Our ethical and exclusions-focused fund range

Anna Mercer

Hello, I'm Anna Mercer and I'm a Responsible Investment Analyst at Square Mile Research.

We at Square Mile are very excited to be working with Royal London on this project which consists of a series of educational videos designed to help advisers debunk the confusing jargon in this space and accelerate the adoption of a common set of terms.

In this video we focus on the area of ethical exclusions and how Royal London is applying this approach within its investment processes. At Square Mile, we define an ethical exclusion fund as one which seeks to avoid industries or company practices which cause harm to society or the environment.

I'm delighted to be joined by Piers Hillier, Chief Investment Officer at Royal London Asset Management to discuss this view.

Firstly Pier, what ethical exclusions are applied to this fund?

Piers Hillier

At Royal London we exclude what we call controversial weapons, so that is cluster, munitions, biological and chemical weapons across all our funds. Specifically looking at our cash range, we exclude tobacco as part of that range. In our ethical funds, we have traditional exclusions around tobacco, gambling, pornography and then we’ve more recently added in environmental exclusions as part of that range. Our real belief in that dark green space is that we've got the right exclusions, but broadly speaking, we still think that it's important that we engage and look to try and change habits as well.

Anna Mercer

Well, how the exclusions apply it and is this clearly stated?

Piers Hillier

Yes, so within our systems we automatically apply those exclusions, so we code our systems so that we can't buy either sectors or securities that are in those sectors which we've specifically excluded.

Anna Mercer

How and where these exclusions referenced?

Piers Hillier

In our cash funds we've got them explicitly included in our KIDs, our prospectus, and the new data sheets include the exclusions as well. On the ethical side of things, it's in our prospectus and it'll be coming to our data sheets in due course.

Anna Mercer

And how is adherence to these exclusions monitored?

Piers Hillier

So first and foremost, by the fund managers. It's their responsibility in terms of running the funds on a day-to-day basis. However, we have a compliance team that will monitor those to make sure that we haven't breached any of the restrictions that are in place. If we do, then we'll take appropriate measures to address them.

Anna Mercer

How often are the exclusions reviewed?

Piers Hillier

We review the exclusions on a quarterly basis for our cash funds, and then it's an annual process that runs for the ethical funds. In addition to that, we're effectively doing that as part of a daily monitoring program when fund managers are making decisions around investments. So back to that exclusion policy that is systems driven, but we're also alive to the fact that data will be updated periodically. We will look out, for example, when data vendors that support us come out and add a new security to an exclusion list, or they identify an issue that we need to consider as part of our investment process.

Anna Mercer

What is the structure of the review process?

Piers Hillier

The review process is done in conjunction with the fund managers, normally with the head of that investment area. In the case of our cash funds, it'll be the Head of Fixed Income and then they'll also work with our Responsible investment team, who are subject matter experts in this area. They will engage with our external data vendors as well as the owned data we prepare ourselves to identify whether there any issues that we need to consider.

One example that we've had recently where we had some issues with respect to Glaxo Smith Kline, and MSCI identified an issue that came up through our data screening. The Responsible investment team engaged the fund management team to say look, we need to consider this issue in light of this new evidence, and that's how that's the process, live and real for you.

Anna Mercer

Who is responsible for applying the exclusions?

Piers Hillier

So first and foremost, it's the responsibility of the fund manager. They have day-to-day responsibility for running the investments, their proximity to the decision-making process. In addition to that, as I say, we have systems based controls as well as those investment compliance teams and our Responsible investment team that work injunction to support them.

Anna Mercer

Have there been any instances of breaches, and if so, how are these resolved?

Piers Hillier

That example I touched on before with respect to Glaxo Smith Kline, it's not technically a breach because we were invested and then some new data become available to us. However, when that information changes, we should be prepared to change our view, we should be prepared to investigate, and if we feel that that that means a restriction should now apply, or an exclusion should apply, then we will divested that security.

Anna Mercer

Is Royal London Asset Management a signatory to any responsible investment initiatives? If so, which ones?

Piers Hillier

We’re signatories to the UN PRI and have been for a significant period of time. We're also signatories to the UK Stewardship Code and we've issued two UK stewardship reports, the one this year in 2021 has been really beneficial in terms of starting to share our views about stewardship and how we take engagement seriously, and also where we've chosen to exclude if issues arise.

In addition to that, most recently we've joined the Net Zero Asset Management initiative and that's really focused on the climate side of how we move to a net zero carbon effect for society as a whole. In addition to those formal bodies, we engage through industry initiatives as well.

Anna Mercer

Did Royal London Asset Management or any of the funds receive a rating from any of these initiatives? And if so, is this kind of publicly available?

Piers Hillier

Yeah, so we're pleased to say that we are A plus rated by under UN PRI. There's a formal report that from them and that is readily available on the web, and you get access it on our website as well.  

Anna Mercer

Thank you, Piers, and thank you for listening. We hope you found this video informative.