The Sarasin & Partners Climate Active Endowment Fund. A Charity Authorised Investment Fund

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1 The Sarasin & Partners Climate Active Endowment Fund A Charity Authorised Investment Fund

2 Contents Why might Climate Active suit you? 3 The Advisory Panel 4 The Climate Active Investment Philosophy 5 Company engagement in more detail 6 Changing the System to protect our Climate 7 Key Facts 8 Appendix 10 2

3 Why might Climate Active suit you? Climate change poses risks to our way of life. It is also driving Government policy that is set to transform how we produce and consume energy. The Sarasin & Partners Climate Active Endowment Fund is a multi-asset portfolio, designed for trustees who are seeking attractive and sustainable long-term investment returns against a back drop of increasing climate related risks. Governments from around the world set out their determination to limit climate change to well below 2 C in a landmark climate accord drawn up in Paris in December (the Fund) offers a timely multi-asset investment solution for charities that: are concerned by increased climate risk, the actions to counter climate change that government will take and the impact these are likely to have on asset prices want to play a part in driving behavioural change that will result in decarbonisation: investors will be able to join in engagements, adding their voice to the debate The strategy aims to bring about, and benefit from, action by businesses to strengthen their resilience to climate change in line with the Paris Climate Accord. The Fund is actively managed; the first line of defence is Sarasin & Partners thematic approach to equity selection. This reduces the investment universe from over 4,500 companies to between 80 and 100. The Fund automatically divests and never owns any company that derives 5% or more of its annual revenue from either the extraction of thermal coal or oil from tar sands, the most greenhouse gas intensive fossil fuels. Further investment and divestment operates on a case-by-case assessment of the vulnerability of each company to climate change and whether it will be able to develop a climate-aware strategy that will deliver attractive long-term returns for shareholders. In reaching decisions, Sarasin & Partners are guided by: our new Climate Active Advisory Panel the Oxford Martin School Investment and engagement Principles 1 investors in the strategy The Fund embraces an active and focused approach to its engagement with companies and policy-makers on climate-related issues in line with the Paris goals. Our Climate Active process also considers the investor obligations within the Principles on Climate Obligations of Enterprises drawn up by international lawyers and judges to define how companies and investors should uphold the Paris Climate Accord. The portfolio is an evolution of the core Sarasin Endowments Model, which has produced a real return of +4.4% per annum since its launch in December 2005 and an increased income distribution in each and every calendar year. 2 Most world leaders are committed to decarbonising the global economy by the second half of this century but divestment alone will not result in decarbonisation, a healthier planet or a less risky portfolio. Investors in the Sarasin & Partners Climate Active Endowment Fund can play a role in combatting climate change while seeking attractive investment returns and performing their fiduciary duties in a responsible manner. 1. Original principles published in 2015, with revised principles expected in See Appendix for further details. 2. Source: Sarasin & Partners LLP as at Past performance is not a reliable guide to future performance. 3

4 The Advisory Panel In 2017, we created a new Climate Active Advisory Panel to help us consider all matters related to investing against a backdrop of climate change and the need for the world to decarbonise. The panel meets four times a year to discuss exclusions, corporate engagement and activist policies, together with potential policy work in conjunction with governments and like-minded institutions. Résumés of the panel members are shown below: David Pitt-Watson (Chair) David is a leading practitioner in the field of responsible investment. He has broad non-executive experience at KPMG, was the Treasurer of OXFAM and an Executive Fellow at The London Business School. Previously, David was Chair of Hermes Focus Funds. As co-founder, and CEO of the Focus Funds and Equity Ownership Service, he built and led the largest responsible investment group of any institutional fund manager in the world. David has co-chaired the UN Environment Programme s Finance Initiative and was closely involved in the setting up of the UN s Principles for Responsible Investment. Heidi Hellmann Heidi became Head of Group Strategy and Market & Competitor Intelligence at Centrica in Heidi has had over 25 years experience working in the oil and gas and power sectors, having started her career at Exxon in She has an MBA in Finance and Multinational Management from The Wharton School, University of Pennsylvania, having also worked at Royal Dutch Shell, Aramco and BG Group. Sir John Beddington Sir John was elected Fellow of the Royal Society in 2001 and appointed CMG in From 2008 until 2013 he was the Government Chief Scientific Adviser (GCSA) reporting directly to the Prime Minister. As GCSA, he was responsible for increasing the scientific capacity across Whitehall. During his time as GCSA he set up the Scientific Advisory Group in Emergencies (SAGE) that reported to the COBRA committee. He is the Senior Adviser to the Oxford Martin School and Professor of Natural Resource Management at Oxford University. He is a Non-Executive Director of the Met Office (currently Acting Chair), chairs the Cabot Institute External Board at Bristol University, the Global Academies Panel at Edinburgh University and the Systemic Risk Institute at the LSE. Professor Cameron Hepburn Professor Cameron Hepburn is Professor of Environmental Economics at the Smith School and a Fellow at New College, University of Oxford. He is the Director of the Economics of Sustainability Programme at the Institute for New Economic Thinking and Co-Director of the Net Zero Carbon Investment Initiative at the Oxford Martin School. He has degrees in law and engineering, a doctorate in economics, and over 30 peer-reviewed publications in economics, public policy, law, engineering, philosophy, and biology. Cameron has advised governments (e.g. China, India, UK and Australia) and international institutions (e.g. OECD, UN organisations) on energy, resources and environmental policy. He is a member of the Economics Advisory Group (with Lord Stern and Professor Helm) to the UK Secretary of State for Energy & Climate Change. 4

5 The Climate Active Investment Philosophy Governments must create the environment that drives decarbonisation, but it is companies that will be the principal vehicles for achieving this energy transformation. All companies dependent on fossil fuels not just those who extract them - face a daunting challenge in navigating the move to a new energy system. To deliver sustained shareholder value many companies will need to rethink medium and long-term strategies, as well as near-term decisions on capital investment. Against this backdrop, asset owners and managers must be prepared to research and understand how different strategies and scenarios will impact each company s prospects, and hold management to account as and when necessary. Shareholders can play a supportive role as companies rethink their competitive positioning for a zero-net emissions economy. In some cases investors may be best served by companies gradually winding down their operations and returning cash to shareholders to reallocate to alternative ventures. A holistic and fiduciary-oriented approach The Climate Active Endowment Fund offers a comprehensive investment solution for trustees concerned by mounting climate risk. We invest in companies that we expect to deliver enduring shareholder value in a way that is consistent with a 2 C cap in global warming. Where we believe additional value can be added through improved capital stewardship, we devote resources to targeted engagements. The strategy is appropriate for investors with a longer-term horizon that need to meet clear capital and income growth goals, and who feel one or more of the following: accelerating climate change poses a risk to these ambitions climate change will happen more quickly than current consensus opinion governments will drive increasingly intense policy action to combat climate change it would be appropriate for them to help influence government policy they have a role to play in guiding management teams to more sustainable business practices The Fund will therefore utilise both divestment and engagement as tools to protect and enhance capital in line with a heightened emphasis on climate risk, together with representations to government and other regulatory bodies. Climate-aware investing The most carbon-intensive fossil fuels will be automatically excluded from the Climate Active Endowment Fund: fossil fuel extractive companies that generate 5% or more of their revenue from thermal coal or the extraction of oil from tar sands. The Fund will further divest from companies where the climate risks are not being adequately managed, and there is little prospect for a profitable strategy aligned with a 2 C cap on warming. The materiality of climate risks will be determined through sectorspecific climate stress tests that assess the earnings impact from government policies and technological advances consistent with the Paris Climate Accord. As far as possible, the physical impacts from climate change will also be assessed. Where companies are vulnerable to climate risks in line with the Oxford Martin School investment principles the Fund will either divest where there is little prospect for building resilience, or initiate a dialogue with the company to push for a strategy that delivers attractive shareholder returns whilst meeting the world s net-zero emissions target. Active ownership Climate Active is committed to company engagement where we think we can catalyse change to enhance a company s resilience to climate risk and deliver attractive long-term returns for shareholders. We will seek in-depth engagements with between three and five companies each year. Companies we prioritise for active engagement are vulnerable to climate risk; have the potential to remain profitable in a 2 C scenario; but have yet to articulate a compelling strategy. We will divest after or during an engagement if: there is no demonstrable commitment to revising the strategy in line with the Paris Accord s 2 C goal within 3 to 5 years or concerns arise over a company s financial outlook during an engagement process Company engagements are guided by our Advisory Panel. The Panel comprises individuals with deep experience of activist investment, climate change, the Paris Accord and fossil fuel exposed companies. Their involvement helps to ensure that we select our targets wisely and the engagements are effective. 5

6 Company engagement in more detail Where it makes sense to work collaboratively with other long-term investors to increase the pressure and ensure our voice is heard, we will seek to build alliances. All our conversations with companies are based on an assessment of capital deployment and long-term shareholder returns, taking the Paris climate commitments into account. This assessment is holistic, incorporating scientific data on climate change, emerging regulation and technological advances. Our approach to engagement seeks to be supportive of positive action, but challenging of inaction. Where necessary we adopt the more robust tactics employed by relational activist funds that we believe to be effective in delivering change. Key features of our approach include: Prioritisation Engagements are strictly prioritised to ensure we target companies where: 1) there are core strategic issues around fossil fuel operations that impede long-term value creation for shareholders; and 2) where we believe we can effect change. Thorough analysis Unless we can present a well-researched and compelling case for change, we will not gain traction with the broader shareholder base or the targeted Board of Directors, which is essential for success. The focus is on capital allocation and strategy, but we also consider operational matters particularly where they pertain to climate change. Our input aims to point to emerging problems from a long-term shareholder perspective, to ask targeted questions to encourage a response. Clear and achievable targets The course of action identified by the Board should be achievable and include specific targets, e.g. new operational targets to minimise emissions; capex plans that take account of a lower carbon world; dividend policy to return cash to shareholders where suitable investment opportunities do not exist. Escalating pressure on the Board We always seek a constructive dialogue with the Board. Initially we seek private conversations setting out our concerns. Where appropriate, we will reach out to other large and / or concerned shareholders to explore joint action. Where private engagement fails to gain sufficient traction, we may look to increase pressure on the Board. Possible actions include: publicly disclosing our concerns and calling for change; using our vote to apply pressure on directors; reporting breaches of director duties, or rules governing company reporting to shareholders; filing shareholder resolutions; or in extreme cases putting forward director candidates. Winning the argument Acting in conjunction with the unit holders, and the Advisory Panel we may make our case public to help raise awareness of risks to shareholder capital. Additional leverage is gained by building a network of supportive thought leaders in the business and policy worlds. 6

7 Changing the system to protect our climate Climate Active prioritises policy outreach to promote regulatory and market-wide action that supports decarbonisation. This is important because climate change is a systemic challenge, which demands an economy-wide response. Our policy outreach dovetails our company engagements aimed at ensuring alignment with the Paris Climate Accord. Our Fund is positioned to be resilient to and to gain from accelerated action to combat climate change. For many policy initiatives we collaborate with other investment managers, joining broader initiatives like the Aiming-4-A coalition, the International Investor Group on Climate Change (IIGCC), the United Nations Principles for Responsible Investment (UNPRI), and the Portfolio Decarbonisation Coalition (PDC). We also work with other like-mined professional bodies pursuing the same goals, like ClientEarth (a public interest law organisation). One area where we are taking a stronger lead is in promoting more reliable and prudent accounting for climate risk. This is vital to underpin the efficient allocation of capital between and within companies, by ensuring the correct information is sent to market participants. This builds on our established reputation in the UK and internationally for policy work on accounting and audit standards. Apart from the change that can result from policy outreach, engaging in the broader policy debate is a powerful complement to individual company dialogues because it: builds credibility with Boards with whom we speak and helps us form alliances with like-minded investors and supportive thought-leaders, improving chances of success in company engagements 7

8 Key Facts A multi-asset portfolio, designed for charity trustees who are seeking attractive and sustainable long-term investment returns against a backdrop of increasing climate related risks 1. Investment Goals Fund Objectives a) To achieve long-term capital and income growth. This is defined as being a total return target of inflation (CPI) +4.0% per annum over the longer term (7-10 years). b) To produce a consistent stream of income: the Fund can make use of an income reserve account to smooth income payments to unit holders. Income is expected to grow consistently over the longer term, but not necessarily every single year. c) The Fund will seek to outperform a bespoke, index-based benchmark. 2. Illustrative risk and return features Trend Total Return p.a. % Asset Class Neutral Allocation % 1.3 Gilts Corporate Bonds Equities Property Alternative Cash 0.0 Projected Returns Key Risk Metrics Total Fund 100 Income Yield 3.1 Trend Annual Return 5.2 Trend Annual Real Return 3.1 Maximum Annual Draw-down* % Value at Risk (VaR)* Annualised Volatility* 10.4 Please note: there are no guarantees that the projected returns will be achieved Source: Sarasin & Partners LLP. * Data since As at VaR is the statistical measure of minimum anticipated loss over a given period. Our calculations are based on historical observations since 1st January For example a 95% 1 year VaR of means that you could expect to lose at least 12.0% 1 in 20 years (5% of the time). 3. Currency Hedging Strategy The natural position for this fund is to hedge some non-sterling currency exposure back to the benchmark weighting (71.5%) in sterling. However, as an actively managed fund, the Investment Policy Committee and Fund Managers may take a view on expected movements in currency and recommend more or less hedging. Cross currency hedging is permissible. 4. Portfolio Construction Sarasin & Partners will seek to weight positions by conviction, while incorporating sufficient diversification within and across asset classes, regions, themes and opportunity sets to spread risk efficiently. We would expect to own: Up to 100 bond positions. Maximum exposure to noninvestment grade bonds is 20% of the total fixed interest weighting Up to 100 equities, diversified by theme, sector and geography Property and alternative assets will predominantly be owned via specialist 3rd party funds 5. Ethical Restrictions The Fund will operate a negative screening policy as follows: No investment in companies with 5% or more of their turnover involved in the mining of thermal coal or tar sands Following engagement, no investment in companies that needlessly emit significant quantities of carbon into the atmosphere, or which do not take seriously the transition to a low carbon economy Qualitative judgments to be considered on a regular basis by the Climate Active Advisory Panel Zero tolerance on tobacco production and manufacturing of tobacco related products No investment in companies that generate significant turnover from the manfacture of arms, alcohol, gambling and pornography 6. Derivatives The fund uses derivatives for investment purposes and is not limited to their use for Efficient Portfolio Management only. However, the fund does not target market exposure of above 100%. 8

9 7. Costs The investment management fee within the Fund is 0.75% per annum. For investors with over 3m to invest, the following sliding fee scale will apply, with rebates being paid quarterly in arrears: 0.750% on the first 3m 0.625% on the next 2m 0.425% on the next 15m 0.375% on the next 15m 0.300% above 35m The other operational costs of managing the CAIF are expected to amount to 0.07% per annum. In addition, we expect between 7.5% and 17.5% of the Fund to be invested in specialist property and alternative investment funds which will have other costs imbedded within them. 8. Benchmark The benchmark and tactical operating parameters are set out below: Asset Class Current Index Cash - Government Bonds 9.0 ICE BofAML UK Gilts All Stocks Corporate Bonds 8.5 ML Sterling Corporate Bond Total Bonds & Cash 17.5 UK Equities 20.0 FTSE All-Share Index (5% Capped) International Equities ( Hedged) 25.0 MSCI All Countries World ex UK (Local Currency) International Equities 25.0 MSCI All Countries World ex UK Total Equities 70.0 UK Property 4.0 IPD All Balanced Property Fund Index International Property 3.5 S&P Developed Property Total Property 7.5 Total Alternatives Month LIBOR Total Sterling Weighting 71.5 The Fund will also seek to outperform the ARC Steady Growth Charity Index. 9

10 Appendix The Oxford Martin School Investment and Engagement Principles 1. Commitment to net zero emissions by a specific date or at a temperature increase cap (e.g. well below 2C ), including supply chains and products sold (i.e. Scope 3 emissions) 2. A profitable net zero emission business model: to demonstrate viability & credibility of strategy 3. Quantitative mid-term targets: to enable verification of progress towards netzero emissions The Climate Active investment philosophy can also be accessed at Sarasin & Partners via segregated portfolios and can be offered as a multi-asset solution, or as a single asset class portfolio of equities or bonds for charities, pension funds and other investors. 10

11 Important Information The Climate Endowment Fund is designed for registered charities only. This document has been approved by Sarasin & Partners LLP of Juxon House, 100 St Paul s Churchyard, London, EC4M 8BU, a limited liability partnership registered in England & Wales with registered number OC which is authorised and regulated by the Financial Conduct Authority with firm reference number and passported under MiFID to provide investment services in Republic of Ireland. The investments of the fund are subject to normal market fluctuations. The value of the investments of the fund and the income from them can fall as well as rise and investors may not get back the amount originally invested. If investing in foreign currencies, the return in the investor s reference currency may increase or decrease as a result of currency fluctuations. Past performance is not a guide to future returns and may not be repeated. There is no minimum investment period, though we would recommend that you view your investment as a medium to long term one (i.e. 5 to 10 years). Frequent political and social unrest in Emerging Markets, and the high inflation and interest rates this tends to encourage, may lead to sharp swings in foreign currency markets and stock markets. There is also an inherent risk in the smaller size of many Emerging Markets, especially since this means restricted liquidity. Further risks to bear in mind are restrictions on foreigners making currency transactions or investments. For efficient portfolio management the Fund may invest in derivatives. The value of these investments may fluctuate significantly, but the overall intention of the use of derivative techniques is to reduce volatility of returns. The Fund may also invest in derivatives for investment purposes. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect of any such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct. indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI s express written consent. 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Sarasin & Partners LLP and/or any other member of the J. Safra Sarasin Group accepts no liability or responsibility whatsoever for any consequential loss of any kind arising out of the use of this document or any part of its contents. The views expressed in this document are those of Sarasin & Partners LLP and these are subject to change without notice. This document does not explain all the risks involved in investing in the fund and therefore you should ensure that you read the prospectus and the KIID which will contain further information including the applicable risk warnings. The prospectus, the KIID as well as the annual and semi-annual reports are available free of charge from or from Sarasin & Partners LLP, Juxon House, 100 St Paul s Churchyard, London, EC4M 8BU, Telephone +44 (0) , Telefax +44 (0) For your protection, telephone calls may be recorded. 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