I’m Stephanie Hukins, the Sustainability Investment Director at Schroders Australia, and with me today are Simon Doyle, CIO and Head of Multi-Asset; Angus Sippe, Fund Manager in the Multi-Asset team; and William Wu, Fund Manager & Investment Stewardship in our Australian Equities team.

In the spirit of reconciliation, I’d like to begin by acknowledging the Traditional Custodians of country throughout Australia and their connections to land, sea and community. We pay our respect to their Elders past and present and extend that respect to all Aboriginal and Torres Strait Islander peoples today.

Before we get started, I just wanted to run through some housekeeping. Today's webinar will be recorded and distributed after the event. We'll be chatting with my colleagues for approximately 40 minutes. We'll have some time for Q&A from yourselves. Please do use the web chat function on your screens below.

So Simon, before we dive into sustainability and the relaunch Sustainable Growth Fund, can you take a moment to set the scene on what we're seeing in markets today?

Simon Doyle: Sure, Steph. Yeah, certainly plenty to talk about and a year does make a big difference. So I guess what we've seen this year, I think, is the start of a significant transition in economies but also markets from an environment that's prevailed pretty much since the global financial crisis of very low interest rates, very significant liquidity in both markets and the economy, good growth, and a lot of that’s sort of flowed through, I guess, into elevated asset prices across the board. Probably around a year or so ago, we started to see inflation building for a whole raft of reasons, both structural, including things like de-globalisation and some cyclical, particularly, I think the stimulus that we sort of put into economies post the GFC, both on the monetary and, sorry, post-COVID, both on the monetary and fiscal side and it’s basically just over-inflated the global economy, chewed up a lot of capacity, and lo and behold, ten you have inflation problems. That's changed the way policymakers are thinking - we've seen rates rising to really try and put a lid on inflation. And as rates of have risen, asset prices across the board have weakened. And I think probably one of the most challenging things about this year is - has been the breadth of weakness across the board. I mean, everything from government bonds and investment grade credit through to equity markets, here and abroad, have weakened significantly, and that’s made it very difficult for portfolio constructors to generate sort of positive returns through this period where everything's been selling off.

As I said, I think this is a part of a transition; I don't think we're through this yet. We’ve clearly seen lower equity market prices, we’ve seen higher bond yields so we’re starting to see some value move back into markets. But I think there's a bit more to come, so I think brace for more volatility, more interest rates, more uncertainty with regards to inflation, and I think ultimately we will end up with recession at some point in the not too distant future.

Stephanie Hukins: Angus, switching focus to sustainability and ESG, we often hear how sustainability and ESG applies to say, an equities portfolio, but it's a little less clear in other asset classes and especially multi asset. Can you tell me how you think it can be applied to multi-asset portfolios?

Angus Sippe: Sure, Steph. And it's been a long process for us to get to this stage, and what we have built upon is our core process; the core process remains unchanged. And while many view ESG as bottom-up, there are many things we think you can do from a top-down perspective. Within all our strategies, including this fully sustainable one, we've adjusted all of our expected returns for all asset classes and all regions by climate change number. And that incorporates things like the physical costs of the climate rising for those stranded assets, which we know all too well here in Australia. So think about the more emerging market, the more fossil fuel-reliant and the warmer a country is, the lower the expected return.

In Europe, for example, European equities, it’s slightly positive because of the various ESG policies and their climate is more mild. So we're incorporating that from a top-down approach. We're also achieving this from a science-based lens, so we’re using that science that we have in all this research to drive our asset allocation decisions. But ultimately, the philosophy is what we refer to as the ABC framework – you’re Avoiding harm, Benefitting society and Contributing to solutions. So as we bring that all together and all the asset classes, and we'll talk a bit more in detail of those, especially on the equity side, that's really the philosophy there where we are looking at how, the lens we look at it from for sustainability.

Stephanie Hukins: Okay. It sounds a bit complicated. So we've recently rebranded the Sustainable Growth Fund. So how do you incorporate all those factors into that fund?

Angus Sippe: Yeah. So there are a couple ways we could have gone about it. Now, approaching it from the sustainability side of things would've made that quite easy. But it is important for us to approach that from the investment side, so making sure that this is grounded in our core investment approach, that approaching ESG, and this isn't about just excluding certain parts of the market, it's about capturing those transition opportunities as we see them coming through. And the ABCs help with that. At the same time, we are avoiding some of those biggest ESG risks, or at least mitigating the impacts of those.

But as we've achieved this, the investment objective remains unchanged; it’s still a CPI+5 portfolio. We've layered in a much more sustainable profile, admittedly, that's more skewed towards the E of ESG, but over time we, as the data becomes available and the research supports that, we'll move that more towards the S side of things. But we've also significantly reduced the carbon intensity of this portfolio. Now, as you say, this wasn't easy. This was a 12 to 18 month process, where we had to make sure that we had all the componentry available to us across the business, across all the different asset classes. And then what we've settled on is a core and satellite approach, where we have a fully sustainable core and then we have a satellite which allows us to move more to the impact end of the spectrum or thematic end of the spectrum. Think energy transition, those type of strategies.

And as we work through this, everyone who knows the Australian market will know that the sectoral composition makes ESG a bit more of a challenge. Anyone who knows us also knows that Martin's team, we really like their process, so it is important for us to work with Will (Wu) and Martin (Conlon) to achieve fully sustainable strategies and exposure in the Australian market, avoiding some of those concentration issues you would get from purely a negative screen type of approach.

Stephanie Hukins: So, Will, over to you, per Angus’ point around the strategy’s role you’ve created for the Sustainable Growth Fund, can you first start by telling us what is biodiversity, and also in the context of natural capital?

William Wu: Sure. So what is natural capital? Firstly, natural capital and biodiversity are terms often used interchangeably, but essentially what they’re trying to refer to is the world’s stock of natural assets, that is, land, air, water, and all the living organisms. Now, what is unique about natural capital is that it's finite. We actually can't produce more of it. And it also underpins all of economic society yet it doesn't show up in any economic measures of growth.

In terms of how important it is in terms of climate change, for example, it is absolutely vital. We cannot solve climate change without solving the biodiversity crisis. For example, over 40% of climate mitigation required for us to reach our Paris goals, actually comes in the form of biodiversity or carbon sequestration.

From a financial perspective, for example, it is absolutely vital. It is estimated that the services that nature provides accounts for higher than or more than half of the world's working GDP. A figure that's about $40 trillion US. So you can see natural capital absolutely underpins everything.

Stephanie Hukins: Excellent. So obviously this is a relatively new term for us in this space but it's coming quite quickly from what we're seeing. Can you explain how you translates some of those broader concepts of biodiversity into an investment framework and process?

William Wu: So, first of all, from an ESG perspective, it's not about ‘box ticking’. When we're trying to determine the valuation of the company, we're looking at how sustainable is the business model; the sustainability of its cash flows, so we want to actually incorporate everything that is material, both from a financial and ESG sense, into the valuation of the business. Now, when it comes to investment ideas for the biodiversity strategy, we use two credible universally accepted frameworks that already exist. The first one is the UN biodiversity framework, the second one is the science-based targets for nature framework, which essentially proposes actions and key focuses in three areas. The first one is Value, so where a company incorporates biodiversity in its decision making. So, example of that, would be, say, Woolworths who is targeting zero food landfill by 2025, carbon positive by 2050.

The next area is Maintain, so where companies help reduce externalities. In other words solution providers. A great example of this would be Cleanaway, Australia's largest wastewater company, or renewable energy companies, such as Mercury. The last area is Enhanced, so essentially companies that will help us transition to a nature positive world either through know-how, technology, raw materials, or financial systems. So a great example of this would be a lithium miner like IGO or an engineering business like Worley who has 50,000 engineers globally, they're designing hydrogen plants, solar, wind and also chemical plants that's going to develop synthetic fuels from bio plastics. So this biodiversity strategy’s key aim is to direct most of its investments in these three areas.

Stephanie Hukins: So Angus, I’m going to come back to you and ask some questions around exclusions. But, Will, I just wanted to double check before we move on, does that mean that your universe is quite narrow because of biodiversity or how does that work?

William Wu: That’s a great question. Because biodiversity incorporates more ESG issues than just climate change, our opportunities in this sense are actually quite broad. So we actually see the opposite effect of what you typically see in ESG funds, that our universe is actually larger than, say, a fund manager that only focuses on climate change.

Stephanie Hukins: Interesting. So, Angus, can you tell us, just going back to the Sustainable Growth Fund, what’s your approach to exclusions.

Angus Sippe: Yeah, so we do exclude, but I want to be clear that that's not the defining characteristic for this portfolio. And as you can see here, there are three main types of exclusions and simplify this down, we can see the headings across the top. So in certain categories, we are trying to avoid those major suppliers, then we're avoiding the ones that might have some ancillary smaller type of revenue association with that. And then we have those hard exclusions which are tobacco production companies and controversial weapans.

So this is all important within the portfolio because this is the line in the sand where we're going - it's revenue based at the company level. It's not - this portfolio is not an ex-fossil fuel or ex-energy, because that - those types of resources and companies are important for the transition, especially on the energy side. And so moving to a quite extreme version of a sector or fossil fuel exclusion would limit our opportunity set in that transition, which is not what we're trying to achieve here. But on the right hand side here, we think on this transition, it's important to be able to bring some of these companies that are potentially not as great today, have a little bit of air on them, but are going to provide some of those solutions going forward.

Now there are a couple of criteria for those companies to be included, that they have a science-based target decarbonisation net-zero plan that is along the lines of the Paris Accord, they have a material reduction in their emissions intensity versus their regional peers, or green bonds that are ring-fenced in terms of their usage. But on the next slide, you'll see how we pair those together with the rest of portfolios. As I've said, there's negative screening, how we incorporate some of those more transitionary names to capture that sort of those winners in that transition phase. And then we have the positive screening, and this is where we use some of the more satellite exposures which will be about 20% of the portfolio. Those sorts of thematics or strategies which we think will have a more positive impact especially in this transition phase.

Stephanie Hukins: Excellent. So there's a lot we've covered already. A lot of lingo is in this space, a lot of acronyms, some of which we have heard today. I have to say I feel like I'm drinking from a fire hydrant every day when it comes to sustainability. Simon, to hear from you, it feels like we've done an awful lot over the last 12 to 18 months, but there's always much more that can be done. So let me ask you where to next in terms of sustainability in the multi-asset space?

Simon Doyle: Yeah, I think, I mean, I think it's a very relevant observation, I think we’re digesting a lot of information, research. Our clients are thinking about sustainability from a whole bunch of perspectives and I guess we're ultimately sort of looking to do, I think, similar things which is to generate good investment outcomes and to do it in a way that has a positive impact.

And so where have we come from? We've sort of come from a point where we always sort of thought that ESG was important but it was less explicit in our process. Over the last probably half a dozen years, for us as an organization, we sort of moved from that point to the point where E, S and G considerations are integrated in every part of the research process.

What does that mean? It means that we're really considering E, S and G risks and opportunities as part of the core investment process. And I think that's probably - I think at a very important part of what we're doing is to continue to evolve our core investment processes to make sure we're understanding all these risks. And E, S and G, climate and so on are becoming much more significant in terms of their impact on sort of broader growth, inflation, wellbeing, corporate performance than they ever have been. So I think that's something we will continue to evolve as the science and the research etc., evolves. How we, I guess, the more sort of, I guess, nuanced part of that sort of process is investing in a way which is sustainable. So shifting from incorporating E, S and G considerations to actually investing in a way where you are sort of - we're looking directly for opportunities that are sustainable in terms of how we invest.

And I think we've seen a huge amount of development in terms of the ability to implement decisions in different ways across different asset classes, in a sustainable way. And I think, from a multi-asset perspective, that actually makes the task easier because we can reflect our core investment views in a whole lot of different ways where we're investing in asset class strategies that are inherently sustainable. And I think that will continue. And I think the third sort of area is really how we communicate with our clients. Because, I mean, because the reality is, there's as many different ways of thinking about sort of ESG reporting as there kind of probably are ways to do it. And what we want to try and achieve is reporting to clients in a way that is sensible, that is relevant, they can understand.

And I think that's another sort of important part of the sort of the sustainability journey. And I guess, just to round out, I think because there are a lot of different ways of thinking about sustainability, we want to be engaged in that debate, we want to be sort of helping to inform and develop the thinking around sustainability so we can all sort of end up with, I guess, better outcomes in the longer run.

Stephanie Hukins: So I'm just going to skip to your comments there about the reporting side. A key motivator in the industry are client demands to better understand the carbon emissions profile of the portfolio, versus the benchmark, for instance. I believe we might have a slide that we could go to, it would be interesting to hear your thoughts on the carbon profile of the Sustainable Growth Fund and how that's changed.

Simon Doyle: Yeah. And I’m happy for Angus to sort of to dive in here as well. I mean, I guess from personally in terms of the sustainable growth fund, when we were, I guess, transitioning or thinking about the transition from the strategic growth fund to the sustainable growth fund, what we needed to think about was, well, what are the objectives that we specify for the strategy from an ESG perspective? And there's probably three, two of which are probably more tangible than the others. The first was we wanted to make sure that there was a demonstrable improvement in carbon intensity versus our strategic asset allocation. The second was to somehow ensure that we were having a net positive impact in terms of the sorts of investments that we were implementing.

And the third was really around the level of engagement, as Angus said, it's not all about exclusions, actually, how do you get change is to influence, and that's by talking to companies and so on. So those are the three sort of metrics we set out, but you can sort of see from the graphic, the - we've - the changes that we implemented in the composition or through the implementations, we didn't really change the asset allocation, we just changed the way we implemented some of those decisions, working with Will, and so on, on biodiversity. We've seen carbons emissions intensity more than half and we think that's a pretty significant achievement particularly given that we haven't had to sort of change our asset allocation at all, just change the way we think about implementation. And so we monitor, we measure, and I think we have a - can demonstrate a significant improvement in that area.

Angus Sippe: The other interesting thing is this is - we actually changed the ranges to be a bit more ‘growthy’ within this. So many people think that you taking out sort of fossil fuels, you can't access that real world growth, but we have, and you can see the effect there. And this being a multi-asset portfolio is the combination of all the different parts and the asset parts. I'm not saying it was easy but I think you can see there that there are solutions available today, both domestically and globally, those exposures everywhere which is why it took us 12 to 18 months to make sure that that was achieved. And this is a by-product of the process, it wasn't us starting from this point, it's just emphasising that it's coming from the investment perspective, that there are ways to implement we think smarter that can achieve these pretty promising outcomes today.

Stephanie Hukins: Yeah, sure. It's a fast-moving space. So it's good to know that things are becoming more and more readily accessible. We touched - we talked about a lot on exclusions which everyone relates to quite simply, but I think another key aspect of sustainability in ESG is what we call at Schroders, active ownership. So that's about whether the decision - an exclusion is a decision to starve a company of capital. But you've touched on, Angus, the transition to the new economy and whether you want to be exposed to that. So can you explain some of the considerations on company engagements, which then allows us to encourage change, still being exposed to that transition?

Angus Sippe: Absolutely. And this comes in many and varied forms, and Will and I have been in engagements with companies just looking at the report of data which can often be erroneous understanding those impacts. So definitely engagement is a key part of any ESG strategy because a lot of the companies that are the biggest emitters today can have the highest impact and are very cheap. So, one example in our portfolio is one of the transition names is Nextera Energy, which currently looks like it has reasonably terrible emissions but its business model is to buy out old coal-fired power stations in the US and convert them to renewable energy sources. So over time it improves dramatically. So having a forward-looking bias towards how we're positioning the portfolio assets, alongside engagement, is key.

A lot of these external data or the backward-looking metrics in a lot of these companies look terrible, especially - I keep bringing it back to the energy space - the biggest, the mega caps, are the ones that can make the biggest difference and they're also generally the ones that are the biggest renewable providers. So we can do that in a combination of ways, like I said, in sustainable core with engagement, but also tilting towards the impact side of things, and Will probably has more examples of these types of things.

William Wu: Yeah. So, one of the key targets of the biodiversity strategy is to lift the number of companies that incorporate natural capital in the business plan. So when we've done our own analysis, we think that only 25% of the ASX 300 values biodiversity, and science tells us that we need to get that number up to 100%. So part of our core engagements advocacy reporting is to look at that number over time until it gets to 100%. And an example of that would be, for example, recently we've had discussions with one of Australia's largest miners. We want to develop a set of biodiversity KPIs.

Ultimately, we believe if you're not measuring it, you're probably not managing it. And you may ask us why is this company attracted to speaking with us? Well, not only do we have local expertise in the industry, like Steph and myself, but we also have global ESG expertise. Globally, we have 51 dedicated ESG specialists, and I mean, that's a number that's far larger than most investment teams. So a lot of these companies that we're talking to about biodiversity or avoiding emissions they're just attracted to us because of that specialty.

Stephanie Hukins: And just before we move on from that, part of the scale of that team is the data aspect around ESG, which can be a challenge at times, shall we say. I'd like to just hear on where you'd like to see the data sort of conversation evolve for this audience.

William Wu: Yeah, certainly. When it comes to biodiversity data it’s probably a bit more nuanced than  climate change, there's very little guidance on what data is available data. So having a large team, a specialised team, not just local but global, we know what is happening in US or Europe and we can translate that to potentially what could be an opportunity. We are future-looking when it comes to these sorts of investment decisions. And then within the team, I work alongside James Bandara who has a data science background. So between him and me, I know kind where the data is and James is able to systemise that data, giving us great local expertise.

Simon Doyle: I think I might just add to - from a multi-asset perspective, obviously we're investing in equities or investing in equities in developed markets, emerging markets, or investing in debt markets, both corporate and government and currencies in private markets and so on. And I think one of the challenges from a data perspective is there's probably - there's a lot more data at the large cap end of the global market, but as you move sort of further away, that data gets harder to capture, harder to sort of dig out and process. And I guess that's one of the - Angus talked about the time it took us to kind of really, I think, properly get our heads around how we would deliver a sustainable strategy in a multi asset format. Part of that challenge was around sort of making sure we had good data across the board to understand our risk, but also to be able to provide good quality and sort of accurate reporting.

Angus Sippe: And I think that reporting's key and anyone who looks at the fact sheet of this strategy can see how transparent it is. We have a number of internal and external metrics and we also write up all those transitionary names, but holding in the portfolio and the rationale for that. So it's one thing to have the data yourself, but to report it and give everyone that comfort to know what you're doing and where the potential breaches are on the more systematic side, and why you are holding those type of names is really good.

Stephanie Hukins: Fascinating. It's a big challenge. Yeah. Angus, I might just - we've got some more slides, so I’ll just do a quick call out to our audience. If you’ve got any Q&A, it would be great for you to start sending them through. This is going to be my last formal question for Angus. How are you seeing the investment outlook today after Simon's very blunt opening comment, have you got any bright spots for us?

Angus Sippe: I do. They might not be there today. So on the screen there you can see is what our current asset allocation is – it’s very defensive in that we are overweight cash, underweight global fixed income, because it's still the inflationary pressure coming through some of those diversifiers in the portfolio and then obviously underweight global equity. So starting from a conservative point versus our SAA. On the right-hand side, you sort of can get a feel from that stylised graphic there, how diversified this strategy is. So despite moving more sustainable, we haven't really had to give up the breadth of implementation at the asset class level and underpinning that Australian equities biodiversity are some other sort of more systematic passive strategies. So we've still got a very high crossover with our integrator strategies as we do today. As you can see, part defensive.

On the next slide, some of these bright spots we've talked about mainly in fixed income today. So we have, sorry, missing a slide, but the fixed income we’re starting to see some yields pick up really aggressively especially in some of the high yield names. So you're getting 8% yield which is part of why markets think the Fed and the RBA are going is very attractive versus cash levels today. So there's a lot in the price for some of these fixed income assets which we think is starting to look attractive. So we think more buying on dip there. But the next slide is what are the things that will cause us to change our view? And these are policy-based thoughts. So you can see kind of our base case along there is the Federal Reserve continues to hike but at a slower, slower pace, maybe after tomorrow, the quantitative tightening continues, start to see that fiscal prudence and the Chinese-US Russia-Ukraine tensions continue.

On the bullish side, if you started to see even a pause in rates hikes, I think that would be very positive for markets because the instability goes away. The fiscal spending could increase, starting to see a bit of signs in the early polls that the Democrats might win not only the Senate but the House, giving them greater fiscal control. And then the binary risk of say the Ukraine war de-escalates, and we have no insight into that, but these are the types of things, on the policy side, which would make it turn more positive to re-engage with the markets.

Stephanie Hukins: Thanks for that formal section. We've got a few questions coming in. I might start with you Angus, an adviser has asked, I'm interested in multi-blend sustainable managed funds but there seems to be few around, why is that?

Angus Sippe: I think the honest answer is it's hard. It's taken us, with our depth and breadth of resourcing, 12 to 18 months to come at this from an investment perspective, as Will talked about, we have dedicated domestic and international ESG specialists, we have a whole raft of desks. Every investment desk across Schroders has had to incorporate sustainability in their core strategies and then delivering that in a single package which is attractive for yourselves and simple to understand, is really difficult. And I think that's the honest answer why it's taken so long and there aren't any out there today. Not many.

Stephanie Hukins: Another question that's come through from an adviser, I guess new emission reduction targets are very important but what is also important is how this fund is performing in comparison to its peers and how it benefits investors?

Simon Doyle: Yeah, I think that's absolutely correct. I guess when we started to think about how we would transition or the idea of transitioning the strategic growth fund to the sustainable growth fund, the first thing that we laid out was that we can't compromise on the investment outcomes. We have a long term track record, we don't always get it right but we certainly have, I think, a pretty robust sort of investment process and what we did on sustainability needed to be additive to that. So that's incredibly important. If I think about that aspect of the strategy over the last sort of 12 months or so, I think we're kind of, well, I think we've been broadly on the right side of the moves that have happened in markets and economies.

I think it's also fair to say we haven't fully captured that. And I think that's partly been because of the breadth of the weakness and partly because of, I think, a few decisions that we took amidst the uncertainty of things like the Russia, so the Ukraine war, and so on to try and sort of manage some of that downside risk which didn't work out quite as well as we would hope. So. I think our sort of peer relative performance is okay but not great, but certainly not because of the decisions we've taken on the sustainability side. If I look at the sustainability outcomes, I think they've been incredibly positive. So I think, overall, I'd probably give us - I think we've done, okay. But there's - probably could have done a bit better on the investment side through this uncertainty.

Angus Sippe: I think two other things is to be clear is we haven't converted this to an ESG benchmark, we are still managing this against the sort of the regular benchmark. So we're not saying that you are taking that ESG risk, we are still managing that from an investment perspective. And the ESG is not the biggest active risk we are taking, there are asset allocation changes and all that. And our implementation, just like in our non-sustainable strategies, we'll have style tilt and all that to feed into the portfolio and offer diversification. So over time, we think that can play out very positively.

Stephanie Hukins: I want to stick on investment markets perspective, with the 60/40 portfolio and bonds, let's look at bonds for a second, are we close, after a horrific year, are we close to a tipping point?

Simon Doyle: I think we're getting close. I mean, I think we've seen a lot of tightening priced into the market. I guess what we haven't really seen yet is sort of that tightening start to really constrain economic activity. And I think we'll get to a point where we start to see growth slow, the market will start to look ahead to what's next and I think we'll start to see easing of prices. Next year's probably a little bit too early at this stage. So I think we’re there or thereabouts, there are sort of risks on both sides, but I sort of think the point about - I think the challenging outlook, I think we've got to recognise, and Angus sort of alluded to this, we have seen a significant repricing. I feel much more comfortable about what's happening in markets today than I did a year ago where there was no - we had no interest rates, no risk premium, expensive equity markets. And that's basically been reflected in very poor performance of markets, but that poor performance of markets is rebuilding risk premium. And bonds are a key part of that.

So I think we're going to get a pretty significant opportunity to make some aggressive investment decisions in the next sort of three to six months based on that sort of rebuild of risk premium. So I think there is a, notwithstanding the challenges today, is actually quite a positive picture for the future based on what's happening.

Stephanie Hukins: So I'm surprised this hasn't come through in the Q&A and I’m sorry Angus, but I have to ask you, with energy still surging this year, some sustainable funds have had a hard time picking up the market. So, is there a long-term cost of investing in a sustainable fund?

Angus Sippe: We don't think there is, especially in the multi-asset perspective, there are so many levers we can pull to address that. And that's why we thought it was important to keep those market-based benchmarks rather than, say, an ex-fossil fuel benchmark. Styles go in and out of that favour all the time. And we know that sustainability has a growth bias which isn't being rewarded in the entire inflationary environment. But one of the reasons why we took 12 to 18 months was making sure we can manage this portfolio through a full cycle and knowing that this time would come and we're not heavily reliant on the overpriced tech within this portfolio.

As I've shown, it's very diversified within that, but some of these impact names, especially these transition names can really release some of the value. And as I said, some of those are the major energy companies in the world. So we own some of those exposures, it's one of the reasons why we didn't just go ex-energy. So yes, we think they'll probably be challenged today because of that potential style bias within that, but that's not how we're building these portfolios and we have other means within the portfolio to offset that and to benefit from some of these opportunities that are coming up.

Stephanie Hukins: Great. So I might just look to wrap it up, but I want to ask each of my panellists just to take a minute or so to say what's the one key message you'd like to leave with the audience today? And Will, I'm going to go to you first.

William Wu: I would say that looking at what offshore markets are doing and the focus on natural capital or biodiversity and not just climate change, we think that's going to have a significant influence on all market participants here domestically. And ultimately that is an acknowledgement of the science. The science tells us that natural capital, which includes climate change, matters. It's going to be absolutely vital in combating climate change. As I've touched upon, it touches every impact, it touches every sector, half of the world's GDP comes from natural capital. So certainly, we think when you're only looking at climate change as a risk, you're ignoring the majority of the E in the ESG. So we certainly think that investors should look at natural capital, not just climate change.

Stephanie Hukins: Simon, I'm going to come back to the key message, but we do have one more question. So we might as well see if we can address it. It's about the war in Europe, how do you see market near future development in light of ongoing war in Europe and what is your prediction where it will go and what probability for markets to rebound if war still persists?

Simon Doyle: Well, yes, in a way, I mean, I think, firstly, I think - I don't think the war in Europe is the key story. The key story is the increased - significant increase in inflation, and I guess, the rebalancing of interest rates. And that's, I think, ultimately what's driving re-pricing. I think the war in Europe is exacerbating the uncertainty and it's certainly exacerbating headline inflation through the impact on energy prices. So I think if we were to see an abatement of that risk in Europe, I think that would be a short-term positive for market. You'd certainly see a relief rally occurring. I think if it were to escalate, then I think that would probably move markets the other way just given the potential for that to broaden out.

It's really hard to work out which way it will go. And I think that's why we’re staying on the defensive side. At the moment, we think markets aren't sufficiently cheap, they haven't sufficiently discounted the really sort of or even our baseline scenario of recession hasn't really been discounted. So I think it's prudent to stay cautious for the time being because it is quite hard to know which way Putin in particular will go there.

Stephanie Hukins: And while I've got you talking, would you leave your key message?

Simon Doyle: I think, I mean, in a way that's probably it, but I think we are in the midst of a structural repricing. This is not just a small burst of inflation that'll be over and we'll be back to happy days of the sort of post-GFC, low interest rates, lots of liquidity, this is more significant than that. I think ultimately it's a good thing. A world of free liquidity and mispriced risk isn't good for anyone in the long run. So, knowing that interest rates can come up - go up and down, knowing that companies need to compete for capital rather than actually just have it handed to them, I think that's a good thing. And so I do think the investment environment, despite the uncertainty, is actually moving into a much healthier environment that will support active management, good research, and the sensible allocation of risk.

Stephanie Hukins: It definitely feels like things are transitioning, not just sustainability. Angus, one key message for our audience today?

Angus Sippe: I think what you're seeing from all environmental studies is we're sort of on a collision course, but they're also quite clear that if we make changes today, we can invert that. And hopefully, what's clear today is despite the challenges approaching it from the investment side and having a robust core that also achieves sustainability is available and is out there today. And we're measuring ourselves against the full index. So we're not abiding by what that sort of style factor would be within ESG, so that's the key message for us. And as we move through this journey, we'll be incorporating other elements of this as the markets catches up to this end of sustainability.

Stephanie Hukins: Excellent. Thank you, Will, Angus, and Simon, for your time today. If any of our guests today or have got any further questions or would like to talk to any of this panel further on anything we haven't or have touched on today, please do reach out to your Schroders representative. If you'd like to find more information on the Sustainable Growth Fund, we suggest you head to the Responsible Returns website run by Responsible Investment Association of Australasia, who have a formal certification accreditation program on all sustainable funds in the market, not just ours but others as well. Thanks for your time today, we really appreciate it if you could answer the survey that we're sending out shortly with the key points as well as the slides on today's webinar. Have a great day.


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