Maria Teresa Zappia, head of sustainability and impact at Schroders Capital, and deputy CEO of Blue Orchard, shares her priorities for the year ahead.
Where have you reached on your portfolio decarbonisation/climate journey? What is next on the to-do list?
In 2022 Schroders was one of the first financial institutions to have our science-based targets formally validated by SBTi. As a group, we have a mid-term goal to align our operations and portfolios to 2.2C by 2030 and a long-term goal to align to 1.5C by 2040. Our 2022 climate report updates on our progress against our transition plan, including our portfolio temperature score and the encouraging outcomes of our largest-ever company engagement programme.
In private assets, it has been quite a journey. Schroders Capital was officially launched in June 2021, we hired our Climate specialist in 2022, and we now also have two climate specialists in our real estate practice. Because of the lack of established methodologies, we remain humble, but we are proud of what has already been achieved.
Climate is now integrated across our investment and reporting processes and our teams have developed a carbon measurement framework that covers all asset classes – real estate, private equity in emerging and developed markets, infrastructure and private debt and credit alternatives in emerging and developed markets, including for example, collateralised loan obligations (CLOs). Active ownership, and how we engage with our stakeholders on climate, has been another key focus. We have been advising internal and external stakeholders on climate measurements in private assets and we worked a lot with our colleagues on the listed side to be able to address clients’ questions across public and private assets, despite the respective specificities. Finally, we have further developed our fossil fuels approach to address the higher risk of stranded assets we see in our markets, and we have strengthened our approach with further exclusions and higher expectations vis-à-vis the assets that are critical to enable a just transition and need to transition to lower carbon and material footprints.
Next on our to-do are the intensification of our decarbonisation efforts. We will continue to develop our climate offerings to meet our clients’ fast evolving and ever more complex needs and continue to channel capital towards effective climate transition and solutions strategies. Here, innovation goes well beyond portfolio building and structuring; this is about getting this in-depth understanding of our clients’ challenges, evolving and sharing our methodologies with them, and producing innovative investment solutions (eg hydrogen) that effectively help them meet their own commitments.
One of our objectives is also to be able to report on our progress against Schroders’ net-zero commitments across private asset classes. Whilst some asset classes are more advanced, such as real estate, the goal is to develop decarbonisation plans across our portfolio.
ESG data: Do you think the industry has now reached a good place in terms of data frameworks?
ESG data is improving, but it is still far from perfect in private assets. Our platform sits across four pillars and eight different investment divisions, and we still see huge discrepancies.
Carbon data is clearly improving, and we are actively engaging with the likes of PCAF, TCFD, SBTi or the Investment association to make sure that emerging standards accurately reflect the specificities of private assets; we have notably seen great progress in carbon measurements in emerging markets with BlueOrchard. In private equity we mostly invest through GPs, and ESG data is still a challenge but our commitment to supporting our GPs in their sustainability journey is increasingly perceived as critical value add by our partner and portfolio companies. We are an active member of the ESG Data Convergence Initiative to make sure that the industry as a whole works towards enhanced meaningful disclosures.
Our private debt and credit alternatives businesses are also focused on disclosures. One example of our approach in private debt is the ILS ESG Transparency Initiative which our ILS team co-founded with the objective to improve transparency in ILS transactions; we are proud to say that it now includes ILS managers from Switzerland, France and the UK, representing about 30 percent of the total ILS market.
ESG data: Are you now finding ESG data (both your own and industry benchmark data) to be genuinely decision-useful for investment decisions? (can you be specific?)
Data is improving. Carbon methodologies have become a must and we start to see meaningful data sets. Outside of carbon, we find that there is still a lack of reliable external data providers to provide decision-useful data and benchmarks. At this stage, we still mostly rely on our extensive due diligence processes rather than on external data providers for our investment and engagement decisions. In this respect, CSRD (and ISSB) will be a game changer at least in Europe, and we actively engage with our portfolio companies to help them prepare for it. Delivering meaningful reporting to our clients, especially for multi-private assets and semi-liquid solutions, will remain a key focus area in 2024.
What is the next step in your ESG journey for human rights and supply chain risk?
From an investment standpoint, we will continue to invest into our frameworks and tools. In 2023, Schroders introduced a global norms framework for identifying companies which have breached the OECD Guidelines for Multinational Enterprises, the UN Guiding Principles on Business and Human Rights or the principles and rights set out in the eight fundamental conventions identified in the Declaration of the International Labour Organisation on Fundamental Principles and Rights at Work and the International Bill of Human Rights. The objective is to enhance the robustness and transparency around which companies we decide to exclude from investments and on which basis. 2024 will see the rollout of this framework into private assets. From a corporate standpoint, in 2024, we plan to further refine our supplier risk assessment process, enhance our due diligence processes for higher risk suppliers and continue to develop specific training for teams, for example, our Procurement teams. We also look to continue building modern slavery awareness through mandatory training for our people.
What is the next step in your ESG journey when it comes to nature?
In Schroders Capital we now manage a number of climate portfolios with an allocation to nature-based solutions. We believe indeed that reaching global net zero requires a holistic investment approach and Natural capital and biodiversity are therefore fully integrated into our approach. In BlueOrchard first fund of fund strategy for instance, we invest in aquaculture, marine resources, biodiversity. With multi-private asset climate solutions, we have a mandate to invest in sustainable forestry. As the investment universe continues to expand, we will continue to enhance our natural capital ESG and impact assessment frameworks and scorecards, supported by our sustainable research team and lessons learned from our investment teams.
What is the first item on your DEI to-do list in 2024?
The first item is certainly embracing an inclusive culture that celebrates diversity of thought and enables us to achieve our purpose of providing excellent investment performance to clients through active management. Schroders is taking a data-led approach to diversity and inclusion, and we strive to be transparent about our progress and aspirations as we believe this is key to driving inclusion and diversity. We will continue to prioritise enriching our understanding and impact through data, both quantitative and qualitative, to identify where positive impact has been made and where there is more to do. As part of our 2030 aspirations, we want people to feel they belong at Schroders, and we measure this through our employee engagement scores; we want to lead by example and hold ourselves accountable to change through voluntary disclosures, and therefore we voluntarily published our UK ethnicity pay gap this year, having achieved 80 percent disclosure; we are convinced that increasing diverse representation brings a wealth of perspectives.