Schroders                            DEF0054

Written evidence submitted by Schroders

 

 

Dear Mr Dunne and Ms Lucas,

Sustainable Timber and Deforestation

I would like to thank you for the opportunity to provide evidence to your inquiry on Sustainable Timber and Deforestation.

In response to your query with regards to our holdings of Drax, I have enclosed further detail on our engagement history with Drax in the context of our wider Active Ownership Strategy.

We believe that action on nature and biodiversity goes to the heart of our fiduciary duty to our clients. We recognise that deforestation, conversion and associated human rights abuses pose potentially significant risks to the value of the investments we manage on behalf of our clients, as companies face increased threat of value chain disruption, physical risks and regulatory and consumer scrutiny.

As responsible investors and guardians of our clients’ assets, we seek to actively influence behaviour, so that the companies in which we invest are managed in a sustainable way. We have set out further details in our group nature and biodiversity position statement1 on how we plan to use our influence to limit the pace of biodiversity loss with urgency this decade. We have also set out further details of our plans to eliminate exposure to commodity-driven deforestation in the companies held in the investment portfolios we manage by 2025, as codified in the Financial Sector Commitment on Eliminating Commodity-Driven Deforestation.

We consider active ownership to be the influence we can apply to management teams, and we aim to drive change that we believe should better protect and enhance the value of our clients’ investments by encouraging sustainable business practices.


 

1 Group Nature and Biodiversity Position Statement: https://mybrand.schroders.com/m/4d6b8da1cd44ccc9/original/Group-Nature-and-Biodiversity- Position-Statement.pdf?_ga=2.223386459.1557770721.1667811527-1415394353.1631526756


 

 

 

 

Effective engagement requires continuous monitoring and ongoing dialogue. Where we have engaged repeatedly and seen no meaningful progress, we will escalate our concerns. Decisions on whether and how to escalate are based on the materiality of each issue, its urgency, the extent of our concern and whether the company has demonstrated progress through previous engagements. We consider divestment to be the final stage in this escalation, where continued and sustained engagement has not delivered the change anticipated.

 

Individual fund managers’ decisions to reduce their exposure to any particular security will be driven by their view of the level of risk and sustainable returns, including based on ESG factors, according to the particular investment objective of the fund or mandate they are working towards on behalf of their clients.

Drax is a case in point. As you will be aware at the time of writing, Schroders holds 6.8% of the company across several funds and mandates, with a market value of

£173mn. We have a long engagement history with the management team of Drax over the last two decades.

 

Drax is the largest renewable energy generator in the UK with ambitions to become Carbon negative by 2030. It has been transitioning its business model over the last decade from coal-fired energy production towards biomass power generation and pellet production. We believe that investors can play an important role in supporting the net zero transition by providing companies with the support and capital that they need to reorient their business model towards more sustainable practices.

 

Timber is positioned to play an important role in the transition towards a net zero carbon economy, by supporting greener building practices, materials production and energy as well as carbon sequestration. We consider biomass producers to play an important role in supporting energy security for the UK as it transitions towards net zero carbon emissions. Drax’s Bioenergy with Carbon Capture and Storage (BECCS) technology positions them to lead the way in this respect, having piloted the technology since 2019 and with a project that could become the world’s first commercial carbon negative power station by 2027.

 

Wood pellets for Drax’s biomass production are sourced from a number of locations around the world, and we have spent significant time scrutinising the sourcing practices of Drax including conducting on-site visits; engaging with them on their audit processes and satisfying ourselves that they are complying with regulation in the UK and Europe (which includes extensive requirements in order to be eligible for subsidy) and other high regulated markets, to ensure they are sustainable and deforestation free.

 

By its nature, Timber is a key deforestation risk commodity, and we know that there are several challenges for companies in the timber supply chain in ensuring that their sourcing and production practices do not inadvertently result in land conversion, sustained forest degradation or illegal deforestation of protected areas. Companies in the timber supply chain need to ensure heightened due diligence, full supply chain traceability and strict audit and assurance processes to manage this risk. Through our engagement with the management team of Drax and after reviewing specific site production and sourcing data on each of their wood pellet


 

 

 

facilities, we have used our influence as shareholders to ask them to strengthen this practice in recent years.

 

We have also taken steps to communicate our concerns to the board and management team regarding the recent BBC Panorama program focus on Drax’s sourcing practices in British Columbia. While we are reassured that the Government’s own investigation “did not find that the allegations that “Panorama” made are fundamentally sustained2”, we have called for a firmer commitment from the firm not to seek any more Category Two licenses3 and a target to transfer or dispose of the existing two licenses within the next 12 months. We also requested a commitment from Drax to publish harvest site avoidable waste metrics.

 

We continue to engage with Drax on issues related to deforestation and Biodiversity considering the central nature of this critically important topic to their business model. We will continue to monitor the investment rationale for ownership in Drax in line with our commitment to eliminate commodity driven deforestation by 2025.

 

 

Yours sincerely,

 

Andy Howard,

Global Head of Sustainable Investment

 

 

March 2023

 

 

 

 

 

 

 

 

 

 


 

2 https://hansard.parliament.uk/Commons/2022-12-06/debates/F64F3AE8-E706-434D-B4CF- B11D18CF0BC6/SustainableEnergyGenerationBurningTrees#contribution-8F0BB6FF-1AE5-460A-9EE9- 89A9DDDC4E2C

3 Drax has since confirmed directly with us it has no plans to acquire further licenses