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Schroder Global Climate Change

A thematic equity strategy

Climate change investment themes

2 | Schroder Global Climate Change Investment Themes

Long-term policy goals to cut greenhouse gas emissions require nothing short of an industrial revolution to engineer a low-carbon economy capable of sustainable growth. We believe transitioning to a low carbon world will have far-reaching consequences for a broad range of industries and companies, and require investments across multiple sectors, not just renewable energy. In this document, we outline the broad climate change themes that characterize our investible universe.

Climate change investment themes

ThemeSub-theme examples

Investment opportunities

Energy Effi ciency

Industrial effi ciency Built environment Light-weighting Electricity grids Information and communication

Automation Insulation and Lighting Carbon fi ber/specialist coatings Online retail Sharing economy

Sustainable Transport

Energy effi ciency in transport Mass transport systems Alternative transport modes

Tires, turbochargers, transmissions

Railroad and infrastructure Hybrid and electric vehicles Batteries, fuel cells

Environment Resources

Agricultural productivity Biofuel Food retail Carbon removal/storage Water

Agricultural equipment Ethanol Food retailers Forestry Water supply/infrastructure

Clean Energy

Wind Solar Hydro Nuclear Renewable power

Wind turbines Solar supply chain Electricity generation Nuclear power Renewable energy providers

Low Carbon

Gas value chain Gas transmission and distribution

Schroder Global Climate Change Investment Themes | 3

A signifi cant shift in investment is required within the energy sector to limit global warming to 2oC. The International Panel on Climate Change (IPCC) estimates that over $600 billion will be invested globally in energy effi ciency solutions between 2010 and 2029. In contrast, reductions of over $300 billion per annum are estimated for fossil fuel power plants and extraction (see Figure 1). In addition to reducing carbon emissions, these energy effi ciency investments also offer rapid payback for companies able to make them, even more so than renewable sourcing. As the chairman of Google, Eric Schmidt, wrote in his blog: “the cheapest energy is the energy you don’t use in the fi rst place”.

Figure 1: Changes in annual investment fl ows 2010-2029 (Billion USD2010/yr)

Opportunities to improve energy effi ciency can be identifi ed in a wide range of sectors and processes, including:

Industrial companiesIndustrial companies are often highly energy intensive, with equipment and processes requiring vast amounts of heat and power. There is signifi cant scope for energy reduction through technological improvements, sensors, automation, precision operating, electrifi cation of heating and processes, reduction in wasted energy and more effective pumps and air compressors.

Building sectorThe commercial and residential buildings sector accounts for approximately 30-40% of global energy emissions and between 60 and 70% of electricity consumption and indirect emissions. Energy effi ciency requirements for buildings are a key feature of all G8 countries’ energy effi ciency policies. This is particularly true in the EU where minimum energy performance standards in new buildings are mandatory. Policies targeting retrofi t of existing housing stock are also emerging. As a result, we expect to see an increase in the scope and stringency of minimum energy performance standards, the introduction of energy-smart buildings and the technology and equipment to support them. House-builders are increasingly seeking to create low or zero emission products, driving penetration of components such as insulation, LED lighting, heat pumps, integrated solar heating and generation.

Energy effi ciency

Source: IPCC AR5 WG3, 2013: Summary for Policymakers. In: Climate Change 2013: The mitigation of climate change

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OECD Non-OECD WorldMaxMedianMinMean

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Renewables Nuclear Power plants with CCS

Fossil fuel power plants without CSS

Extraction of fossil fuels

Energy Efficiency across sectors

4 | Schroder Global Climate Change Investment Themes

AviationAircraft use large amounts of fossil fuel. As there is no easy substitute to this at present, it is essential to improve effi ciencies. Aviation fuel consumption can be dramatically reduced through decreasing aircraft weight and enhanced engine effi ciency. In the case of the former, this can be achieved through using lightweight materials (e.g. carbon fi ber, titanium and composite plastics) and improving aerodynamics. Engine effi ciency, on the other hand, relies on innovation in technology and fl ight control systems.

LightingLED lighting is far more energy effi cient than traditional incandescent light bulbs and lasts up to 10 times longer than compact fl uorescent light bulbs, leading to tangible fi nancial savings in the long term through lower electricity usage. Rapid technological advancements and improved manufacturing processes have increased the viability of LED usage in multiple sectors, from architecture to automotive, while bringing costs down dramatically such that they are now competitive with older, less effi cient alternatives. Governments around the world have passed measures to phase out incandescent light bulbs, including the EU, Australia, the US, China and Brazil. The widespread adoption of LEDs will signifi cantly reduce electricity demand from lighting, and is reshaping large parts of the lighting fi xture and building design industries.

RetailTraditional brick-and-mortar retailers are highly energy ineffi cient and are associated with a high carbon footprint compared to online retail business models, which have lower inventory requirements, product waste and obsolescence. Online retailers are able to utilize their supply chain and logistics network to better distribute goods while also deploying energy effi cient fl eet delivery vehicles. We expect this advantage over the traditional retail business model to grow stronger as carbon and urban planning policies increasingly support the effi cient distribution of goods.

Greenhouse gas emissions from transport are increasing at a faster rate than any other energy-consuming sector, with road transport the main contributor (see Figure 2).

Figure 2: Transport related greenhouse gas emissions (1970 to 2010)

Sustainable transport

Source: Sims at al (2014, Citigroup)

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1970 1975 1980 1985 1990 1995 2000 2005 2010Domestic Waterborne International and Coastal Shipping Domestic Aviation2International Aviation HFC & Indirect N,O Pipeline etc.Rail Road Indirect Emissions from Electricity Generation

GHG Emissions (GtCO2 eq/yr)

100%

TTotal Direct and Indirect 7.1(Total Direct 7.8)Total Direct and Indirect 4.9

(Total Direct 4.7)

Total Direct and Indirect 2.9(Total Direct 2.8)

1.91%9.26%4.10%6.53%2.16%2.38%1.60%

32.06%

+2.11%

Around the world, governments are aggressively targeting fuel effi ciency standards, as illustrated in Figure 3. This has spurred companies to undertake substantial investment to improve the effi ciency of incumbent technologies, such as lightweight materials or turbo-charging smaller engines. Innovative technologies have resulted in better tires with lower road friction and rolling resistance,

Schroder Global Climate Change Investment Themes | 5

Figure 3: Fuel effi ciency standards are tightening fast

Miles per Gallon Equivalent (CAFÉ/Local Test Cycle)

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China Enacted

U.S. Enacted

U.S. ProposedChina Proposed

E.U. Proposed

E.U. Enacted

Japan Enacted

Source: International Council on Clean Transportation

However, in order to meet challenging emissions reductions targets, our view is that road transportation needs to be completely revolutionized, not merely made more effi cient.

Electric vehicles have emerged as the most promising solution and technological winner. Both governments and the auto industry are betting on a large scale shift from combustion engines to electric drivetrains, and this is leading to rapid growth for companies that can offer the necessary battery and electric power train components. Government funding is helping to drive this shift; for example the US government is allocating funding to advance the development of batteries and other electrochemical storage devices to facilitate electric car penetration.

Environmental resourcesDespite efforts to reduce emissions and transition to a low-carbon economy, some degree of warming is thought inevitable. This warming, along with more extreme weather events, is expected to have an overall negative impact on agricultural yields, pushing up prices globally and driving a need for greater investment in agricultural productivity. Some parts of the world, particularly the sub-tropics, will be more negatively affected than others.

In addition, the quest for renewable fuels is leading to an increasing amount of biomass (e.g. corn, oil seeds, energy crops and forestry products) being used for heating, electricity and fuel rather than food. This is also putting pressure on productive agricultural land and contributing to further upward pressure on prices.

As a result of these impacts, there is greater focus on investment in agriculture. The agriculture value chain, from farm machinery and irrigation systems to crop science and seeds businesses, will all benefi t from increased demand, innovation and pricing power. Furthermore, the penetration of new technology in these areas has a very long way to go outside developed markets.

Another benefi ciary of the infl ationary impact of climate change is food retail. For most food retailers, increases in food prices are simply passed through to consumers, and it is well established that infl ationary pricing is much better for a retailer in any particular category than defl ation, best exemplifi ed by the relentless struggles of consumer electronics retailers worldwide. Infl ationary pricing enables retailers to leverage their fi xed cost base more effectively, resulting in higher margins and ultimately higher prospective earnings growth.

improving vehicle fuel effi ciency, particularly for heavy trucks. Similarly, innovations in transmission mechanisms and components and have improved traditional internal combustion engine vehicles.

6 | Schroder Global Climate Change Investment Themes

Achieving the emissions reduction needed to limit global warming to 2oC requires a signifi cant shift in the energy mix. Renewable energy, such as wind and solar, has a crucial role to play in the transition to a low-carbon economy to mitigate climate change. Over the next fi ve years, renewable energy is expected to represent the largest single source of electricity growth, with costs falling (see Figure 4) and rapid expansion amongst emerging economies and developing countries.

Growth in renewable energy has been strong, with 2014 standing as a record year for both wind and solar installations. The International Energy Agency (IEA) expects renewable energy additions to reach 700 gigawatts (GW) globally by 2020, with wind and solar representing almost half of the total global power capacity increase. This compares to wind installations of only 15GW and solar installations of only 6GW in 2006. By 2020, the IEA estimates the amount of global electricity generation from renewable energy will be greater than the combined electricity demand of China, India and Brazil today.

In particular, we believe that solar technology has gone past a point of no return in terms of the development curve and is now poised for very widespread adoption indeed, with costs having now

Clean energy

Figure 4: Falling costs of solar as technology improves and capacity ramps up

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Installed photovoltaic capacity (cumulated at year-end in GW)(Bar chart, left-hand axis)

PV Module Price Index (2000=100)(Line chart, right-hand axis)

United States Japan Germany

Source: Enerdata, from SolarWirtschaft, IEAPV, EPIA, Observer, SEIA. Capacity is shown as a bar chart, and corresponds to the left-hand axis. Prices are shown as a line chart, and corresponds to the right-hand axis.

Meanwhile, rising demand in combination with supply constraints means that water is becoming increasingly scarce on a global basis. A lack of water availability has severe economic implications, and businesses will need to demonstrate that they have assessed the long-term sustainability of their business models through water risk assessments of their supply chains, their business process (and location) and future consumer demands. Firms will also need to develop water management programs to counteract the risks posed by water scarcity.

The situation offers opportunities to businesses developing new sources of water (e.g. desalination and recycling), those improving the supply of freshwater reserves through infrastructure upgrades, those improving the effi ciency of water use, those producing more water effi cient consumer products and those are who focused on reducing water pollution.

Finally, forestry has enormous potential to reduce emissions and mitigate the impacts of climate change. It is a renewable energy resource that is uniquely able to capture and store carbon, and can be used as a low-carbon building product and a cleaner alternative to burning fossil fuels. As these properties are increasingly recognized and valued by policymakers, we expect forestry asset prices to be well supported.

Schroder Global Climate Change Investment Themes | 7

fallen so rapidly as to make this form of generation highly competitive. Further innovations in residential and utility scale battery storage technology are highly likely to provide further support to this market.

Low carbonWithin this theme, the strategy is able to invest in companies involved with the transmission and distribution of gas.

We exclude companies that report signifi cant ownership of fossil fuel reserves (e.g. oil, coal, gas, tar-sands, shale-gas) from our investable universe. While natural gas is the preferred complement to renewable energy by policymakers and is considered the cleanest burning, and therefore lowest emitting, fossil fuel, we exclude natural gas extraction and production companies due to two main reasons. Firstly, over the next 10 years, emissions reduction targets will become more diffi cult to achieve, and gas-based emissions are likely to come under greater scrutiny, taxation and regulation than they have in the past. Secondly, with the improvement in reliability and fall in costs of battery storage, this alternative technology is becoming a more viable long-term option for the back-up of renewable energy production on the electricity grid, threatening the traditional role of “peaker” natural gas power plants.

OtherNot every technology or trend affected by climate change falls neatly into the above themes, though they represent approximately 85% of the investable companies in our universe. New climate-related insurance products, the simple effi ciency of many ‘sharing economy’ business models, and treatments for certain climate-related diseases such as malaria and asthma are examples of additional industries and structural trends that we invest in. Our approach is to assess climate-related trends with a truly open mind, and to identify companies in any part of the economy where climate change is having a signifi cant positive affect on the business outlook.

Important information: The views and opinions contained herein are those of the Global Climate Change team, and may not necessarily represent views of Schroders. These views are subject to change over time. This newsletter is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any fi nancial instrument mentioned in this commentary. The material is not intended to provide, and should not be relied on for accounting, legal or tax advice, or investment recommendations. Information herein has been obtained from sources we believe to be reliable but Schroder Investment Management North America Inc. (SIMNA Inc.) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document when taking individual investment and / or strategic decisions. The information and opinions contained in this document have been obtained from sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties. The opinions stated in this document include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee that any forecasts or opinions will be realized. Past performance is no guarantee of future results. All investments involve risk, including the risk of loss of principal. SIMNA Inc. is an investment advisor registered with the U.S. SEC. It provides asset management products and services to clients in the U.S. and Canada including Schroder Capital Funds (Delaware), Schroder Series Trust and Schroder Global Series Trust, investment companies registered with the SEC (the “Schroder Funds”.) Shares of the Schroder Funds are distributed by Schroder Fund Advisors LLC, a member of the FINRA. SIMNA Inc. and Schroder Fund Advisors LLC. are indirect, wholly-owned subsidiaries of Schroders plc, a UK public company with shares listed on the London Stock Exchange. Schroder Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc and is a SEC registered investment adviser and registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec, and Saskatchewan providing asset management products and services to clients in Canada. This document does not purport to provide investment advice and the information contained in this newsletter is for informational purposes and not to engage in a trading activities. It does not purport to describe the business or affairs of any issuer and is not being provided for delivery to or review by any prospective purchaser so as to assist the prospective purchaser to make an investment decision in respect of securities being sold in a distribution. Further information about Schroders can be found at www.schroders.com/us. Further information on FINRA can be found at www.fi nra.org. Further information on SIPC can be found at www.sipc.org. Schroder Fund Advisors LLC, Member FINRA, SIPC. 875 Third Avenue, New York, NY 10022-6225.

BRO-GCCTHEMES

S C H R O D E R G L O B A L C L I M A T E C H A N G E

Investment philosophyTackling climate change will have a powerful impact on the global economy. Long-term policy goals to cut greenhouse gas emissions require nothing less than an industrial revolution to engineer a low-carbon economy. Adapting to some climate change that is already inevitable and mitigating further climate change through the transition to a low-carbon economy will, therefore, affect all industries over time. What is distinctive about our philosophy is our appreciation that the effects of climate change will be far-reaching and affect a great many more companies than those purely involved in renewable energy, energy effi ciency and environmental resources. As such, we believe that a dynamic and evolving universe across all sectors is the best way to capture the investment opportunity.

The Schroders Global Climate Change Team has undertaken a fundamental analysis of every major sector of the economy in constructing our investment universe to determine those companies whose long-term business outlook, we believe, will be impacted by efforts to mitigate or adapt to climate change. Our comprehensive investment universe comprises over 700 stocks across developed and developing markets from which to select our best ideas. This broad investment universe enables us to always focus on great investment ideas, not just the stocks or themes currently in favor. Only the highest conviction stock ideas make it into the portfolio, and we are not afraid to exclude whole sectors if they become overvalued.

While the path to a low-carbon economy is predictable, we do not believe it is well understood, or discounted, by the equity market. As a result, the fast-changing growth and relative valuation opportunity that climate change presents to investors represents a signifi cant opportunity for alpha generation. We believe that companies that recognize the threats and embrace the challenges early, or that form part of the solution to the problems linked to climate change, will ultimately outperform the broader global equities market.