Our approach to engaging with sovereigns on sustainability issues
Engaging with sovereigns is part of our role as stewards of our clients’ assets. We explore the benefits of engagement, its scope, and the mechanisms we use.
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The social and environmental backdrop facing countries and their governments is changing rapidly. As pressures like climate change and social unrest intensify, how governments choose to manage sustainability risks and opportunities through their policy agendas and spending has a material impact on our role as investors and our ability to deliver long-term returns on behalf of our clients. We are long-term investors in government issued securities, state owned enterprises, and companies and assets whose profits and performance are significantly influenced by the policy environment they operate within. Given the scale and diversity of our investments, the returns we can generate for our clients are impacted by market wide and systemic risks such as climate change.
As stewards of our clients’ assets, we have a responsibility to actively engage legislators, regulators, trade associations, consumer organisations, and civil society on important issues that impact our clients’ long-term investment returns. This includes a responsibility to engage with governments on their approach to managing sustainability risks and opportunities and their approach to addressing market wide and systemic risks.
This position statement sets out in more detail the benefits of sovereign engagement, the scope of this engagement activity, our governance, and the mechanisms for engagement we use.
We focus here on our role engaging with governments on sustainability issues from an investment perspective. It is important to note there are a wide range of policy issues affecting our clients. Engagement with policymakers on sustainability issues may take place through our public policy team, our Active Ownership team, or through investment teams. We feel strongly that it is important to view policy advocacy in the round. Our engagement with policymakers is underpinned by the following principles:
- Our public policy engagement is underpinned by ethical behaviour, integrity and transparency. In this context, we comply with legal and regulatory obligations. We are registered under the EU Transparency Register and adhere to the EU Transparency Register’s Code of Conduct. While engagement includes regulators, our public policy exchanges are kept separate from day-to-day supervisory contacts.
- We do not make political contributions, nor do we employ the services of serving politicians for lobbying purposes. We do not fund All-Party Groups(APGs)in the UK or similar elsewhere (including the European Parliament). Any political activity by employees must be kept separate from duties as an employee. We make use of public affairs agencies, but they do not make representations on our behalf.
- Click here for more information: Engaging with policymakers | Schroders global
The benefits of sovereign engagement
Effective engagement with sovereign issuers and policymakers can:
- Deliver insights to investors about how countries are managing sustainability and market wide risks and opportunities. This in turn can support better investment decisions.
- Provide feedback to sovereign issuers and policymakers about:
- how we consider sustainability factors in our investments and
- the demand from of our clients for sustainability linked securities
This can help sovereigns to proactively manage sustainability risks and opportunities including systemic and market wide risks, through their policy agendas and spending.
How we engage
Scope of engagement
Below we set out an overview of the kinds of engagement activity we may undertake with sovereign issuers and policymakers. These can be linked to our role as investors either directly in sovereign linked securities, or indirectly as investors in assets whose prospects are informed by the policy and spending environment they operate in.
Governments must balance the needs of many different stakeholders and ultimately are accountable to their citizens. Where we hold investments in sovereign securities, the rights and responsibilities that we have are fundamentally different to those that we have as an investor in companies, where we have voting rights. Our approach to engagement will therefore differ from our approach to engagement on listed markets as we set out below.
It is important to acknowledge that governments are vested with the authority to make decisions on behalf of society. Our role is not to challenge or supersede these democratic processes, but rather to facilitate a clearer understanding of how governments intend to allocate capital and to provide support in the development and implementation of effective policies. Through this approach, we aim to contribute constructively to policy discussions, ensuring our expertise informs, rather than overrides, the decision-making processes entrusted to elected representatives.
Governance of our approach to sovereign engagement
Our main mechanism for governance of sovereign and policymaker engagement on sustainability matters within Schroders is the sovereign sustainability forum. This provides group wide oversight of our sovereign credit sustainability work programme. The forum is chaired by the global head of sustainable investment and has representatives from the investment desks that invest in sovereign securities across the firm.
The central Public Policy team and the Sustainable Investment team collaborate through different channels to address policy topics and contribute to Schroders' policy engagement with governments. Where possible, both teams aim to align key messaging and identify areas where policy engagement and stewardship outcomes are mutually supportive.
How do we analyse sovereigns?
Schroders uses SustainEx™1 to estimate the net social and environmental “cost” or “benefit” of an investment portfolio having regard to certain sustainability measures in comparison to a product’s benchmark (where relevant). It does this using third party data as well as Schroders own estimates and assumptions and the outcome may differ from other sustainability tools and measures.
Sovereign SustainEx™ is a tool which measures the global costs and benefits arising from specific activities, and how countries contribute positively or negatively to these. Our country-focused SustainEx framework examines around 30 measures of social and environmental impacts attributable to sovereigns, leveraging the insights of over 750 academic and industry studies to quantify the global costs and benefits we have identified. We apply the resulting analysis to over 150 governments.
How do we engage?
Where appropriate, we may seek to participate in constructive dialogue with appropriate government stakeholders, using our sustainability and investment expertise to offer insights into how their policy agenda and spending may impact us as investor. The balance of engagement objectives for sovereigns will be “insights driven”, i.e. focussed on fact finding, as opposed to “outcomes driven” where a particular change is sought. Outcomes driven engagements, where we believe it is appropriate to seek more transparency or seek change in government policy and spending, will be driven by the need to manage investment risk and opportunity on behalf of our clients.
There are various reactive and proactive opportunities for engaging with sovereign issuers and policymakers, including:
Reactive opportunities for engagement:
- As part of a bond issuance roadshow – with the issuing bank or debt management office (DMO). We have leveraged the increased interest in green bonds to facilitate engagement with a wide range of government stakeholders, including with environment departments.
- Market engagement meetings organised by the DMO and Treasury department. We are increasingly seeing countries initiate outreach to investors to gather views about their ESG reporting and financing plans.
- In response to a government consultation, e.g. on sectoral reform.
Proactive opportunities for engagement:
- We proactively seek to meet with policymakers, where we identify material risks and opportunities. For example, on investment research trips, fund managers may meet with a wide range of government stakeholders to enhance their understanding of the risks and opportunities in the country.
- Through collaborative engagement initiatives with other investors, where our engagement objectives are aligned. This can be in the form of signing advocacy letters and participating in direct collaborative engagement meetings.
- Participation in international policy fora such as the UN Conference on Biological Diversity (UNCBD) or UN Convention on Climate Change (UNCCC).
We seek to engage on material issues that impact investment risk and opportunity on behalf of our clients. Our approach is outlined on page 11 in our Engagement Blueprint.
Important considerations for sovereign engagement activities are as follows:
- Materiality: We seek to focus our engagement on what we consider to be the most material sustainability threats and opportunities for countries. These are areas which could have a significant impact, both negative and positive, on sovereign credit quality, or the long-term value of the companies and assets whose capital allocation decisions are significantly impacted by the relevant policy environment.
- Regional context: For sovereign engagement we consider the differing context for emerging and developed market economies in defined peer groups. We also consider established international norms and conventions (such as the UN Sustainable Development Goals, the Paris Agreement, or the Global Biodiversity Framework). This enables us to use an independent standard for assessing a country’s progress relative to targets or goals they have established, with reference to its peer group. There are various frameworks for state governance. Our role is not to opine on these models but to consider the impact of a wide range of social, environmental and governance indicators on the long-term value of the assets we manage on behalf of our clients.
- Opportunity for engagement: Some countries have better established processes for engaging with capital markets on sustainability matters. We will consider what proactive and reactive engagement opportunities are available around the political and bond issuance cycle. There may be less opportunity for engagement with policymakers during an election campaign or because of significant geopolitical events. Some states, owing to their governance structures, are less likely to engage with institutional investors.
1 For more information on Sovereign SustainEx™, see here.
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