Schroders                            CAP0058

Additional written evidence submitted by Schroders

Dear Ms Lucas and Mr Dunne,

Schroders evidence to inquiry on Natural Capital

I would like to thank you for the opportunity to provide evidence to your inquiry on the role of Natural Capital in the Green Economy. At your request, following our correspondence1 last year on our holdings of Drax Group PLC, I am pleased to enclose further detail on our recent engagements with this company on deforestation.

At the time of writing, Schroders holds almost 8% of the company’s shares across several funds and mandates. We have engaged with the management team and Board of Drax 12 times in the last year. This has included an on-site visit to their power station as well as multiple engagement calls and meetings with the management team where we have focused on sustainable sourcing of timber, we have also consulted third party stakeholders to inform our perspective on the material risks and opportunities for the business.

In addition to our engagement with Drax, we have established a wider programme of engagement with investee companies on deforestation risk, further details of which can be found in our recent report ‘Managing deforestation risk within our investment portfolios, a year in review2’.

As Drax recently appointed a new Chair and new Chief Sustainability Officer, a key focus of these engagements has been to impress upon the new management team the seriousness with which we take deforestation and climate risk, and our concerns with allegations of degradation of old growth forests used to source timber for their operations. We have asked the team to:

• develop and communicate a robust process for verifying deforestation and conversion free timber sourcing, which includes precise traceability,
• to develop meaningful KPIs for management on the progress of environmental indicators following the set-up of an environmental dashboard, and

• to demonstrate early alignment of reporting with the Taskforce for Nature Related Financial Disclosures (TNFD), to which Drax has committed to become an early adopter.

These are consistent with the asks of companies we have set out in our Group Biodiversity and Nature position statement3, albeit our engagement with Drax has been particularly extensive.

We are looking forward to continuing this dialogue with Drax’s leadership team as they set cement their priorities and will continue to look for improvements in the companies’ approach to managing deforestation risk. We will continue to monitor the company’s progress in tackling this critical question, and the investment rationale for our ownership in Drax in the context of our belief that deforestation risks are material investment risks, and our best efforts to eliminate commodity driven deforestation from portfolios we manage by 2025.

Please do not hesitate to contact me if you would like to discuss our approach to managing biodiversity and deforestation risk within our investment portfolios further.

Yours Sincerely,

Andy Howard

Global Head of Sustainable Investment