Schroder BSC Social Impact | ESG

The Company's sustainability objective forms an integral part of its broader investment objective, which is as follows:  
 
The Company’s investment objective is to deliver measurable positive social impact as well as long term capital growth and income, through investing in a diversified portfolio of private market impact funds ("Impact Funds"), separate accounts managed by third party asset managers ("Managed Accounts"), co-investments alongside such funds or other impact investors (which may include the Portfolio Manager) ("Co-Investments") and direct investments ("Direct Investments"), in each case so as to gain exposure to Social Impact Investments. "Social Impact Investments" are investments intended to have a positive social impact on people predominantly in the UK while providing a financial return to investors, including, but not limited to, High Impact Housing, Debt and Equity for Social Enterprises and Social Outcomes Contracts (as such terms are defined in the investment policy below).  
 
Investments will be selected for their ability to contribute towards the reduction of poverty and inequality as well as addressing other critical social challenges in the UK.  
 
The Company aims to provide a Net Asset Value total return of the United Kingdom's Consumer Price Index ("CPI") plus 2 per cent. per annum (once the portfolio is fully invested and averaged over a rolling three- to five- year period, net of fees) with low correlation to traditional quoted markets, while making a significant contribution to addressing social issues in the UK.  
 
The impact of the Company's investments and how the Portfolio Manager's activities contribute towards achieving a positive social impact will be measured and reported on at least annually.  

The Company's investment policy and strategy sets out how the Company seeks to achieve the sustainability objective, which is as follows:  
 
The Company will invest in a diversified portfolio of Impact Funds, Managed Accounts and Co-Investments, which in turn support charities and social enterprises, with a focus on helping to alleviate some of the UK's most pressing social challenges. The Company may also make Direct Investments.  
 
Impact Themes
 
The Company and its advisers have identified key impact themes that help to determine which investments are selected and the sectors which the Company seeks to have a positive impact on. In summary, these impact themes include but are not limited to:  
 
- Reducing poverty and inequality – Providing essential services to disadvantaged or vulnerable people;  
- Good health and well-being – Providing health and care services and early intervention support to improve health outcomes for underserved and vulnerable people, and reduce the strain on the public health system;  
- Education, training and decent work – Supporting social organisations which empower disadvantaged people to improve educational outcomes and access better training and employment opportunities; and  
- Just transition to net zero – Contributing towards a fair transition to an environmentally sustainable society by creating new opportunities to reduce emissions and social inequality at the same time.  
 
The Company will make Social Impact Investments that seek to deliver a positive social outcome consistent with one or more of these or other impact themes together with a financial return. Such investments may include, but are not limited to, investments in:  
 
- High Impact Housing – Including property funds that either acquire or develop high quality affordable housing, from more specialist housing for vulnerable groups (for example, transition accommodation for people who were formerly homeless or fleeing domestic violence) to housing for low-income renters currently living in poor quality or insecure accommodation.  
- Debt and Equity for Social Enterprises – Including charity bonds, portfolios of secured loans and funds that invest in established social enterprises via mezzanine debt and/or equity.  
- Social Outcomes Contracts – Contracts between a public sector or government body and a delivery organisation whereby an external investor provides upfront capital to the delivery organisation and is repaid by the income stream from the public sector body based upon social outcomes delivered rather than on a fee for service basis.  
 
The market for Social Impact Investments in the UK is a rapidly evolving market and the Company retains the flexibility to identify new impact themes and invest in Social Impact Investments other than those in the categories set out above, subject to the investment restrictions below.  
 
The Company will typically obtain exposure to Social Impact Investments through investing in Impact Funds, Managed Accounts and Co-Investments. The Company will usually make investments on a commitment basis, expected to be called over a period of time. The Company will generally hold minority interests in Impact Funds, but may hold majority interests where appropriate including, for example, where the Company may be a cornerstone investor alongside the Portfolio Manager. Co-Investments would be made alongside third party impact investors, including the Portfolio Manager. It is expected that the Company will invest in Impact Funds and Co-Investments alongside the Portfolio Manager, benefitting from the broad range of opportunities sourced by the Portfolio Manager. Direct Investments are not expected to comprise a material proportion of the Company's portfolio.  
 
Investment Restrictions 
 
The Company will manage its assets with the objective of spreading risk through the following investment restrictions that limit the Company's exposure to not more than:  
 
- 60 per cent. of Net Assets in High Impact Housing;  
- 60 per cent. of Net Assets in Debt and Equity for Social Enterprises, of which, not more than 30 per cent. of Net Assets will be held in equity interests via funds;  
- 40 per cent. of Net Assets in Social Outcomes Contracts;  
- 30 per cent. of Net Assets in Social Impact Investments other than High Impact Housing, Debt and Equity for Social Enterprises and Social Outcomes Contracts;  
- 10 per cent. of Net Assets to a single Investment, held directly or indirectly on a look-through basis;  
- 20 per cent. of Net Assets to any one Impact Fund;  
- 25 per cent. of Net Assets to Impact Funds and Managed Accounts managed or advised by the same investment management and advisory group; and  
- 15 per cent. of Net Assets to non-UK Investments.  
 
Each of the above restrictions will be calculated at the time of commitment and where the Company's exposure will be the aggregate of the value of the Company's Investments plus its outstanding commitments. Where the Company makes an Investment otherwise than on a commitment basis, the time of commitment will be the time of investment.  
 
The Company will not be required to dispose of any investment or to rebalance the portfolio as a result of a change in the respective valuations of its assets. However, the Portfolio Manager will regularly monitor the portfolio and may make adjustments from time to time consistent with the objective of managing portfolio risk, return and impact. Where the calculation of an investment restriction requires an analysis of underlying Investments held by an Impact Fund or Managed Account in which the Company is invested, such calculation will be based on the information reasonably available to the Portfolio Manager at the relevant time.  
 
As a result of managing its assets and spreading investment risk in accordance with the above restrictions, the Company expects to have diversified exposure across its various counterparties and co-investors.  
 
Cash and Liquidity Management  
 
The Company may hold cash on deposit and may invest in cash equivalent investments, which may include short-term investments in money market type funds and tradeable debt securities. In order to efficiently allocate the Company's funds whilst it may otherwise hold significant levels of cash, the Company may also make short and medium term liquid investments, including in social bond funds, closed-ended listed funds and other liquid investments, that the Portfolio Manager considers are consistent with the Company's liquidity requirements, investment policy, investment guidelines and risk profile while also meeting high Environmental, Social Governance ("ESG") criteria ("Liquidity Assets"). The Company may invest up to 30 per cent. of Net Assets in Liquidity Assets, measured at the time of investment. The Company intends to only utilise the full 30 per cent. allocation immediately after a fundraise and at most times no more than 20 per cent. of Net Assets shall be invested in Liquidity Assets.  
 

The Company's assets will be managed so that at any time when they are fully invested and/or committed, at least 70 per cent of the portfolio assets by value are being managed with a clear and specific plan to achieve a measurable and positive impact on social issues in the UK. Such impact will be monitored over the life of the investment according to the evidence-based standards outlined above. Pending deployment of cash, monies may be temporarily invested into Liquidity Assets (as defined in the investment policy above). For these purposes, the Company's assets are considered "fully invested and/or committed" when the total value of invested assets in, and undrawn commitments to, Impact Funds, Managed Accounts, Co-Investments and Direct Investments equals at least 90% of the Net Asset Value.  
 
The portfolio composition will reflect the opportunities available to the Portfolio Manager, based on the performance, social impact and maturity of the Impact Funds, Managed Accounts, Co-Investments and Direct Investments. There may be times when it is appropriate for the Company to have a significant cash or cash equivalent position instead of being fully or near fully invested, including for the purpose of seeking to satisfy expected capital calls on commitments to Impact Funds and to manage the working capital requirements of the Company.  
 
There is no restriction on the amount of cash or cash equivalent investments that the Company may hold. Cash and certain cash equivalents will be held with approved counterparties and in line with prudent cash management guidelines agreed between the Board of the Company, the AIFM and the Portfolio Manager.  
 

The Company has designed a Theory of Change to articulate how the Company's investment activities and underlying assets are expected to lead to a positive and measurable impact. The Theory of Change includes three key parts which are set out in more detail below:  
 
1. Problem statement and identification of key impact themes in the UK that need addressing;  
2. Types of investment activities that contribute towards addressing the impact themes; and  
3. Positive social outputs and outcomes targeted under each impact theme identified.  
 
Part 1 - Problem Statement: The Company has identified the following impact themes (as introduced in the investment policy above) that it is seeking to improve through its sustainability objective:  
 
1. Reducing poverty and inequality – As of January 2024, more than 1 in 5 people in the UK were in poverty, and the challenges faced by lower-income people have become increasingly severe over the last two years. For instance, lower-income people in the UK face multiple barriers to accessing essential products and services, including housing, energy, food and finance, and often have to pay more for these products and services than higher-income households. This ‘poverty premium’ adds more than £2.8bn a year to the bills of low-income households, affecting them directly and reducing the cash flowing through local economies in the UK. Inflation has also placed further pressure on lower-income households.  
 
2. Good health and well-being – Self reported ill-health in the UK has been rising, with this being exacerbated since the onset of the Covid-19 pandemic. More than a third of working-age adults self-reported long-term health conditions in 2023, a number which has been steadily increasing over the last few years. For those in employment suffering from long-term health conditions, this leads to increasing sickness absence; while the number of people economically inactive due to long-term sickness rose to 2.5 million in 2023 - an increase of 400,000 since the Covid-19 pandemic. The rising trends of ill-health put pressure on the health services, with referrals to elective treatment waiting lists in England reaching 7.4 million in May 2023, which is up from 4.6 million people in January 2020. Long-term care accounts for more than three quarters of NHS spending. An estimated £31bn in funding is needed to meet the UK’s rising demands for social care by 2030. Meanwhile on average £3-4k of public money is spent per person on healthcare annually.  
 
3. Education, training and decent work – According to research published by the Children’s Commissioner in 2019, nearly 1 in 5 children in the UK (nearly 100,000 children a year) have left the education system without basic qualifications. The Covid-19 pandemic exacerbated this problem, with children from disadvantaged and vulnerable backgrounds (such as pupils on free school meals and children with special educational needs) being disproportionately affected, resulting in the widening of the educational attainment gap. This gap affects the lifelong prospects for these young people, hampering their chances of obtaining apprenticeships and jobs. According to the Institute of Fiscal Studies: “The share of 18-year-olds who are not in education, employment or training (NEET) was at 16% in 2022, near equal to the share last seen in the Great Recession of the late 2000s”. This comes at a significant cost to public finances, with the total lifetime cost estimated to be in the range of £12-32bn at the end of 2008.  
 
4. Just transition to net zero - A 'just transition' refers to the process of moving towards a more sustainable economy while ensuring fairness and equity for all workers and communities. Fuel poverty and energy inefficient homes are significant problems in the UK. For example, 3.2mn households in England (13%) were affected by fuel poverty in 2023, with the fuel poverty gap increasing by 20% compared to 2022; and 56% of homes in England and Wales not meeting the minimum energy efficiency level. The transition to an environmentally sustainable society is the defining challenge of the 21st century. In the UK alone, an estimated £1.4tn of investment is needed to attain net-zero emissions by 2050. This unprecedented level of financial mobilisation also offers huge opportunities for positive social impact, by creating more (and better) jobs, reducing inequality and revitalising communities. A focus on social impact and communities will also be vital in gaining the wide public buy-in needed for a successful transition.  

Part 2 - Investment Activities: To fulfil the sustainability objective, the Company’s investment activities are as follows:

Part 3 - Output, outcome and impact: The Company believes that the investment activities will lead to the following outputs, which in turn will contribute towards addressing the impact themes: (1) Reducing poverty and inequality; (2) Good health and well-being; (3) Education, training and decent work; and (4) Just transition to net zero. 

The below table outlines in more detail the positive social outcomes targeted under each impact theme.
 

More details of the ESG framework are available at the Company's website. 

INVESTMENT TRUSTS: Schroder BSC Social Impact Trust plc [AM + Individual] (schroders.com)