For the period
01 January – 31 December 2011

In Australia and New Zealand, the company operates under
the name of Colonial First State Global Asset Management(CFSGAM). Outside of Australia and New Zealand, thecompany is known as First State Investments (FSI). The entire
company is collectively referred to as CFSGAM in this report.

Colonial First State Global Asset Management
Product Disclosure Statements (PDS) and Information
Memoranda (IM) for the funds issued by Colonial First State
Investments Limited ABN 98 002 348 352, CommonwealthManaged Investments Limited ABN 33 084 098 180, and CFSManaged Property Limited ABN 13 006 464 428 (collectively
CFS) are available from Colonial First State Global AssetManagement. Investors should consider the relevant PDS or
IM before making an investment decision. Past performance
should not be taken as an indication of future performance.
No part of this material may be reproduced or transmitted inany form or by any means without the prior written consent
of Colonial First State Asset Management (Australia) Limited
ABN 89 114 194 311 (CFSAMAL). This material contains or
is based upon information that we believe to be accurate
and reliable. While every effort has been made to ensure its
accuracy, none of CFS or CFSAMAL offers any warranty thatit contains no factual errors. We would like to be told of any
such errors in order to correct them.

This material has been prepared for the general informationof clients and professional associates of CFS and CFSAMAL.
You should not rely on the contents. To the fullest extent
allowed by law, CFS and CFSAMAL exclude all liability(whether arising in contract, from negligence or otherwise)in respect of all and each part of the material, including
without limitation, any errors or omissions.
This material is intended only to provide a summary of
the subject matter covered. It does not purport to becomprehensive or to render specific advice. It is not an offer
document, and does not constitute a recommendationof any securities offered by any of CFS or CFSAMAL. No
person should act on the basis of any matter containedin this material without obtaining specific professional
advice. Colonial First State Global Asset Management
is the consolidated asset management division of theCommonwealth Bank of Australia ABN 48 123 123 124.
Copyright © Colonial First State Group Limited 2012.
All rights reserved.

Contents
Foreword from the Chief Executive Officer

4

Chapter 1: Governance, policy and strategy

6

About Colonial First State Global Asset Management

7

Governance of the approach to responsible investment

8

Summary of the approach to the PRI

9Work towards global best practice11

Chapter 2: Investment team activities

12

Equities

13

Asia Pacific and Global Emerging Markets

14

Australian Equities, Growth17

Australian Equities, Core

19

Global Resources

21

Listed Property Securities

24

Global Equities

27

Global Listed Infrastructure

29

Indonesian Equities

31

Global Credit and Fixed Interest

33

Direct Infrastructure

35

Direct Property

38

Chapter 3: CFSGAM activities

41

Engagement through voting

42

Research and education

44

Collaborative initiatives

46

Integrated reporting49

Cross team engagement51

Viewpoint

52

Chapter 4: Looking ahead

54

Appendix		

56

Contact details

Inside back coverForeword from the Chief Executive Officer

Welcome to the Colonial First State Global AssetManagement (CFSGAM) responsible investment reportfor the 2011 calendar year. This is the fifth year that
we have produced a responsible investment report.
Previously we have reported against our progress in
implementing each of the six Principles for Responsible
Investment (PRI). However, we have changed the focus
to report specifically on what each of the investment
teams is doing across CFSGAM to implement responsible
investment. This reflects that, over time, every teamwithin CFSGAM has increased the sophistication andrigour with how environmental, social and governance(ESG) issues are assessed in the teams’ investment
processes, and the improvements it has made toinvestment stewardship practices. We have also grouped
together all our activities under Principles 3, 4, 5 and 6
into one section on business-wide activities.
I am proud of our investment teams globally and theleadership they have shown when integrating ESG
considerations into their investment strategies. While ourquality-focused active investment styles make us wellplaced to lead in our approach relative to quantitative
or index strategies, I believe the rigour of our approachto responsible investment has been a contributing
factor to the performance of our funds. More than 70%
of our strategies have outperformed their respective
benchmarks over three and five years. Our approachto responsible investment adds value to our global
investment products and, while direct attribution isdifficult to demonstrate, I believe the correlation issignificant.
Our stewardship activities are a strength in our
approach to responsible investment. In 2011, CFSGAM
voted at more than 1,600 company meetings on morethan 18,000 resolutions. CFSGAM will typically seek
to relay concerns to company management prior tovoting against a resolution. This engagement conveys
to companies the rationale behind a decision not tosupport a resolution and can assist in improving future
governance standards.

4

Responsible investment report 2011

While we do not include every company engagement
on ESG, the engagement examples provided in thisreport demonstrate the seriousness with which wetake our role as a fiduciary. We firmly believe that, as amanager of other people’s money, we should behave asan owner of companies, not a trader. We make a pointof communicating with companies on the areas of ESG
we think are important and encourage them to manage
long-term risks.
CFSGAM also invests in property and infrastructure
assets directly and is active on ESG issues. CFSGAM
Property directly controls the management of realestate it manages on behalf of investors, and so it is in afavourable position to implement responsible investment
initiatives and processes to directly affect ESG outcomesof the investments. Further, as one of Australia’s firstunlisted infrastructure investment managers, CFSGAM
has a long history of implementing ESG issues into
investment strategies, particularly as they relate to risk
mitigation and value protection and creation.
Two of the biggest challenges to mainstreaming
responsible investment practices across our investment
portfolios are the lack of consistent and comparable
ESG reporting by companies and the absence of quality
education on responsible investment. To help addressthese gaps, we were very pleased to see the ongoing
success of the Integrated Reporting Initiative in 2011.
We were an active participant in the dialogue throughour participation in the Australian discussions and wecontinue to communicate our preference for fit-forpurpose ESG reporting by companies.
Similarly, we commend the Responsible Investment
Academy for its development of the Responsible
Investment Essentials course. While there is still some
way to go before we have comprehensive responsible
investment courses for investment analysts, in 2011 weenrolled more than 40 of our investment professionals
across our organisation on to the Academy’s course.

To manage many of the long-term environmental
challenges we face, we need an effective regulatory
system that starts to price externalities. As an active
member of the Investor Group on Climate Change, anda significant investor in the Australian markets, we havefor many years been a participant in the debate aroundemissions trading. We have long believed investors
require a price on carbon to provide greater certainty
when making long-term investment decisions. We werepleased to see the passing of legislation that will see
a price on carbon in Australia and, while the Emissions
Trading Scheme will be very much a soft start, it is a stepin the right direction.
We continue to be a participant in the global policy
debate and again signed the Investor Statement on
Climate Change. In January 2012, we participated in the
fourth Investor Summit on Climate Change at the UN
Headquarters in New York.
I commend the United Nations Principles for Responsible
Investment for its ongoing success in recruiting new
signatories to the PRI and its ongoing support ofsignatories. To have grown to a signatory base of morethan 900 international investors in a little over six years
is a significant achievement. I believe the investment
industry has started to think about responsible asset
management on a par with responsible investment.

Governments and regulators around the world arestarting to address perceived shortcomings throughcodes of stewardship, required disclosures on voting andgeneral guidelines. We need to not only consider how we
integrate ESG issues into our investment processes, butalso how we develop and deliver our products to ensurethat we have a continuing focus on delivering what is in
the best interests of our clients.
Finally, we had built into our business’s balanced
scorecard the target to be top quartile across five of
the six Principles of the PRI by reporting year 2011.
I am pleased to say that we achieved that target a year
early in reporting year 2010, due to the commitment
towards investment best practice from all the peoplein our business.

Mark Lazberger
Chief Executive Officer

Ongoing financial trouble around the world is increasing
the focus on the financial services sector. With public
protests taking place in many of the world’s major cities,
the financial services sector needs to work hard tomaintain its social licence to operate. As a shareholder
in many large organisations, and direct owner of large
property and infrastructure assets, a social licence tooperate is an important part of CFSGAM’s operations.

5Chapter 1
Governance, policy and strategy

Traditional blanket from Rajasthan

6

Responsible investment report 2011

About Colonial First State Global Asset Management

CFSGAM is a global asset management business withexperience across a wide range of asset classes andspecialist industry sectors. CFSGAM manages assets
across a diverse range of global asset classes, including
equities, cash, fixed interest and credit, property
securities, listed infrastructure, direct property anddirect infrastructure.

Ownership structure
Commonwealth Bank of Australia
Market cap US$83.4 billion

Business andPrivate Banking

CommInsure

Institutional Banking
and Markets

Premium
Banking
WealthServicesManagement

International
Financial Services

Colonial First State Global Asset Management
FUM US$144.2 billion
Australia and New ZealandColonial First State
Global Asset Management
FUM US$94.8 billion

RetailBanking Services

Colonial First State

Ex Australia and New ZealandFirst State Investments
FUM US$49.4 billion

Source: Colonial First State Global Asset Management as at 31 December 2011.

CFSGAM’s approach to responsible investment
CFSGAM seeks to integrate a consideration of ESG issues
into every investment process across the organisation.
This is driven by a belief that ESG issues are material
investment issues that have the potential to impact
long‑term investment performance.
As a fiduciary, CFSGAM has regard to the long-term
interests of its clients. This drives the long-term focus
on responsible investment, with ESG considerations an
integral part of the investment process employed by all
asset class teams.
CFSGAM’s approach to responsible investment does notlook to build socially responsible or ethical strategies thatscreen out particular companies or sectors. Rather, ESG
issues are considered in the same manner as traditional

financial issues in terms of their capacity to affectlong-term investment performance. This is highlighted
because there remains some misunderstanding
across the investment industry around the definitionsof mainstreaming ESG versus socially responsible or
ethical investing.

Key aspects–– A strong governance process is in place to ensure
continuous improvement–– A strong focus on achieving global best practice–– A specialist team dedicated to responsible investment

7

Governance of the approach to responsible investment

Since signing the PRI in March 2007, a governance framework has
been established to ensure there is responsibility across CFSGAM forthe relevant aspects of the PRI.
A PRI Steering Committee, which is comprised of senior
representatives from across the business and chairedby the Chief Executive Officer, is responsible for setting
the organisation-wide responsible investment policy
and strategy.

Supporting the PRI Steering Committee are subcommittees and working groups that deal with assetclass-specific ESG issues. These sub-committees ensurethat tangible work is undertaken to implement the
PRI into the different investment strategies across theorganisation. Every investment team has a staff member
allocated to ESG considerations who spends a notional
10% of their time on responsible investment-related
activities. There are also asset-class-specific policies
which are reported against.

Governance structure
CFSGAM Executive Committee

PRI Steering Committee

Climate Change Position Statement

Responsible Investment Policy

Annual Responsible Investment Report

Listed equities and credit and fixed interest
implementation committee

Property working groups

Infrastructure working groups

Voting and engagement policy

Direct property sustainability policy

Infrastructure ESG policy

Corporate governance andengagement report

Direct property
responsible investment report

Client reporting

Listed funds reportingKey

Committee nnPolicyReporting n

8

Responsible investment report 2011

Summary of the approach to the PRI

Principle 1

Principle 2

We will incorporate ESG issues into investment
analysis and decision-making processes.

We will be active owners and incorporate ESG
issues into our ownership policies and practices.

Principle 1 is important for CFSGAM as it is the Principle
which has the most potential to impact investment
returns. Principle 1 underpins CFSGAM’s goal of achieving
responsible investment best practice through thesuccessful integration of ESG considerations into every
asset class and investment product globally.

Proxy voting rights are an important part of shareholder
responsibility, and CFSGAM seeks to vote on all possible
resolutions at company meetings. Prior to voting, therelevant investment manager and company equity
analyst carefully consider each resolution, with guidance
provided by CFSGAM’s ‘Guidelines and principles forcorporate engagement on governance, environmentand social issues’. Recommendations from a selectionof independent corporate governance research houses
are also sought. CFSGAM emphasises that its investment
teams retain full control over their proxy voting decisions
and do not necessarily follow the guidance provided bythird party governance research houses. Data provided
by third party service providers is used only as anadditional source of information that investment teams
use when making their voting decisions.

Every investment team across CFSGAM tailors its
approach to its investment process. This is reflectiveof the different investment strategies and styles
across the global group. The objective in every caseis to use ESG analysis to help make the best possible
investment decision.
A number of resources are made available to support
the investment teams implement Principle 1. These
include education sessions, dedicated internal
resources, governance policies and external ESG
research providers. Governance processes are in place
to help ensure continuous improvements in activities
relating to Principle 1.
Each investment team completes a quarterly surveyof responsible investment activities as they relate to
the investment process, and details the engagement
undertaken with companies. The sharing of informationin this manner allows investment teams to effectively
collaborate on engagement across asset classes andgeographies. This survey also ensures CFSGAM is pushingdown the supply chain to encourage ESG research to be
produced by sell-side brokers.
By successfully implementing Principle 1 throughout
the business, CFSGAM will ultimately realise the fullinvestment proposition of responsible investment, whichis to make the best possible investment decisions onbehalf of investors.

CFSGAM is an active shareholder through proxy voting
and direct engagement with company managementand directors. CFSGAM’s large scale and reputationin the investment management industry provides its
investment managers with the opportunity to engage indialogue with individual companies on ESG issues.
Through company engagement, CFSGAM seeks tohighlight areas for potential improvement, encourage
disclosure on ESG issues and commend companies thatare making progress in addressing ESG considerations.
CFSGAM also seeks to positively influence companies
towards ESG best practice for the ultimate benefit of
its investors. CFSGAM has guidelines and principles forcorporate engagement which are publicly available on
the company website.
Through carefully considered proxy voting and company
engagement, CFSGAM seeks to ensure that thecompanies it invests in have high performing boards
and an alignment of incentives between company
management and shareholders. This is important forencouraging proper risk oversight, company strategy,
and long-term company performance.
CFSGAM believes that engagement with companies,
together with voting on shareholder resolutions, are key
to achieving ESG improvements. Active ownership andengagement are among CFSGAM’s top priorities as afiduciary, because of the belief that there is a correlation
between companies with good governance practices
and strong, sustainable shareholder returns.

9Summary of the approach to the PRI
continued

CFSGAM also invests in property and infrastructure
assets directly and is active on ESG issues. CFSGAM
Property directly controls the management of realestate it manages on behalf of investors, and so it is in aposition to implement responsible investment initiatives
and processes to directly affect ESG outcomes of theinvestments. The CFSGAM Infrastructure investment
strategy is to typically manage a large enough interest ineach individual business to enable the team to add value
through board and board committee representation. The
team is active on ESG issues through this representationor company engagement, and seeks to ensure that there
are adequate sustainability policies in place, and thatreporting against these policies takes place.

Principle 3
We will seek appropriate disclosure on ESG issues
by the entities in which we invest.
The most important activity undertaken for Principle 3
is direct engagement with companies when providing
feedback on their existing reporting, or encouraging
them to begin reporting and participating incollaborative investor-led initiatives.
CFSGAM welcomes discussions with companies andunderstands the challenges that companies face intrying to meet all the demands of various stakeholders.
There was a large increase in this type of engagement by
CFSGAM’s investment teams globally in 2011.
CFSGAM also believes that corporate sustainability
reporting is an area where collaborative investor
engagement makes sense. Only when a critical mass of
mainstream investors are consistently communicating
to companies the need to report on ESG performance,
will investors have access to the information required.
In this spirit, CFSGAM welcomes the move to integrated
reporting and collaboration across the investment
supply chain.

Principle 4
We will promote acceptance and implementationof the Principles within the investment industry.
CFSGAM actively engages in dialogue, lobbying andinitiatives pertaining to government policy and industry
regulations, most notably through the Investor Groupon Climate Change, the Financial Services Council(Australia), the Asian Corporate Governance Association,
the Property Council of Australia, and the Green Building
Council of Australia.

10

Responsible investment report 2011

CFSGAM considers ESG issues when selecting proxy voting
specialists, investment research and internal operations.
Service providers, clients and peer organisations areencouraged to become PRI signatories where relevant and
CFSGAM encourages the wider investment management
industry to consider ESG issues. CFSGAM participated in a
number of engagement initiatives to promote acceptanceof the Principles within the investment industry during theyear. This included direct meetings with other investors,presenting at conferences and contributing throughsurveys and media dialogue.

Principle 5
We will work together to enhance oureffectiveness in implementing the Principles.
During 2011, CFSGAM continued to communicate
the business case for the PRI and promoted a deeper
understanding of ESG issues through education in
the industry. CFSGAM participated in a number ofengagement initiatives and associations during theperiod to enhance the industry’s effectiveness in
implementing the PRI and contributed to a number ofthought pieces, articles and academic texts.
This collaboration helped CFSGAM to stay abreast ofdevelopments in the sustainability and responsible
investment arena more broadly, and helps CFSGAM
collaborate with like-minded investors to facilitate
ongoing improvements in the industry’s approach tosustainability and responsible investment.

Principle 6
We will each report on our activities and progress
towards implementing the Principles.
CFSGAM seeks to be fully transparent in its approachto implementing the PRI. It is important to keep
stakeholders informed on progress and CFSGAM has
undertaken a number of steps to raise awareness of ESG
initiatives. All current policies and reports are publicly
available on the company website, and mainstream
communications now feature CFSGAM’s approach tosustainability and responsible investment.

Work towards global best practice

CFSGAM is proud of its track record in the consideration of ESG issues
and was one of the first global investment managers to become asignatory to the PRI in early 2007. CFSGAM was the first Australiandomiciled investment manager to release a detailed annual reporton its progress of PRI implementation, now in its fifth year.
Quartile ranking against all investment
managers globally

PRI scores against all investment
managers globally

1stPrinciple 1
100%

80%

60%

Principle 6

2ndPrinciple 2
40%

20%

3rd
Principle 5

Principle 3

4th
Principle 4

Key■ CFSGAM’s score ■ IM’s median score

Source: PRI annual Reporting and Assessment survey 2011

Balanced scorecard approach

0
2008

2009

2010

2011

■ Principle 1 ■ Principle 2 ■ Principle 3■ Principle 4 ■ Principle 5 ■ Principle 6
Source: PRI annual Reporting and Assessment survey 2011

CFSGAM’s continued work towards global best practice in
its approach to sustainability and responsible investment
was recognised in the 2010–11 PRI survey results. As
shown in the chart above, CFSGAM now sits in the top
quartile in five of the six Principles relative to global
investment managers.
Full consideration and integration of ESG issues in
the investment process remains a long-term focus
for CFSGAM and the business is committed todemonstrating leadership in this area.

In 2009, CFSGAM strengthened its PRI governance byembedding PRI objectives into the balanced scorecard forthe business. The balanced scorecard target is that CFSGAM
will be top quartile across five of the six Principles forresponsible investment by the 2011 reporting year.
The successful implementation of the PRI is used tohelp measure CFSGAM’s performance and set key
performance indicators for employees. Relevant areasof the business have specific targets that help the wholebusiness achieve the business-wide target. For example,
the Chief Investment Officer has the most influence overPrinciples 1, 2 and 3 and so is responsible for those, while
the distribution and sales functions of the business are
responsible for aspects of Principles 4, 5 and 6.
CFSGAM was pleased to achieve its balanced scorecard
target one year ahead of schedule, in the 2010 reportingyear. CFSGAM is now working to be placed in the top
quartile in all of the six Principles while developing new
business objectives to help CFSGAM achieve best practicein responsible investment in the medium and long term.

Note to charts: Scores havebeen calculated based on
signatories’ self-assessment andusing the scoring methodology
approved by the PRI Assessment
Group. Although a limited
verification exercise wasundertaken with a proportionof signatories, responses
have not been independently
audited by the PRI Secretariat,
PRI Assessment Group, or any
other third party. Individual
results including comparisons
to the overall results (quartiles)
are indicative and do not imply
an endorsement of signatory
activity. While this information
is believed to be reliable, norepresentations or warranties
are made as to the accuracy of
information presented, and no
responsibility or liability can be
accepted for any error, omission
or inaccuracy in this information.

11

Chapter 2
Investment team activities

Embroidered Mayan cloth, Mexico

12

Responsible investment report 2011

Equities

CFSGAM’s equity investment teams are located in various regions
around the world and provide investors with exposure to a wide
range of equity investments.
About CFSGAM’s equities capability

Equity investment teams’ approach

As well as offering equity solutions in traditional developedand emerging markets, specialist teams offer investors
access to niche areas of global equity markets including
listed property securities, listed infrastructure securities andlisted resources securities.

Each equity investment team takes an autonomous
approach to integrating ESG considerations into theinvestment process, and so the approach to integration
varies from team to team. This autonomous approachempowers each investment team with responsibility for
integrating ESG into its own investment process. ESG
research tools, including ASSET4, RepRisk and specificsell-side research, are used by all equity investment
teams to support their research process.

Equity investing forms a key part of our global business,with more than half of our assets under management
invested in global equity markets.
As a major shareholder in global equities and as asignatory to the PRI, CFSGAM encourages all companies
to pursue best practice in ESG issues, in the belief thatcompanies which do so will generate superior returns forshareholders over the long term.

The ‘Behavioural change or research process’ column
in the ‘Engagement examples’ table denotes whether
the engagement is attempting to achieve a change incompany actions or whether it is part of informing the
research and investment process only.
The approach that each equity investment team takes tointegrate ESG considerations into its investment process
is outlined in this chapter.

13

Asia Pacific and Global Emerging Markets

$40.6

US

billion

FUM as at 31 December 2011

Inception date of asset class 1988
Team size 28
Location Edinburgh, Hong Kong and Singapore

The team’s approach
Since the launch of the Asia Pacific and Global Emerging
Markets (APGEM) team’s first product in 1988, sustainable
investment has always been an integral part of theteam’s investment philosophy and stock-picking
process. At the heart of this philosophy is the principleof stewardship. The team believes its job is to entrustclients’ capital to good quality companies with strong
management teams and sound long-term growthprospects. Each investment is a decision to purchase,on behalf of our clients and the team, not a piece of
paper or an electronic Bloomberg ticker, but part of areal business with all the rights and responsibilities thatgo with this ‘share’ of the ownership of the company.
The team takes these rights and responsibilities seriously.
The team also believes that the way it behaves as aninvestor, and the role it plays in the broader industry,
are important for its own sustainability.
ESG analysis is a fundamental part of the researchand portfolio construction process. The team has astrong conviction that the sustainable positioningof companies plays an important role in determining
long-term shareholder returns for all companies inemerging economies.
The macroeconomic and political backdrop is often
challenging, and the ESG risks are high in developing
markets. The team believes that by understanding
how companies in emerging markets are managing
ESG risks, it can make better investment decisions.
The team believes that governance in particular isa vital consideration when investing in emerging
markets companies.
Short-termism in the investment industry remains amaterial challenge for the APGEM team. For example,
out of more than 50 investment banks covering
Indian companies, the team has yet to find one which
incentivises its analysts on greater than 12 month
performance. It is therefore very difficult to use its
research effectively to help drive long-term returns and
ESG integration. The team looks to try and influence the14

Responsible investment report 2011industry through pushing down its own supply chain to
put pressure on the investment banks to not be involved
in listing companies with questionable practices, and also
produce quality ESG research. The team also participatesin policy debate and supports industry associations likethe Asian Socially Responsible Investment Association(ASRIA) and the Asian Corporate Governance Association.

Incorporation of ESG considerations into theinvestment process
Focus on quality
The team looks to invest only in good quality companies.
Quality is measured through the lenses of management
quality, financial quality and franchise quality. By
analysing the sustainability performance of companies,
the team can better measure less tangible elements ofquality and identify hidden risks.
The team has an absolute returns mindset. That is, risk isdefined as losing money for clients, rather than in termsof deviation from any benchmark index. The team’s focus
is as much on the potential downside of investment
decisions as on the anticipated upside. The identificationof long-term sustainability risks thus becomes anextremely important way of managing risk. In addition,
the team’s willingness to differ substantially from index
weightings, both by country and company, means there
is no obligation to be invested anywhere where there areparticular sustainability concerns.

Research
The APGEM team has been constantly exploring new
sources of information and data providers. For example,
the team engaged with non-governmental organisations
such as the World Wildlife Fund prior to a trip to South
Africa. The team also hired a research provider to lookat US company management from an alignment andgovernance perspective. The team is also increasingly
integrating Glass Lewis proxy voting research into theinvestment process where it provides useful information.
The team also supported a student project investigating
corporate governance in South Africa, with resources,
advice and guidance from the team provided in returnfor access to the findings.
The team is very active in engaging with companies
and will regularly raise ESG concerns with company
management. This positive engagement on ESG issues
is a powerful tool to drive shareholder value and protect
and enhance the value of the team’s portfolios. The
team also actively participates in broader discussion andthought leadership around responsible investment inemerging markets.

The APGEM team is finding ESG questions increasingly
useful to differentiate between good and bad quality
companies in developed markets. The team has foundthat many management teams are unable to answer
simple ESG questions and RepRisk has been valuablefor providing material for discussion. Poor governanceand short-term remuneration policies are a significant
area of focus in the recently-launched World Wide
Fund. The team has also started to analyse the pay
differential between the highest and lowest paid
employees in US firms.

Anglo Gold Ashanti

The majority of clients’ commission is allocatedfor access to management which, in turn, is about
gaining ESG insights. The team continues to support
Responsible Research and specific ESG analysts at major
sell-side houses.

The letter explained that our investment rationale forbuying shares in the company was, to a large degree,
predicated on an improvement in the company’s poor
environmental and safety performance. If the company
was able to deliver on this, we saw huge benefits interms of its ability to generate long-term cash flows fromexisting mines, earn the social and environmental licenceto bid for, and operate, new mines and ultimately reduce
its cost of capital. Less than one week later, a new CEO
was appointed with a specific mandate to clean up thecompany. Given the timing, it is safe to say the team was
not instrumental in this appointment.

Engagement example
Over recent years, engagement has started to run therisk of becoming a box ticking exercise to see who cancollect the greatest number of engagement cases.
The team was reminded of this recently, when a fellow
participant in a collaborative engagement projecton palm oil pulled out because it was unable to lay
direct claim in public to the specific, very worthwhile
engagement cases being undertaken by the group. The
team engages with companies on ESG issues for two
reasons. Firstly, because the team has a responsibility as
a part-owner in the business to address any ESG issues
that may arise. Secondly, because if the team can help toaddress these issues satisfactorily, it is able to add value
and reduce risk to portfolios. The engagement approach
is far from perfect and continues to evolve over time.
Below is a brief description of the team’s experience
over the past five years with the investment in Anglo
Gold Ashanti. It is a good example of why company
engagement is a marathon, not a sprint.

Anglo Gold Ashanti is a large gold miner with morethan 20 operations spread across Africa, Australia,
South America and North America. It employs around60,000 people and produces approximately five million
ounces of gold each year. The team’s engagement withmanagement dates back to September 2007, whena letter was written to the Chairman of Anglo Gold,expressing the team’s concern with the company’s
lack of progress in addressing its environmental andsocial problems.

Over the following five years, 12 members of theteam have met with at least eight different membersof the new management team of Anglo Gold over a
total of 17 meetings in Johannesburg, Bogota, London
and Edinburgh. In each meeting, safety performancehas been a key topic. At least three formal written
engagement letters have been sent, as have numerous
emails on environmental and safety issues. The team has
also helped external ESG specialists engage with senior
management. ESG issues raised over that period included
environmental licence procurement, river pollution
allegations, relationships with local communities, use ofprivate security contractors, management of silicosis,
seismic safety threats, tax, royalties, diversity, postapartheid reparations and perverse safety incentives.

15

Asia Pacific and Global Emerging Markets
continued

Has any of this engagement worked? There is never a
clear cut answer to this question. On the one hand, thecompany has delivered a solid improvement in its ESG
performance. Most significantly, fatalities have fallen
59%, while the all-injury frequency rates have fallen
by 45%. Progress has been made across a number ofother health outcomes, from the improved provisionof HIV clinics to malaria, tuberculosis and noise-related
injuries. Environmental performance is harder to assess.
The number of environmental accidents has fallen.
Cyanide certification has risen significantly. The reportingof ESG performance has dramatically improved. The
company is now commendably transparent and bares
itself for all to see. This is no easy thing to do, given thechallenges still facing the business. From what we cantell, the culture of the company has also changed for the
better. To management’s credit it is often held up as arare example of a mining company which is transparent
about the royalties and taxes it makes at a country level.
This is crucial, given the importance of ensuring mining
proceeds are used to fund long-term development.
However, to claim that the team played a direct role inany of these improvements would be misleading. At themost, management may have been provided with someexternal support in order to tackle these issues head on.
Very occasionally, engagement may have encouraged
action on a particular issue. We will never know.
Not only is it difficult to lay direct claim as a minority
investor to any improvements, it is also too early toargue that any transformation has been successful.
Many challenges still remain. Fifteen fatalities occurred
last year. Progress on silicosis remains far too slow. Toomany allegations of water pollution and environmental
damage still persist, while the company currently faces
major protests from communities and MPs in Colombia
concerned about the proposed mine’s environmental
impact. As a minority shareholder, it is almost impossible
to build up a complete picture of these specific issues.
For example, according to the company, 7,000 people
recently marched in Colombia in support of the
proposed mine. Meanwhile, 38 Colombian MPs havereportedly just written a letter to the company outlining
their concerns about the mine. Gaining a genuinesocial licence to operate any mine today is a complex
procedure. Our aim is to reassures ourselves that thecompany goes about this in the right way, and is willingto walk away if the social licence is not forthcoming.

16

Responsible investment report 2011

There is no such thing as the perfect company inwhich we can invest our clients’ and our own capital.
At the final assessment, it is the trend that matters.
If a company continues to progress and steadily
improve its safety and environmental performance,then all stakeholders will benefit. If we can play a role,
however modest, as a minority shareholder, then theengagement will be time well spent. If progress starts
to slow and reverse, a company will very quickly lose its
licence to operate and all stakeholders will suffer. For
now, we remain convinced that Anglo Gold Ashanti is
still heading in the right direction.

Engagement example summary
SectorCountry

Engagement issue

Agriculture
Banking
FMCG
Logistics

India
Singapore
India
China

MiningSouth Africa

Oil and gas
RetailTechnology
Telecoms
Transport

PNG
UK
TaiwanAustralasia
Sri Lanka

Utility
Various

India
Hong Kong

Health and safety
Corporate governanceFood safety standards
Failure to submit audited
financial statements
Safety and community
relations
Community relations
Palm oil usage
Financial transactions
Remuneration package
Low attendance at board
meetings by director
Water usage and weapons
Issue of shares without
pre-emptive rights

Australian Equities, Growth

$10.1

US

billion

FUM as at 31 December 2011

Inception date of asset class 1989
Team size 18
Location Sydney

The team also proactively encourages brokers to increase
the quality and coverage of ESG issues. This is achieved
through feedback that the team gives its brokers, broker
ESG research awards and proprietary work, such as
looking at the performance of directors on boards. In
addition, the team has pushed broker research to include
some specific details about ESG issues which it raised.
The team also encourages brokers to devote resources to
ESG by specifically allocating brokerage to ESG research.

Engagement examples
The team’s approach
The Australian Equities, Growth team analyses ESG issues
at both the industry and stock level under two discrete
sections: board governance, and environmental andsocial issues.
The team uses Porter-style analysis1 to focus on areas ofcompetitive advantage and areas of potential threats.
ESG analysis is used to provide insights into company
management, which then feeds in to the broader view ofassessing the quality of company management. Bespoke
ESG analysis from sell-side brokers is also commissioned
to support our research and company engagement.
Each stock and industry review includes a discussion
on ESG issues and the implications for the company.
During the past year, we have covered a range of issues
including carbon pricing and the valuation implications
for company assets (including team-developed carbon
modelling) for a utility business, board experience andthe diversity and abilities of directors on the board of aconstruction company, and the ongoing environmental
performance of a chemical company.
ESG considerations are key to the team’s ownership
practices. Through direct engagement withmanagement, chairpersons and other board directors,
together with proxy voting, the team sends animportant message to companies that they must take
ESG issues seriously.
Actioning proxy voting is a very important part of the
Growth team process. Core to what the team does
is representing investors, engaging with companies
invested in, and meeting the requirements of the PRI.
Over 2011, the team has worked hard to meet withchairpersons and CEOs to address voting agenda items
and voice the team’s opinions.
To embed ESG considerations across the team, part ofthe investment analysts’ key performance indicators is to
ask a question related to ESG at every company meeting,identify a material issue and engage with the company
to encourage change.

During the second half of the year, the team extended
its engagement to the small cap component of its
investment funds. For example, the small cap teamhas worked to identify a formal list of issues within thesmaller industrial and mining companies it will investigate
further and, where applicable, take up with boards andmanagement.

International gold miner
The team was concerned about conflicting views comingfrom management and the board around the company’s
tenement rights and the timeframes. After conducting
independent research the team concluded that the shareprice exceeded the valuation given the risks and exitedthe stock.

Woodside Petroleum
Woodside Petroleum is considering a liquefied naturalgas (LNG) development at James Price Point in the
Kimberleys, Western Australia, that has attracted
significant attention due to the indigenous community
concerns and environmental impacts. It is unclear
why Woodside Petroleum is looking to pursue thedevelopment from a long-term financial perspective.
Whilst it may be good for short-term net present value(NPV), if the project was to run over, which it may well
do given the ongoing concerns from stakeholders, theproject would not be as economically attractive.
The team requested a meeting with the Chairmanof Woodside Petroleum to better understand how,and to what extent, the board considered the potential
NPV benefits of the James Price Point project in thecontext of the risks around environmental approvals,
indigenous community concerns and broad reputationalrisk to the company. In that context we were also keen
to understand why the James Price Point processing
plant was chosen over other potential processing
options (for example, off-shore processing and piping
to Browse for processing).
1 Porter’s Five Forces analysis
is a framework for industry
analysis and business strategy
development formed byMichael E. Porter of Harvard
Business School, 1979.

17

Australian Equities, Growthcontinued

Small cap education provider

Property fund manager

The small caps team engaged the board of an education
provider following allegations of impropriety by the
Chairman. The team requested a written explanation
and assurance from the board that allegations were false.
The board followed through with this request, which was
subsequently supported by a court ruling. No further
engagement was required.

The team engaged with a property fund manager
and developer representing the interests of minority
shareholders after offshore hedge funds approached
to break up the company. Portfolio managers met withthe disgruntled equity holders to discuss their views.
However, the team’s independent research found that
their proposal would not unlock value and would not,therefore, be in the best interests of investors. The team
met with the Chairman to discuss its views and thepreferred strategic direction of the company.

Engagement examples summary

18

SectorCountry

Engagement issue

Property
MiningOil and gas
Coal companies

Australia
Australia
Australia
Australia

MiningClothing
Media
Financial services
Retailer
Aviation
MiningCoal companies
Oil and gas

Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia

Media
Clothing
Childcare

Australia
Australia
Australia

Childcare
MiningMining
Packaging

Australia
Australia
Australia
Australia

Governance, fees, independence
Helicopter accident
Coal seam gas issues
Government approval process andenvironmental impact statement sign-offs
Director suitability
Second strike on pay in proxy voting
Remuneration of CEO
Remuneration of CEO
Annual report disclosure
Carbon tax and union discussions
Review of rare earths plant
Impact of carbon tax
Coal seam gas project – effects on thewater table
Management/Board discussion on debt
Second strike pay discussions – low hurdle
Chairperson implicated in Premium Income
Fund scandal and reputational risk
Singapore asset purchase delay
Accessing resources from Western Sahara
Indigenous rock art at Abydos
Alternative packaging materials

Responsible investment report 2011

Complete/ongoing

Behavioural change/
research process

Ongoing
Complete
Ongoing
Ongoing

Both
Research process
Research process
Research process

Complete
Complete
Complete
Ongoing
Complete
Ongoing
Ongoing
Ongoing
Ongoing

Research process
Both
Both
Both
Both
Research process
Research process
Research process
Research process

Ongoing
Ongoing
Complete

Both
Behavioural change
BothOngoing
Ongoing
Complete
Complete

Both
Behavioural change
Research process
Research process

Australian Equities, Core

$8.6

US

billion

FUM as at 31 December 2011
Inception date of asset class 1993
Team size 19
Location Sydney

The team’s approach
The Australian Equities, Core team has always considered
ESG when researching companies, because the teambelieves that the approach a company takes to ESG
issues provides an insight into the quality of thecompany’s management. Making ESG considerations
an explicit factor in the research process, as part of thecommitments under the PRI, has enabled the team toformalise this approach.
The team believes that, by systematically considering all
the sustainability issues for the companies invested in,
the team is better aligning with the long-term interestsof its clients. As a fiduciary, considering sustainability
issues is in line with the team’s investment philosophy.
Through the active engagement undertaken with thecompanies in which the team invests, best practicecorporate governance behaviours are encouraged acrossthe Australian market. This is in the best long- terminterests of clients.
The team also looks to influence the investment industry
and encourage brokers and other research firms toprovide ESG research and views on stocks. The teamhas made ESG capabilities part of the overall sell-side
research review process and broker panel structure.

Incorporation of ESG considerations into theinvestment process
Sustainability and governance are an explicit part of thestock research process for the Australian Equities, Core
team. This stock research feeds into the team’s overall
view of the company in a similar way to traditional
financial analysis.
The team considers ESG issues as one of the six
factors in the research process. The other factors aremanagement, industry/company position, valuation,market factors and financials. The following table
describes the considerations under each of these factors.
Where ESG factors are determined to have an impact onrevenues and/or costs, they are quantified and impliedin all other factors, most directly to the valuation andfinancial assessment of the company. The integration of
ESG into the investment process has proved helpful inmaking informed investment decisions, in particular in
the assessment of company strategy and managementof ESG risks.
Management–– Experience –relevant–– Ability to
execute–– Shareholder
focus

Industry/
Company position–– Industry
structure –changes–– Pricing power/
margins–– Competitive
advantage

Valuation–– Triangulation–– Relevant tosector andpeers–– Consistency

Market factors

Financials

Sustainability–– Index
movements–– Market ‘themes’–– Corporate
activity–– Balance sheet–– Cash flow
generation–– Earnings
transparency–– Social policies–– Environmental
policies–– Management
commitment
and disclosure

The team’s primary sources of ESG information arethrough company engagement and by access to publicly
available information from either company reports or
media. The team generally meets with the managementof companies in which it invests at least twice per
year, along with site visits and collaboration with otherindustry participants. The team typically engages withcompanies on sustainability concerns and encourages
companies to improve their management of potential
risks. The team will also enquire about the approachthat company management is taking to address
relevant ESG issues, and it will look for evidence of thisin company reporting.
The team keeps track of all of its engagement activities
in CFSGAM’s proprietary investment database.

Engagement examples
Oil Search
A company’s management of many and varied
stakeholder interests is often most important wheninvestments require both governmental and community
approvals. Investor attention tends to be focused onthese risks and on company behaviour during periodsof development or expansion. However, insufficient
focus on governance and sustainability issues over the
longer term can result in delays, cost blow-outs and,in some cases, jeopardise the start and the completionof projects.
The LNG project being developed by Oil Search, andoperated by partner ExxonMobil in Papua New Guinea(PNG), is a good example of the need for a company
to have a long-term focus on sustainability issues toensure a social licence to operate. The construction of
the project began in March 2010 and is expected to becompleted in 2014 at a cost in excess of US$15 billion.

19

Australian Equities, Core
continued

The development will unlock an energy reserve whichis the equivalent of more than 500 million barrels ofoil. Oil Search has been operating in PNG for many years
and successfully managed the political and landownerenvironment to enable the profitable export of oil. This
long-term relationship and community involvement is
integral to the current project.
As an active investor in the company, the Australian
Equities, Core team has spent considerable time with the
Oil Search management team, including several visits
to the operations in PNG. It is important that the team
maintains a level of comfort that the project will bedelivered both on time and profitably.
As well as being constructed on geographicallychallenging terrain, the 700 kilometre pipeline passes
through villages of differing landowner groups. The
financial and social benefits flowing to the PNG
landowners have been an increasing focus for Oil Search,which is trying to balance stakeholders, and aims foran equitable distribution of the financial rewards of the
project to the communities of PNG. The team believes
that the management of Oil Search has a focus on thesustainability of its business in PNG. Oil Search has won

the practical and financial support of global healthand wildlife organisations because of its programs in
the community. The progress of the LNG project relies
on continuing good relationships with stakeholders
and the successful management of any conflicts
arising. Monitoring the risks associated with the project,
as well as the progress of the construction itself, is a key
part of the team’s dialogue with Oil Search management.

Australian-listed healthcare company
Members of the Australian Equities, Core team engaged
with management of an Australian listed healthcarecompany to better understand its engagement andsustainability processes. The team noticed this company
had a high standard of safety and corporate governanceratings, attested by external industry research reports
as well as company process and statistics. Despite this,the company does little in the way of disclosure anddoes not produce a sustainability report. Given therelative performance on key environmental and safetymeasurements, the team encouraged the company topromote and disclose this key differentiation, as this isviewed as a competitive advantage in the industry and isrelatively under-appreciated by the market.

Engagement examples summary

20

SectorCountry

Engagement issue

MiningMiningMedicalOil and gas
Healthcare
EnergyProperty
Oil and gas
RetailAgriculture

Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia

GamingClothingMedia
Coal
BankingGamingEngineering
Steel
RetailOil and gas

Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia

Safety and environmental incidences
Environment issues management
Governance and stakeholder governance management
Landowner, stakeholder, community, legislative risk
Healthcare reform legislative risk
Industry and manpower management
Community engagement
Coal seam gas issues, staffing and wages risk
Supply chain and remuneration discussions
Remuneration and board level engagement
on governance
Legislative risk to gaming/remuneration
Governance/remuneration
Governance
Local stakeholders/safety
Offshore staffing hubs
Risks and management of gaming
Safety and indigenous skills training
Carbon tax – negotiations and management of risks
Staff engagement – flood response
Management team discussion and tour of operations– assessment of sustainability management

Responsible investment report 2011

Complete/ongoing

Behavioural change/
research process

Ongoing
Ongoing
Ongoing
Ongoing
Ongoing
Ongoing
Ongoing
Ongoing
Ongoing
Ongoing

Behavioural change
Research process
Research process
Research process
Research process
Research process
Research process
Research process
Research process
Behavioural change

Ongoing
Ongoing
Ongoing
Complete
Ongoing
Ongoing
Ongoing
Ongoing
Complete
Ongoing

Research process
Behavioural change
Behavioural change
Research process
Research process
Research process
Research process
Research process
Research process
Research processGlobal Resources

$4.2

US

billion

FUM as at 31 December 2011
Inception date of asset class 1997
Team size 10
Location Sydney, London

The team’s approach
The Global Resources team has implemented
sustainability considerations into its investment process
which provide enhanced information upon which tobase investment decisions. The team believes theconsideration of ESG issues will lead to better risk returnoutcomes, which will ultimately improve long-term
returns for clients.
ESG issues are particularly pertinent for natural resources
companies due to the nature of the industry and thecountries in which they operate. The Global Resources
team has a deep understanding of the industry’s key ESG
issues and is highly skilled in recognising best practicemanagement of ESG issues. The team also actively
engages with companies where it sees there is room for
improvement in the management of ESG issues.
The team has developed a tailored ESG framework thatis part of the stock review process. When an analyst
reviews a resource company, an ESG review will also
be done. While the primary source of ESG informationis company dialogue, the team also utilises ASSET4
and RepRisk to streamline the sourcing of data andinformation.

Engagement examples
International oil exploration and production
One of the most significant issues faced by oil companies
that purchase assets previously managed by state runenterprises are the potential social and environmental
liabilities that are inherited.
One such example is an international oil and gas
exploration and production company focused on
developing oil reserves in Eastern Europe. It is thecountry’s largest petroleum producer, responsible forapproximately 60% of the country’s total output. As withall investments, the team engaged the company withregard to its environmental and social responsibilities
within the country. The company has shown in its
reporting, and as witnessed on a site visit, the desire to
improve the environment and local health and safety

beyond that obligated by its operating licence. This
provides an investment opportunity where ESG issues areclearly being managed in a way that mitigates ESG risk
and improves the overall risk profile of the company.
The company acquired its operating assets from astate run entity that had shown little regard for the
local environment and community by walking awayfrom its production wells, storage and pipelines once
their economic value was exhausted. The company
has spent considerable time and over US$70 million
since taking over operations engaging and working
with local communities to clean up decaying wellheads
and equipment, surface oil and associated drilling
fluids and remediate what would be considered, inwestern countries, an environmental disaster. At thesame time, the company is educating and training local
companies that it engages with to operate in a safe andenvironmentally-friendly manner.
In undertaking engagement with the company, the teamhas supported the company’s approach and encouraged
it to continue with its focus.

Canadian forestry
A Canadian listed company with forestry lease holdings
in China was accused of being fraudulent by anindependent research firm which also questioned thecompany’s accounting practices and asset ownership.
The team met with management in Hong Kong, to get
an understanding of how the company would respondto these allegations. The team walked away from themeeting with concerns that it would not be able toprovide all the information to the market that would be
required to clear itself and that it would take quite a bitof time for the independent committee to conduct its
review and provide the findings to the market. In themeantime, investors would be provided with very little
information.
The team took that the view that the corporate
governance risks were too great and exited the positionin the company.
Since the team exited its position, the company has
been investigated by the Ontario Securities Exchange
and was placed in a trading halt. The CEO has voluntarily
resigned and three other employees have been placedon administrative leave and relieved of their duties. The
company’s unaudited second quarter results, released in
mid-August 2011, highlighted that gross profit margins
from its plantation operations had halved from thesecond quarter 2010, and the company indicated themargin ‘is more representative of our expected averagegross profit margin for future sales’.

21

Global Resources
continued

Corporate governance issue

Australia-based steel makers and suppliers

A Singapore-listed agricultural holding company
announced that it had plans to raise capital by listing
one of its Indonesian subsidiaries during the quarter.
The Global Resources team met with management toengage with them around the purpose of the capitalraising, given the company did not appear to need cash
for capital projects. In the team’s view, the company was
unable to clearly articulate the reasons why it needed
additional capital nor what the capital would be used
for. It appeared that the controlling shareholder interests
were not aligned with minority shareholders and theteam subsequently sold its position. The Indonesiansubsidiary was listed, albeit at a significant discountgiven market conditions were quite negative, which
subsequently impacted the holding company’s valuation.

There was a great deal of attention in the first half of2011 on the proposed introduction of a carbon price inAustralia. A carbon price will have implications for a wide
range of Australian companies, particularly those in theenergy, mining and manufacturing sectors. For sometime, political uncertainty made it difficult to ascertain
the likely impact of the new tax on individual companies.

Coal seam gas
A recent site visit to Queensland to meet withlandholders and community groups highlighted somepotentially serious issues for oil and gas companies
which are involved in coal seam gas developments in
the region. In response, the Global Resources teamconducted a follow-up site visit and engaged with therelevant companies over a series of meetings. Thesemeetings focused on the company’s efforts to address
the environmental and social issues that had been raised,and provided significant comfort to the Global Resources
team that senior management were taking these issues
seriously and responding appropriately.
The CFSGAM Global Resources team continues to closely
monitor the environmental and social issues related tocoal seam gas development and encourages companies
to manage the ESG risks. The team has monitoredresearch and also attended events relating to theconcerns raised by key stakeholders.

Gold company
Ten people were killed after a helicopter, charteredby a major gold producer, crashed in Indonesia. The
Global Resources team met with the gold company’s
management and asked them what was being done
about this incident. Management assured the teamthat a full investigation was being carried out, withresults expected in three weeks. At the time of theincident, workers were called to put tools down
for one hour the next day, and all safety processes/
policies were reconfirmed. The team was satisfied withmanagement’s response, and will await the outcomeof the investigation.

22

Responsible investment report 2011

Investment teams across CFSGAM have closely assessed
the earnings implications of the tax on individualcompanies, as well as the likelihood of exemptions
and assistance packages offered by the AustralianGovernment. Teams across CFSGAM have had ongoing
dialogue with a number of steel companies to keep
abreast of the concessions which are being negotiated.
Steel companies are expected to qualify for substantial
exemptions from the tax, but the earnings impact onother companies could be much greater, affecting theviability of some business models.

Engagement examples summary
SectorCountry

Engagement issue

Complete/ongoing

Behavioural change/
research process

Diversified
miningGold
Agriculture:supply chain
Gold

International

A variety of ESG concerns

Ongoing

Research process

Indonesia
Indonesia

Social (health and safety incident)
Local stakeholders/safety

Ongoing
Ongoing

Research process
Research process

Australia/
TurkeyAustralia

Corporate governanceComplete

Research process

Environment (water impact concerns) and social(compensation, landholder rights)
Corporate governanceManaging inherited environmental liabilities
in Albania
Apparent preferential treatment of Indo v
Singapore shareholders
Discussion of issues: community development,
environmental responsibility, issues in Zimbabwe,
governance in India, the future of Jabiluka
Treatment and support of local and expat workers
during the Egyptian uprising
Concerns over training and safety

Ongoing

Both

Complete
Ongoing

Research process
Research process

Complete

Behavioural change

Ongoing

Research process

Complete

Research process

Complete

Behavioural change

Ongoing

Research process

International
oil and gas
Forestry
International
oil and gas
Agriculture:
plantations
Diversified
miningInternational
oil and gas
International
oil and gas
International
oil and gas

China
CanadaSingapore/
Indonesia
GlobalEgypt assets
CanadaAustralia

Environment (water impact concerns) and social(compensation, landholder rights)

23

Listed Property Securities

$3.3

US

Engagement examples

billion

FUM as at 31 December 2011
Inception date of asset class 1991
Team size 11
Location Sydney, London, Hong Kong, New YorkThe team’s approach
ESG continues to be included as a ‘Quality Factor’ to beassessed when analysing a company and is incorporated
in the research process. The team believes thatcompanies with stronger ESG ratings are better placedto achieve strong long-term returns for shareholders.
A main challenge continues to be the lack of consistentreporting from companies.
An in-depth understanding of a company, the industry inwhich it operates and the company’s position within thatindustry is gained through fundamental research. The teamanalyses a company’s management, asset quality, financial
position, strategic direction, regulatory environment andoverall competitive landscape. This includes a considerationof ESG issues for the firm. Typically this involves gathering
information from company management and asset visits,
Colliers research, broker research and discussions with local
sources or competitors.
The qualitative weighting factors in the team’s process
are based on a set of three major qualitative criteriathat influence performance. These include ‘capitalmanagement’, ‘strategic direction’, and ‘managementand ESG factors’. Each of these three qualitative factors
receives a score out of a potential of five, to create apotential total of 15.
ESG scoring is based on environmental policies, social
policies, board quality and composition, alignmentof interest with shareholders and remuneration
factors. This element uses pure ESG analysis and otherqualitative factors.
Another issue is the impact a minority shareholder canhave on influencing the behaviour of a company. The
team does not own shares in every listed company andtherefore is only entitled to vote at Annual General
Meetings for companies that it invests in. When the teamchallenges companies it doesn’t invest in, companies
invariably respond with statements such as, ‘ourshareholders approved it at the last AGM’.

24

Responsible investment report 2011

Remuneration in Australia
Remuneration has been a major talking point in 2011
as the ‘two strike’ rule came into effect and many
remuneration reports were voted down for a first strike
across the market. The team met with a number ofboards over the AGM season to express concerns withremuneration policies within the listed property sector.
One of the concerns is using market capitalisation asa suitable peer group measure to base remuneration,
without considering other measures such as the returnon equity. The return on equity needs to be in-line
if market capitalisation is to be used as an effective
benchmark.
Furthermore, companies have been encouraged
to clearly state the performance hurdles set for
management. The team has welcomed changes toremuneration policies by Stockland Group and Mirvac
Group. The team believes that management should be
remunerated to reward good work, but there needs
to be a clear set of hurdles that encourage long-term
performance without excessive risk taking. The team’s
process includes assessments of management’s ability
to deliver on strategy and the best use of capital.
Appropriate remuneration and KPIs are key to thisassessment.

Deutsche Euroshop
There was a material change to the company’s
performance-based pay structure which was thenimplemented. A long-term incentive scheme wasintroduced based on positive change in market
capitalisation. The team actively questioned anddisputed this change and the lack of alignment withshareholders.
The team has been a shareholder in the company forsome time and has since exited its position. While itexited its position based on relative value, the change
in remuneration structure was also considered in theinvestment decision-making process.

Eurocommercial Properties

US-based REIT

The team met with the senior management ofEurocommercial Properties and followed this up with asite visit to its Swedish shopping centre portfolio, as partof the ongoing research process. A discussion was hadon the company’s understanding of how environmental
considerations applied to its business. The company
discussed how the planning framework in countries
determined building quality and components. Sweden isquite strict when it comes to the environmental standardsof buildings and, given the extreme weather, issues likeheating and insulation are embedded in the design
process. Meanwhile, the planning system in France isincreasing its focus on environmental issues, whilst thecompany’s third largest market, Italy, lagged behind.

Prior to purchasing the stock the investment team met
with the company’s CEO. It expressed concern about
the company’s poor capital allocation, but left themeeting convinced that the company would take moreaggressive actions to improve its share price. Based on
this assessment, and the fact that the shares were thentrading at a 30% discount from net asset value (NAV), theteam added a position in the company at that time.

Management also mentioned how the differing attitudesof retailers (local vs international, franchise vs owner) toenvironmental issues impacted how successfully it wasable to introduce various schemes, such as waste recycling
and automated lighting. In most cases, the common
denominator was the impact these actions would haveon the tenant’s bottom line, which is most noticeable
through the impact on the level of service charge.

Within weeks, the board took the positive step ofreplacing the company’s CEO and CFO. Subsequently, theteam spoke with the new CEO. The team agreed with
the new CEO’s strategy to increase cash earnings per
share by selling non-income generating assets (primarily
developments and land), increasing portfolio occupancy,
and refinancing expensive preferred equity on thebalance sheet.

25

Listed Property Securities
continued

Engagement examples summary

26

CompanyCountry

Engagement issue

Diverse property

Australia

Diverse property

Australia

Property
investment
REIT

Netherlands

REIT

HK

REIT

Australia

REIT

US

RetailREIT (IPO)
REIT (IPO)
REIT

Netherlands
Germany
TurkeySingapore

Discussed remuneration report and company
strategy. Voted against remuneration report
Discussed remuneration report and company
strategy. Voted against remuneration report
Discussed environmental impacts ofdevelopments
Discussion of estimated cost savings fromenergy and water efficient refurbishmentsthat were recently completed
Site visit to see recently upgraded green
building features
Continuing to engage on corporate
governance issues within the listed REITs
The team was concerned that the company
had often raised equity at a significant discountto its NAV. It spoke with the CEO and advised
him that the team believed the share price
was being depressed by concerns aboutfurther dilutive equity raises. In answer to thequestions, the CEO indicated in an earnings callthat the company would not raise equity below
NAV. This had a positive impact on the shareprice, and the team believes it is an importantdiscipline for the company going forward
Corporate governance and merger
Corporate governance
Board independence
Discussion with management about Singapore
Government incentives offered for green
building developments

Singapore

Responsible investment report 2011

Complete/ongoing

Behavioural change/
research process

Ongoing

Behavioural change

Ongoing

Behavioural change

Complete

Both

Complete

Behavioural change

Complete

Research process

Ongoing

Behavioural change

Complete

Behavioural change

Ongoing
Complete
Ongoing
Complete

Both
Both
Both
Behavioural changeGlobal Equities

$2.8

US

billion

FUM as at 31 December 2011
Inception date of asset class 1997
Team size 10
Location London

Integration of responsible investment into theinvestment process
The Global Equities team believes that companies with astrong Competitive Dynamic create long-term value forshareholders. These are companies that have a winningbusiness model, abundant growth opportunities and astrong management team. The team is uncompromisingin its appraisal and will only invest where strong
Competitive Dynamics are identified.
The symptoms of ESG issues can directly impact any of thefavourable attributes, but it is considered that the causes
rest with management. Consequently, ESG work forms
a key part of the team’s management appraisal. This is a
critical part of the research process, as a negative view onmanagement will lead to the automatic exclusion of theinvestment opportunity from consideration.
The team believes that the best way to identify
Competitive Dynamics is by industry, which is why it iscomprised of highly experienced industry specialists.
Each specialist will use this experience to frame thekey ESG issues that pertain to their particular industry.
Providers such as RepRisk and Asset4 are used toprovide data on the key ESG issues for each investment
opportunity under consideration, together with thoseof their competitors. The team seeks to understand thereasons behind poor data and whether it is indicative ofpoor operational or risk management by the company.
The team has a policy of never investing without having
spoken with the company and, where relevant, the teamwill engage management teams on the background andreasons for poor ESG performance.
A good ESG appraisal will likely be reflected in a positive
judgement on management. A poor ESG appraisal will
not only impact that judgement negatively, but could
also lead to our judgement of the business model or
growth opportunities being negatively impacted. This
would have a direct consequence on our expectation of
the company’s valuation.

evaluate every company reviewed to capture both risks
and benefits from ESG factors. The data is powered by
Asset4 and Bloomberg and covers governance concerns,
executive pay, social and environmental concerns
and management factors such as employee turnover.
This ESG score, in turn, will influence the judgementof a company’s Competitive Dynamics and hence thevaluation expectation. This will directly influence stock
selection in the portfolio and ensure that ESG is fully
embedded in the process. It will be a natural next step
to develop a further portfolio of ‘sustainable’ winners
utilising this process.

Engagement examples
The team continues to support four of the most active
ESG research teams on the sell side; UBS, Goldman Sachs,
Merrill Lynch and Citi. The team has attended several
events and meetings offered by these teams, including
a useful meeting on ‘How to avoid the next BP’ by Citi
in January 2011, an ‘SRI & Sustainability’ conference
hosted by Merrill Lynch in March 2011, and a meeting on‘Water Risk to Business’ by UBS in May 2011. In addition,
the team has had several interactions with the Goldman
Sachs Sustain team during the year as it continues to
examine ways the team could collaborate and link theirdata and framework to parts of the team’s investment
process. A team member attended Bloomberg’s
initiation into the responsible investment space andteam members continue to collaborate with other PRI
signatories as well as other ESG analytics such as Trucost.

Mining company
The Global Equities team closely examined the initialpublic offering (IPO) documents of a leading miner andtrader of commodities. Although the company met
several elements of the team’s investment criteria; forexample, good current and future competitive advantage
scores, on other criteria, such as the ability to gain share,
valuation, and end market growth/potential cyclicalmarket peak, the stock fell short of an investment grade.
In addition, the team had a very vigorous debate regarding
the quality of management and the questionable
environmental and social track record of the founder/
CEO as well as the risk of governance issues like market
manipulation. Based on the totality of the information,and taking into account these ESG considerations, theteam decided not to participate in the IPO.

The team is always looking to find ways of improving
its processes and so it is introducing a quantitative andqualitative ESG template score. This will be used to27

Global Equities
continued

China Yurun Food

Retail property investment

The team discussed quality control procedures with thisHong Kong listed meat producer. In addition it was noted
how non-disclosure of environmental and labour policies
was leading to a low ESG score. Investor relations said it
was aware of this and was working on drafting a public
document to address this need. The team was invested fora short time, but it became increasingly obvious that there
were further quality control and governance accounting
issues and the stock was disinvested.

This company has a majority shareholder which occupies
a number of board seats. These board members receivea travel allowance of €600,000 for travel expenses toattend board meetings. This allowance is not extended
to other board members and is deemed excessive. The
Global Equities team actively engaged with the company
to have this travel allowance reduced.

Hawaiian Electric Industries
The Global Equities team discussed the outlook fornuclear power following the Japanese earthquake andthe likely environmental implications given the growing
power needs of the world. In Hawaii, this means morewind power. Hawaii is one of the few places where wind
power is cost effective and doesn’t require subsidies.
The regulatory outlook was key for our investment andour positive view was confirmed by the regulator.

Engagement examples summary

28

CompanyCountry

Engagement issue

PharmaceuticalPharmaceutical
Agriculture

BrazilBrazil
NorwayTechnology

USA

Automotive

Germany

Engineering andconstruction
Automotive

CanadaAerospace anddefence
Food producer

USA

Retailer

Great
Britain

REIT

Singapore

Office fund

Australia

Governance – bonus KPI, use of cash
Governance – use of cash, incentive structure
Discussion of sustainable fish farming techniquesand concerns over adequate regulation and use ofantibiotics within the Chilean fish farming industry
Enquired about management compensation
and retention
Brief discussion of the relevance of electricvehicles to consumers’ lives and the engineering
challenges they bring
Discussion around operations in Libya, particularlyaround safety of personnel
Brief discussion on the limitations of electric vehicle
propulsion systems and the company’s strategy forparticipating in the move to new energy sources
Discussed management succession plan, as the
CEO is 62 and CFO is 65. Board has a plan in place
Discussed quality control systems and in particular
the reporting lines within the company
Discussed the implications of fraudulent claims ofchild labour alleged in a television program four years
ago, since retracted
Discussion with management about shareholder
misconceptions caused by Chairman speaking
interchangeably about the company’s operations
and his private investments
The company took over as Responsible Entity of
another office fund. The team gave feedback onchange to management fee

Germany

BrazilResponsible investment report 2011

Complete/ongoing

Behavioural change/
research process

Complete
Complete
Complete

Research process
Research process
Research process

Complete

Research process

Complete

Behavioural change

Complete

Research process

Ongoing

Behavioural change

Complete

Research process

Complete

Behavioural change

Complete

Behavioural change

Complete

Behavioural change

Complete

Behavioural changeGlobal Listed Infrastructure

$1.1

US

billion

FUM as at 31 December 2011
Inception date of asset class 2007
Team size 7
Location Sydney, Hong Kong

The team’s approach
ESG issues are fundamental to infrastructure companies,
given they have significant service obligations andsocial accountability to the communities in which they
operate. Mismanagement of these issues can clearly
impact sentiment towards a company, but may also
have a direct impact on profits through customer losses,
regulatory outcomes or political intervention.
For example, environmental issues present risks forcoal-fired power stations but present opportunities
for electricity transmission extending to renewableenergies. Social awareness can maintain customer
satisfaction for utilities and reduce political riskin regulatory outcomes. Governance is critical inprotecting minority shareholders.
The team believes that ESG issues can impact
infrastructure stock performance and should be fully
integrated into an investment process. Companies
are not screened on ESG criteria, but rather the risks
are understood and captured in a proprietary quality
ranking. In practice, the team requires a higher return forcompanies that fall short. This process has proved valuable
as infrastructure companies which have ranked higher on
ESG criteria have typically been more defensive.

Incorporation of ESG considerations into theinvestment process
The Global Listed Infrastructure Securities team
integrates its ESG analysis into stock selection throughits quality ranking model. The quality ranking model
consists of 25 criteria that the team believes influence
stock returns in general, and infrastructure securities inparticular. A score is assigned to each criterion, with ESG
issues accounting for 20% of the overall quality score.
Environmental issues are key drivers for someinfrastructure companies, specifically electric utilities,
energy infrastructure (oil and gas pipelines and storage)
and railways. Key environmental issues considered whenscoring infrastructure companies include:–– 30%-40% of the world’s carbon emissions are fromelectricity generation and around half of electricity
generation is from high carbon producing fuels likecoal and oil–– the transport sector is second largest contributor to
global carbon emissions–– the historic environmental safety record–– toxic emissions/waste disposal–– protection of existing environment–– operations in sensitive wilderness areas, and–– public leadership on environmental issues.
Social issues are important to infrastructure companies
as they have obligations to the communities to which
they provide essential services. Key social issues forinfrastructure companies include:–– employee relations and understanding theinternal culture (employee turnover, safety record,management KPIs)–– customer and supplier relationships–– community relationships–– dealing with indigenous populations–– public leadership on social issues, and–– operations or business dealing with rogue governments.
Governance issues are important performance driversof all infrastructure stocks. Board composition andalignment of interests are so important they are
rated separately in the ESG scoring process. The key
governance issues focused on for the governance aspectof the score are:–– structure, composition and skill set of the board andits members–– degree of political interference (especially where thegovernment is a major shareholder)–– dominant shareholders and protection ofminority interests–– externally managed vehicles–– related party transactions–– total shareholder return and return on capital
employed as management KPIs, and–– constitution (eg poison pills).
The scores are subject to robust debate within the teamand peer review to maintain consistency across sectors
and regions.
In determining the score for each category, a range ofinternal and external tools are used. The team believes
the most important source of research is internallygenerated through regular meetings with senior
management and other stakeholders including suppliers,
competitors, regulators and industry bodies. Given theinvestment experience across the team, companies’ andmarkets are understood intimately and the team believes
it is best positioned to form a view on the companies’
approach to ESG and the materiality of ESG issues.

29

Global Listed Infrastructure
continued

To supplement the team’s own research, various external
ESG research and services are employed.
The Quality Rating combined with the Value Rating, whichseeks to rank stocks in the focus list according to theirrelative mispricing, provides an overall ranking of the
securities on the focus list. This overall ranking is the focusof stock selection and portfolio construction process.

Engagement examples
The following examples detail specific key engagement
examples on ESG specific issues.

Transurban
As part of the engagement with the senior management
team of Transurban, the team challenged it on the hurdles
set for bonus remuneration. The belief was that thehurdles set were within reach without accelerated efforts
from management. The management team was also
challenged on the use of EBITDA as a key performanceindicator for remuneration since this actively promotes
acquisitions and short-term time horizons. Since this
discussion, it was observed that the remuneration targets
have been changed to address this concern.

Vopak
The team challenged Vopak’s ability to issue cumulative
preference shares to avoid a hostile takeover. Theseshares, which are issued at the discretion of Stichting
Vopak (a controlled entity of Vopak), could lead to asignificant premium takeover being dismissed without
shareholder consultation. Management continues
to believe that this defence mechanism is needed inorder to remain independent. Whilst this argument
has merit, the team views this unfavourably as it
reduces governance rights as shareholders. The teamcontinues to raise it with management and the team’s
opinion is reflected in the quality score that is assigned
to governance. The team’s active approach led to an
invitation to present to the board of Vopak on key issues
for the company and its management.

PG&E Corporation
As part of the ongoing research into environmental
factors for utilities globally, the team continues
to engage with PG&E to better understand its gas
pipeline operations, including the reasons around thegas pipeline explosion that occurred in the San Brunoarea of California, and the regulatory implications
for the company and other pipeline operators both
domestically and internationally. Utilities continue
to come under increasing pressure regarding safety
and reliability, and this will drive significant capital
expenditure in the years to come.

Engagement examples summary

30

CompanyCountry

Engagement issue

Complete/ongoing

Behavioural change/
research process

Integrated utilities
Regulated utilities
Independent
power producer
Ports
Integrated utilities
Integrated utilities
Regulated utilities
Rail
Integrated utilities
Integrated utilities
Regulated utilities
Water and waste

US
US
India

Environmental – nuclear strategy
Environmental legislation
GovernanceOn-going
On-going
On-going

Research process
Research process
Research process

Netherlands
US
UK
Australia
Australia
China
UK
US
UK

On-going
On-going
On-going
On-going
On-going
On-going
On-going
On-going
On-going

Research process
Research process
Research process
Research process
Research process
Research process
Research process
Research process
Research process

Communications
infrastructure
Regulator
Industry
association
Rail
Rail
Communications
infrastructure

Luxembourg

Governance – anti takeover devices
Environmental – nuclear strategy
Environmental – UK environment for coal plants
Social strategy for rising power prices
Governance – senior management remuneration
Environmental – coal industry
Environmental strategy – clean energy
Environmental strategy – nuclear
Environmental – UK renewable energy policy
with regard to energy from waste
Governance – remuneration

On-going

Research process

USUS

Environmental – energy policy and regulation
Environmental – pipeline safety

On-going
On-going

Research process
Research process

Australia
Australia
FranceEnvironmental – Queensland floods
Governance – remuneration
Governance – shareholder structure

On-going
On-going
On-going

Research process
Research process
Research process

Responsible investment report 2011

Indonesian Equities

$283

US

million

FUM as at 31 December 2011

Inception date of asset class 2005
Team size 6
Location Jakarta

receive a dividend for the next few years. Lastly, following
acquisition, the target company would be highly
leveraged, which could pressure margins and affectcapex plans to develop other mines.
The team took that the view that the corporate governancerisks were too great and sold off its holdings. Post theannouncement, the stock price plunged by 37% and has
not recovered. Indonesian regulator, Bapepam, postponed
the company’s shareholder meeting in December 2011,
and asked the company to provide more clarity.

The team’s approach

Large coal producer

The Indonesian Equities team has acknowledged
the importance of ESG in investment processes andprocedures. The team has not formally undertaken
detailed ESG research for individual companies; however,it has incorporated ESG issues into its discussions during
company visits. Our analysts will alert fund managers
whenever they foresee any potential ESG issues, anda short review on the potential short-term/long-term
impact of the stock will be provided.

This company is one of Indonesia’s largest coal producing
companies, producing around 67 million tonnes per year,
or around a fifth of total national coal production.

Indonesian companies are not accustomed to providing
ESG details yet, thus the team is not able to get sufficient
data to undertake detailed ESG research. We put more
focus on corporate governance as it is the biggest issue
in a developing market. Environment and social issues aretracked through news-flow and analysed accordingly.

However, the management decided to make early
repayments for all the tranches with another refinancing.
Based on the team’s calculations, the new refinancing
won’t significantly improve the company’s cash flow andmargin, because it must pay a penalty, plus an upfront
fee at over 2%. Following early repayment, the teamestimates that the company will end up having a newloan larger than US$1.9 billion.

The Indonesian Equities team believes that putting more
effort into understanding companies’ ESG challenges
and opportunities will provide a better risk-return andless portfolio volatility in the longer term. The team isdetermined to improve ESG research by incorporating
more ESG-related data into its research reports. We will
also seek to educate companies that, by disclosing more
ESG-related data, they will change the way investors may
consider the companies in the long term.

Engagement examples
Coking coal producer
The team subscribed to this coal producer’s IPO in 2010
in the belief that the company offered strong production
growth, high quality coking coal, good margin and aclean balance sheet.
In September 2011, the company’s major shareholder
planned to acquire a 23% stake in an Indonesian coalproducer for US$1 billion at a 46% premium over the
trading price. The team was against this plan due to thefollowing reasons. Firstly, the complex organisational
structure in the target company was never going tobenefit minority shareholders. Secondly, at the timeof acquisition, the target company was experiencing asubstantial loss due to its complex derivatives position.
This meant that the acquiring company would not

In 2009, the company signed an expensive loan of
US$1.9 billion to refinance its convertible bonds and bankloans to various lenders. The loan would be repaid inthree tranches, starting with US$600 million, in 2013 and2014, and US$700 million in 2015. The loan significantly
burdened the company’s margin and cash flow.

Although the company owned remarkable assets,questionable corporate governance and potential
financial engineering made the team reluctant to invest
in the company despite its significant weighting in theindex. Nonetheless, the team remains well informed on
the progress of any news related to the company.

Semen Gresik (SMGR)
A powerful earthquake hit West Sumatra in September
2009 and destroyed most of the properties in thecity of Padang. Fortunately, all the plants, mills,
buildings and houses in Semen Padang’s area were
not destroyed and only experienced minor damage,as the centre of the earthquake was quite far fromthe area. However, the operation had to be stopped
for a week because there was no electricity from theelectricity state company and the inland transportation
infrastructure had been badly damaged.

31

Indonesian Equities
continued

The company had proper procedures in place for
dealing with disaster and so all the physical assets,such as plants, properties and employees, were handledappropriately. No major injuries were reported and theplants were able to operate immediately. However, theinfrastructure problems, particularly the damaged inlandtransportation, were beyond the company’s capacity.
During the event, the company was proactively updating
investors about the conditions and the recovery
progress, and management was very reactive to investor
enquiries. The team views the proper procedures inplace, together with proactive management, as an
added value to invest in the company.

Large mining contractor
In August 2009, this company undertook a rights issue
with the intention to buy one of the second-largest
mining contractors in Indonesia. During the rights issue,
the management of the company clearly stated that
there would not be any other major corporate actions by
the company for the next 12 months.

32

Responsible investment report 2011

In early March 2010, there was a rumour that thecompany was planning to undertake another rights
issue to buy a coal mining company. The team talked
to the company to clarify the issues and it said thatthe company was being offered, but there was no planfor such action. In late March 2010, the rumour was
getting intense and the company was asked again,
and surprisingly, it said that the company was looking
at the offer and it will buy it if the price is right, using
a rights issue for the funding. To make things worse,the coal mining company that was being offered was
related to a group which was broadly known for its bad
corporate governance.
The team saw this as a major violation of good corporate
governance practices and decided to reduce theinvestment in the company. The share price was down by
more than 50% during the event.

Global Credit and Fixed Interest

$25.3

US

billion

FUM as at 31 December 2011

Inception date of asset class 1986
Team size 29
Location Sydney, Hong Kong, Singapore, Jakarta

The team’s approach
The fixed interest and credit asset class faces uniquechallenges when it comes to successfully integrating
ESG factors into the investment process. Unlike equity
investments, where a view can be formed whether an
ESG risk is factored in to the share price, this is not thecase with fixed interest and credit investments. This ispartly because fixed interest and credit investments
mature, with potentially many different maturity dates
for securities issued by any one entity, whereas equity
investments are perpetual securities. In other words,
fixed interest and credit investments are exposed toduration and credit risk, as opposed to valuation risk.
Corporate governance is the most important ESG
issue for fixed interest and credit investors. Corporate
collapses can seriously impact a fixed interest andcredit portfolio’s performance and such events usuallyoccur as a direct result of poor corporate governance.
Therefore, the Global Fixed Interest and Credit teamhas vigilantly incorporated corporate governance risks
within its disciplined investment process, which has astrong focus on managing default risks. This is taken into
account within the internal credit rating (ICR) assigned
to each issuer, where quality of management and thebusiness plan is a factor. It is also incorporated into
the Information Quality Score (IQS), which measures
the potential for ‘credit surprises’. Assessments are
conducted based on the quality and transparency of
the information provided as well as the overall standardof governance.
The team’s credit analysts also assess other elementsof ESG risk as part of the overall investment process,accessing ESG research through providers such as
ASSET4, RepRisk, Glass Lewis Research and Responsible
Research, in addition to the support provided by
CFSGAM’s Responsible Investment team. Environmental
and social risks can point to weaknesses in standardsof governance and highlight potential issues with risk
management. The team has also developed a sector
framework for assessing the relevancy of RepRisk
news as part of the enhancement to our overall ESG
assessment process.

The Responsible Investment team continues to engage
the credit analysts in ongoing training, contributing toincreased ESG research output and coverage (particularlyof Asian issuers), as well as expanded sovereign,supranational private loans coverage. Moreover, theGlobal Fixed Interest and Credit team continues to focus
on downside risks and materiality to credit securities. ESG
risk assessments and rankings have also been integrated
into the team’s proprietary research analytics web tool,
CRED.net.
As part of the transition from previous service providers
to ASSET4, the team cross-referenced and tested
scores from the existing service providers to ensure thecontinuity in data integrity. The team also collaborated
with ASSET4 to apply more relevant ESG indicators tosupranational and sovereign issuers. The team concluded
that company-based criteria in ASSET4 did not always
reflect the real ESG risks for these issuers, which
can more closely reflect a sovereign issuer and theirinherent risks.
In addition to the credit research ratings process, theteam has recently enhanced its process of selecting
intermediaries with whom they transact by including
ESG considerations into counterparty evaluations.
Counterparties are now assessed, in part, on a weighted
range of ESG indicators using data from ASSET4. Results
are provided to counterparties and include examples
of areas which can be improved based on the analysis.
The review process has been completed in 2012

Incorporation of ESG considerations
The Global Credit and Fixed Interest team met with thefour major Australian banks to discuss how they manage
and monitor ESG risk within their lending portfolio. In the
team’s view, the banks appear to have appropriate ESG
policies and processes in place, and are also continuing
to strengthen their culture to recognise and assess
ESG risks. However, there remains an inherent need to
strike a balance between business performance andreputational risk so as to manage low probability andhigh consequence events.
The Global Fixed Interest and Credit team also reviewed
several credits where material corporate governanceissues were identified. In particular, concerns over the
scale of government ownership, the ability to influence
the board composition and nominations, and key
strategic decisions were considered key risks. High profile
Asian companies, such as Sino Forest and NTPC, were
two examples where our ICR and/or IQS was reviewed totake into account poor corporate governance practices,and thus, elevated default risk.

33

Global Credit and Fixed Interest
continued

Furthermore, the team also reviewed several credits
where material environmental and social issues wereidentified. In particular, concerns over the safety levels
and production processes were highlighted as key
risks. High profile Asian companies, such as CNOOC and

Fosun International were two examples where our ESG
assessment was reviewed to take into account weakenvironmental policies and procedures surrounding key
plants and factories.

Engagement examples summary

34

CompanyCountry

Engagement issue

Complete/ongoing

Behavioural change/
research process

Toronto-Dominion BankRoyal Bank of Canada
BNP Paribas
NAB
ASB Bank
Credit Suisse
Bank of America Corporation
NAB
Brisbane Airport
Westpac
NAB
KfW
AfDB
IFC
ANZ

CanadaCanadaFranceAustralia
Australia
Switzerland
United States
Australia
Australia
Australia
Australia
Germany
Tunisia
United States
Australia

Counterparty review process
Counterparty review process
Counterparty review process
Counterparty review process
Counterparty review process
Counterparty review process
Counterparty review process
ESG risk management in financing
Climate change impact
ESG risk management in financing
ESG risk management in financing
ESG risk management in financing
ESG risk management in financing
ESG risk management in financing
ESG risk management in financing

Complete
Complete
Complete
Complete
Complete
Complete
Complete
Ongoing
Complete
Ongoing
Ongoing
Complete
Complete
Complete
Ongoing

Both
Both
Both
Both
Both
Both
Both
Both
Research process
Both
Both
Research process
Research process
Research process
Both

Responsible investment report 2011

Direct Infrastructure

$2.8

US

billion

FUM as at 31 December 2011
Inception date of asset class 1994
Team size 26
Location Sydney, Melbourne, London, Paris

The team’s approach
As one of Australia’s first unlisted infrastructure
investment managers, CFSGAM has a long history of
implementing ESG issues into investment strategies,
particularly as they relate to risk mitigation and value
protection and creation.
As well as running individual mandates for clients,
CFSGAM has three distinct infrastructure vehicles:–– the European Direct Infrastructure Fund–– the Global Diversified Infrastructure Fund, and–– the Wholesale Income Infrastructure Fund.
The CFSGAM Infrastructure investment strategy is
to typically manage a large enough interest in eachindividual business to enable the team to add value
through board and board committee representation.
The team is active on ESG issues through thisrepresentation or company engagement and seeks toensure that there are adequate sustainability policies
in place, and that reporting against these policies takes
place. If CFSGAM Infrastructure does not have a board
seat, it will seek to add value and influence management
decisions by actively exercising shareholder rights.
CFSGAM has developed a detailed ESG policy for its
direct infrastructure investments which outlines how
to engage assets on ESG matters, and how those assets
should engage relevant stakeholders. This policy willallow for greater alignment with clients’ long-term
investment interests.
With a long track record, the process of dealing with
ESG issues has been in itself an evolutionary process.
The team has consistently developed and refined its
commitment to ESG and today recognises it as beinga fundamental part of its investment process.
CFSGAM Infrastructure is also very active in the broader
industry, seeking ways through collaboration to advancethe consideration of ESG issues in the infrastructure space.
The team was the first investor signatory to the Australian
Green Infrastructure Council (AGIC) and also became thefirst Deputy Chair of this organisation. AGIC’s objective isto develop a sustainability rating tool for infrastructure
assets. Such a tool will be very valuable for direct
infrastructure investors in identifying ESG risk factors andopportunities. AGIC had many successes during 2011,
with the ongoing development of the tool, hosting its
second major conference in conjunction with the World
Congress on Engineering Asset Management, hosting
three master classes on sustainability in procurement in
the infrastructure sector and growing its membershipbase to now represent more than 82 institutions. Moreinformation on AGIC can be found at www.agic.net.au.
In 2011, the team also increased its research effort on
ESG issues. Most notably, a detailed research piece wasproduced on climate change, titled ‘Carbon regulationand infrastructure: risk or opportunity?’. The paper
outlines that climate change is an important theme
for investors, with infrastructure assets at the forefrontof society’s transformation to a low-carbon economy.
Investors need to be aware that, in most instances,
the underlying demand for infrastructure services is
expected to remain robust.
What will change is the technological or modal mix
through which services are delivered to the community.
Energy infrastructure, in particular generation, is likely
to be most impacted, with a wide range of outcomes
possible across the sector. Water utilities are also highly
exposed due to the interdependence between energy
and water. Transportation infrastructure will be affectedindirectly, via the impact of carbon. The full paper isavailable on the CFSGAM website.

Incorporation of ESG considerations into theinvestment process
A consideration of sustainability issues is embedded in
the life cycle of the direct infrastructure investment
process. ESG issues are considered in following way:

Step 1: Initial due diligence
Prior to an investment being made in an asset, the teamlooks to consider all the relevant ESG issues for the asset.
No checklist can appropriately cover all the possible
issues, so considerations are made on a case by casebasis. To support this process, reference on the key issues
for the different infrastructure sectors will be made to:–– existing legislation–– the IFC Performance Standards and the Equator
Principles, and–– applicable industry-specific environmental, health andsafety guidelines.

35

Direct Infrastructure
continued

The team does not screen any particular asset or sectors,
rather it looks to do the ESG analysis to support theinvestment decision-making process and ensure the rightprice is paid for an asset.
Additionally, once completed, the AGIC rating tool will
provide a useful process to assist in the identificationof key risk issues and opportunities for all infrastructure
acquisition opportunities.

Step 2: Ongoing asset management
Once an acquisition is made, the team undertakes
ongoing active asset management as part of acontinuous improvement process to value-add to asset
performance and effectively manage risk. This is done
through the active asset management strategy.
CFSGAM Infrastructure specialist fund managers andasset managers meet regularly with infrastructurebusiness management teams to discuss various matters,
including ESG issues. They also visit business sites intheir capacity as shareholder, board member and/or board committee member. To add value, CFSGAM
Infrastructure actively seeks to build relationships at
various management levels within the business during
the life cycle of the investment. Such relationships
provide the opportunity for the open exchange of
information and constructive debate of risks andopportunities including ESG issues which materially
impact on the value of the investment.
In addition, CFSGAM Infrastructure seeks to ensurethat management provides an appropriate level of
information to the board to ensure the approach
management takes in managing potential risks andrealising opportunities is understood by the board.
Examples of the types of reporting requested include:–– Environmental and social risks impacting materially on
earnings, including contingent liabilities.
–– Governance policies and procedures for assuring
compliance with internal ESG policies, improving
performance and mitigating risks across operations,the supply chain and products and services.
–– Human capital processes including:–– retention programs–– workplace health and safety performance–– staff turnover–– succession planning, and–– training and development programs.
–– Performance reporting on measurable environmental
factors, for example:–– energy use–– water use, and–– greenhouse gas emissions.

36

Responsible investment report 2011

Step 3: Valuations
Appropriate management of ESG considerations isundertaken as part of the ongoing valuation of assets
and is a consideration in decisions whether to divest an
investment. Notably in the appointment of a valuation
panel, its ability to include ESG factors into valuations isa key consideration.

Step 4: Ongoing research andindustry collaboration
Thematic ESG issues are considered as part of ouroverall investment strategy. Through participation inindustry dialogue the team ensures it is across emerging
sustainability issues for different infrastructure asset classes.

Engagement examples
Anglian Water
Anglian Water Group (AWG) serves more than six million
domestic and business customers in the east of England.
It is the largest water and wastewater utility in Englandand Wales by geographic area and fourth-largest by
regulated asset base size. CFSGAM owns 33.3% of AWG
through the European Direct Infrastructure Fund andthe Global Diversified Infrastructure Fund as well as client
mandates. This level of shareholder provides CFSGAM
with two board seats.
AWG has a strong approach to sustainability, fully
supported by CFSGAM Infrastructure. As part of its
carbon mitigation strategy, AWG management has set
some challenging targets, including:–– Stabilising operational carbon emissions by 2015. Undera business-as-usual scenario, AWG’s operational carbon
emissions are expected to increase by 10% from 2010
to 2015, driven by population growth and tighter water
quality standards. AWG is aiming to achieve a reductionof 10% in real terms (or zero-growth nominally).
–– Halving embodied carbon in the hard assets for
all capital expenditure by 2015. This is relative tocomparable assets AWG has built prior to 2010, andapplies to both new-build and maintenance projects.
–– Halving total annual greenhouse gas (GHG) emissions by2035. A long-term aspirational target, which will rely onother stakeholders taking action to reduce emissions.
In order to meet these goals, AWG is taking a proactive andpragmatic approach to carbon emissions management.
In addition, when evaluating a project, AWG’s design
engineers integrate carbon emissions estimates into thedesign phase. From questioning whether the project’s
goals can be achieved using existing infrastructure tothinking of ways to minimise and/or reuse materials,
engineers are challenged to think innovatively in orderto reduce embodied, as well as operational, carbon
emissions. To help them do this, tools such as AWG’s

carbon modeller have been developed, allowing themto ‘optioneer’ different designs and select the least
carbon-intensive option.
A good example of the potential benefits of suchan approach is the Bedford Growth scheme, which
involved increasing wastewater treatment capacity foran additional 30,000 people. From the original designs,
AWG was able to reduce embodied carbon by 67%, or
4,833 tonnes of C02. Project capex was also reduced
by 25%, or £5 million, illustrating the tangible financial
benefits that focusing on sustainability can bring.
AWG also seeks to drive the regulatory agenda throughits membership of industry and government bodies.
By being proactive rather than reactive, AWG seeks tominimise the risk of adverse regulatory changes being
imposed on the business.
As a long-term investor in AWG, the team is supportive of
these initiatives as it is believed they help ‘future proof’
the asset against future regulatory changes and increases
in direct and indirect carbon costs. The benefits of suchan approach are clear: a focus on sustainability leads tolower costs, higher returns and lower risks.

frequencies as well as rising sea levels.
–– Water: As outlined above, Brisbane Airport has
achieved a circa 85% reduction to date in potablewater consumption across the airport. Initiatives
include leak monitoring technology, rainwater tanks,
water harvesting design, water restriction devices,
freshwater lakes and recycled waste water network
including Australia’s first on-airport recycled water
treatment plant.
–– Biodiversity: Extensive flora and fauna studies
provided the foundation for BAC to formulate a
Biodiversity Management Strategy, including a 285
hectare conservation zone comprising habitats of thehigher biodiversity values on the airport.
–– Carbon footprint: Brisbane Airport management isalso currently undertaking an energy saving study. Thisinitiative, similar to the water saving strategy, should
lower Brisbane Airport’s carbon footprint and reducethe cost of electricity use across the airport site.

Brisbane Airport
CFSGAM was a foundation investor in Brisbane Airport
Corporation (BAC). Brisbane Airport is Australia’s thirdlargest airport by passenger movements. In 2011, BAC
had nearly 20 million passengers through its terminals
and there are 420 businesses and nearly 17,000 people
who work on Brisbane Airport every day. The vital role BAC
plays in the Queensland economy means environmental
and community issues are critical to its future growth.
Through a long-term shareholding and representationon the Board, the team has always looked to support
BAC’s activities as they relate to sustainability. In thefirst CFSGAM responsible investment report (2008)
there was a case study outlining the achievements of
BAC in relation to a significant water saving initiative.
In 2011, the team is pleased to report the following ESG
achievements at Brisbane Airport:–– Climate change: The long-term impacts of climatechange are a key consideration at Brisbane Airport.
For example, Brisbane Airport’s infrastructure is being
planned and constructed in accordance with longterm sea level rise forecasts. The 1 in 100 flood event
in January 2011 saw BAC infrastructure unaffectedby rising flood waters, with operations continuing at
all stages throughout the flood event, proving theresilience of the BAC’s critical infrastructure under
extreme conditions. Additionally, the new parallel
runway planning process (and specifically the height
the runway will be constructed to) has involved
consideration of changing storm surge levels and flood

37

Direct Property

$18.1

US

billion

FUM as at 31 December 2011

Inception date of asset class 1994
Team size 20
Location Australia and New Zealand

The team’s approach
As CFSGAM Property directly controls the managementof real estate it manages on behalf of investors, it is in afavourable position to implement responsible property
investment initiatives and processes to directly affect
ESG outcomes of the investments. These often have
immediate and enduring financial benefits to ourinvestors, particularly in areas of energy and resource,
and tenancy demand. In this way, responsible property
investment makes good business sense as it positively
impacts investment performance and assists in futureproofing properties to ensure they will continue toprovide strong returns for investors.
CFSGAM Property manages three listed real estate
investment trusts (REITs) along with a suite of wholesale
property funds and direct property mandates valued
at A$18 billion. Each of these investment products is
managed through substantial asset and development
management capability, and each with an RPI overlay.
The team is committed to best practice standards
in environmental management, social incorporation,
corporate governance and risk management. The teamtakes a leadership role in working with industry bodies
to guide government direction and regulation, andconsistently reviews and improves the way it services andsupports all stakeholders.
In 2011, the team increased the amount of research
it undertakes on ESG issues. Most notably, the teampublicly released a detailed research paper on theeffects of carbon regulation on property: ‘Australiancommercial property sector well positioned for carbon
regulation’. The paper found the commercial property
market is unlikely to be materially impacted by the
introduction of a Carbon Price Mechanism (CPM).
A CPM may be a positive development for the industry,helping to future‑proof commercial property against
further increases in electricity costs. This could beachieved by accelerating the adoption of energy efficienttechnologies and through complimentary measures
to assist the sector in the transition to a reduced
carbon economy.

38

Responsible investment report 2011

The Responsible Property Investment team has five key
objectives, incorporating:–– Fiduciary duty: To protect and enhance returns–– Value proposition: To include RPI within theinvestment process and business philosophy–– Communication: Articulate the value proposition of
RPI, and collaborate with others–– Operational process: Ratings and performance to be
maintained and improved across assets and portfolios,
taking all stakeholders and communities into account–– Reporting: Stakeholders to be kept advised of RPIdevelopments and progress.
The team’s proactive management approach toenvironmental and social considerations in building
design and operation demonstrates leadershipcapabilities in the marketplace. By successfully engaging
stakeholders, the team can mitigate risks to its strategy.
Further, by implementing market-leading governancepractices, the team can provide investors with assurance
that their investments are managed prudently andwithin the appropriate fiduciary framework. This robust
approach to incorporation of ESG into all areas ofmanagement in direct property has resulted in a numberof international awards and recognition.

Incorporation of ESG considerations into theinvestment process
We incorporate RPI at all stages of ownershipmanagement and development:
Invest: Each asset acquired is reviewed through a
responsible investment checklist as part of the standard
due diligence process. This process investigates theenvironmental and physical aspects relating to aproperty (land and buildings), in both its construction
and ongoing operation. Social aspects are investigatedin relation to how a building is integrated within its
local community. In relation to governance, the asset isreviewed for compliance with regulatory controls. These
RPI aspects are investigated not as a screening process,but as part of risk identification and mitigation.

Manage: The team sets performance targets to improve
its assets over time. The day-to-day management ofa building is closely guided through the Operational
Performance Strategy. This strategy is focused on setting
and achieving performance targets for the operationof a building based on an appropriate benchmark
for the class and use of each particular building.
Once a benchmark is set, the team then actively
monitors, manages, analyses and reports on the actual
achievement of these targets, and institutes continual
improvement. To drive sustained asset performance theteam:–– trains operations staff to manage properties more
efficiently–– considers life cycle analysis in the replacement of plantand equipment–– considers the needs of a building’s occupiers, and–– has a detailed Tenant Engagement Strategy, including
a Green Lease Strategy (which includes a green lease
schedule, a tenant fit-out guide and house rules,
governing the operation of the asset).
Enhance: The team seeks to refurbish or redevelop
to a high environmental standard when undertaking
development works. When undertaking refurbishment
or redevelopment works, the team aims to improve theenvironmental standard of its assets. The team targets
a minimum of 5-star Green Star ratings and 5-star
NABERS Energy ratings on new developments. The teamalso takes into account the effects on communities
and ensures the buildings are integrated into the social
community, and provides the appropriate infrastructure.
The procurement policy takes into account ESG in
dealing with suppliers.
Create value: The team focuses on the sustainability of
its assets because it is good business practice: improving
the efficiency of assets reduces operational costs. Froman owner’s perspective, a more sustainable building will
typically attract higher income. As such, responsible
property investment is a key factor in maintaining
property valuations over time, which is aligned withfiduciary responsibility and the long-term interestsof unitholders. The responsible property investment
program results in real efficiencies being achieved across
many of the assets managed on behalf of investors. For
example, in the listed Commonwealth Property Office
Fund, the team has been recording results for sometime. Since 2006, properties in this fund are 29% moreenergy efficient, 26% more water efficient, and emit 30%
less emissions per square metre. On one particular asset$3.2 million was spent over a four-year period, replacing
equipment with more efficient plant, retrofitting,and introducing a number of management efficiency
measures, resulting in a 48.5% reduction in C02 and a
return of over 14% per annum.

Engage: CFSGAM Property takes a leadership role inworking with industry bodies to consistently review
and improve the way ESG is practised within theproperty sphere in Australia and globally. The teamassists in providing feedback and guidance to proposed
regulation. Memberships and partnerships include:–– Signatory to the United Nations Principles of
Responsible Investment (PRI) through CFSGAM–– Member of the Investor Group on Climate Change(IGCC), through CFSGAM, and member of theProperty Working Group–– Board member of the Green Building Council ofAustralia (GBCA)–– Co-chairman of the UNEP-FI Property Working Group–– Membership of and National president of the Property
Council of Australia (PCA)–– National sustainability and divisional sustainability
representation (NSW and VIC) on the PCA–– Board representation on, and corporate donor to theProperty Industry Foundation–– Melbourne 1,200 Buildings Partnership with Melbourne
City Council, and–– Signatory membership to the Better Building
Partnership between owners and the City of Sydney.
Through its parent body, CFSGAM Property is also asignatory to the UN Global Compact.

39

Direct Property
continued

Operational Performance Strategy

Direct property life cycle analysis

CFSGAM Property’s Operational Performance Strategy(OPS) covers the management and operation of property
assets by specifying practices to implement ESG
considerations in each building under management.

CFSGAM Property’s life cycle analysis model was bornefrom the need to find drivers for sustainability acrossshopping centre assets. Unlike office assets, where
there are drivers in the forms of legislation and tenantrequirements, retail property doesn’t have these drivers.
The life cycle analysis model assesses whether theowners will realise a return if additional capital is spent tosave on operating costs in the future. This analysis allows
for the selection of more efficient items of plant andequipment which otherwise may not have been selected
due to capital costs being too high.

The OPS serves to embed efficiency improvements
throughout the assets’ operations, for the benefit of
all stakeholders. This approach seeks to maintain andenhance asset value, mitigate operational and legislativerisk, achieve full operational potential and provide quality
accommodation for tenants in conjunction with socialand financial objectives, to achieve a balanced outcome.
The ESG principles underlying the OPS are to:–– benchmark the environmental footprint of thefunds which hold the assets, and the individual
properties managed–– responsibly improve the operational performance andefficiency of all assets over time by setting measurable
short and long-term targets as appropriate–– explore and implement as appropriate, the adoptionof management and design practices, systems
and technologies which promote innovative
performance solutions  
–– understand and influence the associated supply
chain activities–– influence, direct and educate key stakeholders to act
in a sustainable manner, and–– report and disclose performance in a format thatis tailored to suit the information user (transparent,
consistent, relevant and inclusive).

Centres creating communities
The shopping centres that CFSGAM Property manages
form an integral part of communities in which they arelocated and so have the ability to interact with thesecommunities. They are more than just an attractive
place for customers to shop and retailers to operate;they help create better communities, by being vibrantfocal points for their communities. In this regard, RPI
means collaborating to achieve the best outcomesfor all stakeholders of the centres. CFSGAM Property
provides space, facilities and funds to local community
organisations, charities and schools.

40

Responsible investment report 2011

Life cycle analysis presents opportunities to improve
returns to owners, which then flow through various
aspects of the property management business. For
example, by improving the long-term efficiency andsustainability credentials of the assets and bringing
the assets in line with world class standards, tenantsatisfaction is enhanced.

Tenant Engagement Strategy
CFSGAM Property has produced a green leasing strategy
for office buildings, which forms part of our overall social
focus, with particular regard to tenant engagement. All
new leases from July 2011 have a green lease schedule,with commitments by the owner and opportunity forthe tenant to collaborate to improve the environmental
outcomes of the premises.

Chapter 3
CFSGAM activities

Traditional Ikkat fabric from Lombok, Indonesia

41

Engagement through voting

With more than US$70.6 billion invested in Australian and global
equities, CFSGAM is a significant shareholder on behalf of investors
in many listed companies around the world. Voting on company
resolutions is an important component of shareholder responsibility,
and CFSGAM votes on all possible resolutions at company meetings.
CFSGAM is restricted from voting for the approval of share issues
where it has participated in the placement.
Prior to voting, the relevant investment manager
and company equity analyst carefully consider eachresolution, with guidance provided by internal policy
and recommendations from a selection of independent
corporate governance research houses.
A key development in Australia during 2011 was theintroduction of the ‘two-strikes’ rule on executive
remuneration. CFSGAM expects this to enhancecommunication and understanding between
companies and shareholders on the topic of executive
remuneration, and strengthen the link between pay
and performance.
Europe continues to focus on harmonisation of corporate
governance practices, while emerging markets continue
to develop their corporate governance frameworks, withvarying degrees of success.
Given the focus on executive remuneration, it is likelythat legislation will only increase in this area. Setting
limits on executive remuneration, increasing alignment
between performance and pay, and giving shareholders
greater input on remuneration packages are some of thelikely themes surrounding new legislation globally.

The ‘comply or explain’ approach is gaining traction,
especially in Europe, Australia and the US. The UK’s
strong corporate governance framework is built
around the ‘comply or explain’ principle, which requires
companies to disclose their compliance against set
criteria and justify any deviations from best practice.
The US is gradually adopting the ‘comply or explain’
approach, while in Europe it is providing a flexible
framework which allows for harmonisation of corporate
governance regulation across borders.
An issue noted by CFSGAM’s investment teams globally,
including in emerging markets, was an increasing numberof capital raising resolutions without shareholder approval.

Shareholder resolutions voted on during 2011
In 2011, CFSGAM voted at 1,619 company meetings,
voted on 18,427 resolutions and voted against
management 8.0% of the time.

Resolutions supported 71.4%
Resolutions against 8.0%
Resolutions abstained 0.3%
Resolutions non-voting 16.6%

42

Responsible investment report 2011

Types of issues voted on: all votes

Non-voting
Director election
Executive remuneration
Non-executive remuneration
Issue of new shares
Remuneration report
Financial scheme/reconstruction of capital
Constitution/articles of association change
Appoint/Reappoint auditor
Takeover or merger acquisition
Shareholders proposals (SHP)
SHP – Environment
SHP – Social
All other proposals
Total
Types of issues voted on: against votes only

Non-voting
Director election
Executive remuneration
Non-executive remuneration
Issue of new shares
Remuneration report
Financial scheme/reconstruction of capital
Constitution/articles of association change
Appoint/Reappoint auditor
Takeover or merger acquisition
SHP
SHP – Environment
SHP – Social
All other proposals
Total

Number of votes

Per cent of total votes

2,696
6,770
596
511
319
804
65
704
881
121
103
24
47
4,786
18,427

14.6
36.7
3.2
2.8
1.7
4.4
0.4
3.8
4.8
0.7
0.6
0.1
0.3
26.0
100.0

Number of votes

Per cent of votes against

0
601
91
26
35
158
4
181
46
16
35
5
7
839
2,044

0
8.9
15.3
5.1
11.0
19.7
6.2
25.7
5.2
13.2
34.0
20.8
14.9
17.5
11.1

43

Research and education

Despite sourcing third-party research, in-house research remains
the most important source of reference when integrating ESG
considerations into the investment process.
Responsible Investment Academy
The Responsible Investment Academy (an initiative of
the Responsible Investment Association of Australia)
has developed a course aimed at educating investment
professions in a more formal way on responsible
investment. While many in CFSGAM’s investment teams
are experienced in responsible investment, there issignificant interest across our broader business. CFSGAM
has enrolled 40 executives from across the business tocomplete the Certificate for Responsible Investment.

Responsible investment sessions
Responsible investment sessions are held as partof an internal education and awareness-raisingprogram which helps to provide CFSGAM’s investment
professionals with a better understanding of
the opportunities and challenges presented byresponsible investment.

44

These education sessions equip staff with the knowledge
to engage on ESG issues with clients and the wider funds
management industry. The following table summarises
some of the guest speakers who were invited to present
at the investment sessions during 2011 and the topics
they covered.

PRI Academic Network
During 2011, CFSGAM continued to work closely witheducational institutions to develop education materials
and course content. We also participated in global
collaborations, most notably through being a member ofthe Award Panel for the PRI Academic Network ResearchAwards and participating in the Academic Network
Conference. We believe this project was particularly
important given the need to see rigorous academic
research produced to support the investment industry in
its approach towards responsible investment.

Name

Title

Company

Topic

Brief description of topic

Adam Horler

President

LOHAS Asia

Responsible
Investment Briefing:
Can Asian consumers
save us all?

KT RabinCEO

Glass Lewis& Co.

Update on
global corporate
governance issues

Nathan FabianCEO

Investor Groupon Climate
ChangeOngoing politicaldebate of climatechange andemissions trading

Adam Horler from LOHAS, a specialist
sustainability-focused market research firmin Asia, discussed whether Asian purchasers
can begin to consume more responsibly andhow companies have risen to the challenge of
producing less resource and energy-intensive
goods and services.
The CEO of one of CFSGAM’s service
providers – KT Rabin from Glass Lewis & Co.
– provided an update on current corporate
governance issues globally. Specific issues
discussed included corporate governancein the eurozone, US regulatory changes
and emerging trends among pension funds
worldwide.
Emissions trading and the Government’s
proposed carbon tax remained close to
the top of the Australian political agenda
throughout 2011. Nathan Fabian, CEO of
the Investor Group on Climate Change,
provided a comprehensive summary of
his views regarding the ongoing debate
between politicians, listed companies andenvironmental groups.

Responsible investment report 2011

Name

Title

Company

Topic

Brief description of topic

Benjamin
McCarron and
Claire Veuthey

Head of
Research

Responsible
Research

Overview of
the responsible
investment
ecosystem in Asiaand dominant trends

Aimee Kaye

ESG
AnalystandEconomist

Macquarie
Securities

Employeeengagement inAustralia

Richard Boele

FounderandManaging
Director

BanarraGlobal Reporting
Initiative (GRI)
providing aframework forcompany reporting

Dr Nils Kok

Associate
Professor,
Executive
Director

Maastricht
University(Netherlands),
GlobalReal Estate
Sustainability
Benchmark(GRESB)
Foundation

Building better returns
through sustainability
initiatives

Benjamin McCarron and Claire Veuthey fromresearch firm Responsible Research provided
an overview of the current responsible
investment landscape in Asia, including theincreasing number of UN PRI signatories
and sustainability disclosure among listedcompanies. A number of case studies from
China and India were discussed, specifically inthe food, water and energy sectors.
Companies often suggest that people
are their most important asset. Thereappears to be a growing body of evidence
to support this claim, with the latest
international research suggesting thatcompany performance can be linked to
employee engagement. Aimee Kaye, an
ESG analyst from Macquarie Securities,
provided an analysis of employee
engagement trends in Australia, including
human capital measurables such as staff
turnover, remuneration, productivity andabsenteeism and how these factors can belinked to share price performance.
In order to make informed investment
decisions, portfolio managers requirecompanies to provide accurate andrelevant reporting on ESG issues. The
Global Reporting Initiative (GRI) provides aframework for companies to follow whenpublishing these reports. Richard Boele,
Founder and Managing Director of Banarra,
outlined some of the most important issues
to consider in the assessment of ESG factors
and whether the GRI adequately meets theinformation requirements of investors.
Dr Nils Kok, co-founder of the Global Real
Estate Sustainability Benchmark (GRESB)Foundation, provided insightful sessions toexternal analysts and internal employees,
focusing on the correlation between
responsible investment and returns fromproperty, and how asset owners can employ
sustainability initiatives in order to help
generate superior long-term returns.

45Collaborative initiatives

CFSGAM’s Responsible Investment team members and executives
from across the organisation are well-regarded and active
participants in their field and contribute their expertise toa number of third-party organisations including:
ESG Research Australia–– Management Committee Member–– Chair of Evaluation Committee

Green Building Council of Australia–– Member of the Board of Directors

Investor Group on Climate Change–– Founding Deputy Chair–– Member of the Greenhouse and Energy reporting(including Carbon Disclosure Project) Working Group–– Member of the Research Working Group–– Member of the Property Working Group

Property Council of Australia (PCA)–– Member of the National Sustainability Roundtable–– Member of the PCA (Victorian Division) Sustainable
Development committee–– Member of the PCA (NSW Division) Sustainable
Development committee

United Nations Environment Programme
Finance Initiative–– Member of the Global Steering Committee Co-Chair–– Member of the Property Working Group–– Member of the Asset Management Working Group

Financial Services Council–– Member of the Investment Committee–– Member of the ESG Working Group

Australian Green Infrastructure Council–– First Deputy Chair and Director

Association of Superannuation Funds ofAustralia Investment Policy Sub Committee–– Committee Member

46

Responsible investment report 2011

Other collaborative initiatives that CFSGAM participated in,or continued to be a member of, during 2011 included:–– Asian Corporate Governance Association–– Association for Sustainable and Responsible Investment
in Asia (founding member)–– Carbon Disclosure Project–– Water Disclosure Project–– Extractive Industries Transparency Initiative–– International Corporate Governance Network–– Forest Footprint Disclosure Project–– Responsible Investment Association Australasia

Carbon Disclosure Project and Water
Disclosure Project
CFSGAM again accepted the invitation to become asignatory to the Water Disclosure Project. CFSGAM was
one of the first signatories to sign in 2010.
Like the Carbon Disclosure Project, the Water Disclosure
Project will survey 302 of the world’s largest companies
in sectors that are water-intensive or face particularwater-related risk. A total of 354 signatories representing
US$43 trillion are signatories and 408 companies in the
Global 500, the South Africa (JSE) 100 and the Australia(ASX) 100 that operate in water-intensive or watersensitive industry sectors were surveyed.
The Water Disclosure Project requests information on
the risks and opportunities companies face in relation towater; on water usage and exposure to water stress incompanies’ own operations and in their supply chains;
and on companies’ water management plans andgovernance. This information can then be used to inform
investor signatories on potential investment risk andcommercial opportunity.
In 2011, CFSGAM was again a signatory to the CDP.
On 1 February 2011, 551 signatories representing
US$71 trillion in assets requested information on carbon
emissions and climate change from the chairmen/
CEOs of over 6,000 of the world’s largest companies.
CFSGAM’s Direct Property division is also a respondent
to the CDP.

Stewardship code

Financial Services Council working groupAs reported in the 2010 Responsible Investment report,
after careful review CFSGAM took the decision to notsign the UK Stewardship Code.

The FSC working group was formed in 2010 and CFSGAM
has been an active participant since inception. In 2011,
the FSC worked collaboratively with the Australian Councilof Superannuation Investors (ACSI) to develop and release
an ESG Reporting Guide for Australian Companies. The
guide is aimed at ASX 200 companies which are notreporting on ESG issues, and provides some guidanceon how to report, including key themes under theenvironmental, social and governance pillars. References
are provided to standard reporting frameworks andnorms for each theme and some example indicators andbest practice reporters are referenced. The guide can beaccessed on the CFSGAM website.

Representatives from CFSGAM met with the CEO of the
Financial Reporting Council UK (FRC) to discuss the UK
Stewardship Code. CFSGAM discussed its alignment withthe principles behind the Code and our active engagement
as investors. Direct dialogue with companies is a key way
for CFSGAM to assess management quality and the risks
and opportunities of the companies invested in. CFSGAM,
exercises its voting rights thoughtfully, with diligence andcare. CFSGAM is a signatory to the PRI, which provides aframework and forum for better engagement, and CFSGAM
believes that there is little, if any, obligation in the Code thatis not covered by the PRI.
In addition, CFSGAM expressed to the FRC its concern
about the strength of the Code and the ability for it tomake genuine improvements to real stewardship byinvestors. Concerns were raised that the combinationof no review mechanism and the speed and numberof signatories to the Code will lead to many signatories
failing to fulfil the intention of the Code. CFSGAM gave
the example that a review of signatories to the Codehighlighted that there are some investor signatories
which have a very different view on investor stewardshipto CFSGAM.

ASX Corporate Governance Council
Corporate Governance Principles andRecommendations Roundtable
CFSGAM participated in a roundtable to review
Principle 7 of the ASX Corporate Governance Principles
and Recommendations. The roundtable included nonexecutive directors, governance advisers, institutional
investors, proxy advisory firms, company secretaries
and risk officers. The group discussed a range of issues
related to how companies manage and report theirmaterial business risks and focus on the reporting of ESG
issues and what role and possible approach the Principles
and Recommendations could play in this area going
forward. This is consistent with the Financial Service
Council work on an ESG Reporting Guide for AustralianCompanies and will provide better exposure and support
for the Financial Services Council (FSC) initiative.

The working group also wrote to the ASX as part ofits review of listing rules for additional reporting on
mining and exploration activities. The working groupencouraged the ASX to consider payment transparency
by companies to sovereigns, consistent with theExtractive Industries Transparency Initiative which is
supported by the Australian Government. Similarly, in
July 2010, the United States passed the Dodd-FrankFinancial Reform Act which requires companies engaged
in extractive industries, and registered with the US
Securities and Exchange Commission, to publicly disclose
any payments they make to governments, country bycountry and project by project.

Emerging Market Disclosure Project, Indonesia
The Emerging Market Disclosure Project (EMDP), a PRI
initiative aimed at increasing disclosure by emerging
markets companies, is focusing on Indonesia thisyear. Given CFSGAM’s presence in Indonesia, CFSGAM
participated in a study that looks to understand how
ESG issues are factored in lending and investment
decision processes by asset managers, pension funds,
development banks and commercial banks in Indonesia.

47Collaborative initiatives
continued

Cluster Munitions Working GroupESG Research Australia

CFSGAM has participated in a Cluster Munitions Working
Group of investors who are all signatories to the PRI. This
Group is made up of eight institutional investors.

CFSGAM was again an active member of ESG Research
Australia. CFSGAM had a representative on theManagement Committee and chaired the Research
Evaluation Committee. In doing so, CFSGAM coordinatedthe responses from all signatory members on theirviews of ESG research across the Australian market andfacilitated the roundtable discussions that led to thesummary report and award event. The summary reporton ESG research in Australia can be found on the ESG
Research Australia website.

These signatories recognise that their international
investment universe may include companies thathave involvement in the manufacture of weapons orcomponent parts that contravene the Convention
on Cluster Munitions 2010 or the Ottawa Treaty. The
Convention on Cluster Munitions and the Ottawa Treaty
prohibit the use, production, stockpiling and transfer ofcluster munitions and anti-personnel mines.
The ultimate aim of the Group is to establish adefinitive list of such companies in order to produce
a factual and widely-accepted list for use amongst theinvestment community.
As a part of this process, the investor group is
actively collaborating through research and company
engagement to gain greater clarity on company
exposure to cluster munitions or anti-personnel mines,
to better inform their investment decisions and also
to ensure compliance with legislation prohibiting
investment in such companies where applicable.
The Group wrote to US-based companies linked tothe defence sector which are not involved in cluster
munitions to commend them for their policy andencourage them to consider making a formal, publicstatement regarding their policy toward cluster
munitions. The Group acknowledged the leadership ofthese companies and outlined the risks involved in the
manufacture of such weapons.

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Responsible investment report 2011

Forest Footprint Disclosure (FFD) project
In support of the FFD, CFSGAM joined 19 other investors
to endorse a letter to encourage non-disclosing
companies to respond to the project. These letters went
to numerous companies across the forest supply chain
and emphasised many causes of deforestation and thecontribution to climate change, as well as the risks tocompanies and investors.

Integrated reporting

CFSGAM is very supportive and engaged in the regional discussions on
integrated reporting. The concept of integrated reporting is effectively
that companies should combine their traditional financial reportingand sustainability reporting in a way that articulates how ESG issues
are relevant to strategy, risk management and financial performance.
Integrated reporting should also encourage integrated thinking.
CFSGAM has always articulated to companies that is
has a preference for such reporting; however, it seems
the industry has now reached a tipping point in therecognition of the need for integrated reporting. Driven
mostly in the UK by the Prince of Wales’ Accounting for
Sustainability Project, and the Global Reporting Initiative,
there is a critical mass of large companies, accounting
firms, regulators and investors now collaborating on
the frameworks for integrated reporting. CFSGAM isproviding input into that process through the Australian
forum coordinated by KPMG and the Society forKnowledge Economics.
The initial paper coordinated by the working group on
investors’ perspectives outlined that, as more investors
commit to a mainstream consideration of ESG issues intheir investment selection processes, they face a numberof challenges relating to information flows that include
a lack of:–– usable information on a company’s ESG performance;sustainability reports are typically targeted atstakeholders other than investors–– information from many medium-sized andsmaller companies–– consistent data year on year (in content and approach)and lack of consistency in definition across the sector–– candour and relevance in disclosure; sustainability
reports are presented in a marketing style, and do notnecessarily address the key issues that are the mostmaterial to the company and investors, and–– complex metrics with a lack of standardised
methodologies for calculation and setting ofboundaries, for example regulatory requirements
which focus on local boundaries for companies withinternational operations.

By looking at ESG performance, investors will also be
looking for insight into the efficiency of operations.
Ideally, investors would have access to reporting that
disclosed:–– an articulation of the business strategy and the key
strategic drivers, and how ESG issues could impact thecompany’s ability to deliver on its strategy–– a description of the most relevant ESG issues for thecompany and the time frame of any potential impact–– the governance process in place for managing ESG
issues, for example which ESG issues are managed byrisk, strategy, the Board or operational management–– information on whether and how externalities are
identified and measured, and potential liabilities
estimated, in the event that regulation were tointernalise that cost in future–– relevant performance data to demonstrate theprogress and success (or otherwise) of the approach,for example energy use and safety performance–– a discussion around materiality and how ESG issues arebeing managed–– forward-looking discussion on how ESG issues aregoing to be managed and how that impacts the
traditional forward-looking statements of the company–– whether a company identifies future ESG regulatory
risks which could impact the balance sheet (eg throughasset impairment)–– a simple concise summary of the key ESG issues
without the marketing gloss.

49

Integrated reporting
continued

During the period, CFSGAM provided stakeholder
feedback on the paper Towards Integrated Reporting:Communicating Value in the 21st Century. This paper
is the first output of the Global Steering Committee.
CFSGAM’s feedback is focused on the fact that:–– the framework needed to put a greater focus on risk
management and financial performance–– there needed to be an articulation of the investor needfor comparability of ESG data, and–– the principle of accuracy and no spin needed to bestronger, as this should not be a marketing exercise.
CFSGAM believes that the strongest aspects of thereport are the articulation of the five different ‘capitals’(manufactured, human, intellectual, natural and social
capitals) and the investor’s perspectives. While there is
still not a template and a ‘how to’ guide for companies,
the paper provides good context and a business case forcompanies moving towards integrated reporting.
In CFSGAM’s engagement with companies, it
increasingly raises the opportunity of moving towards
integrated reporting.

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Responsible investment report 2011

Cross team engagement

While most engagement is driven by the investment teams,
on some more technical issues company engagement is
supported by the Responsible Investment team. Examples of suchengagement in 2011 are given below.
Palm oil

Extractive Industries Transparency Initiative

The sustainability, or otherwise, of the palm oil industry
continues to challenge investors globally. It wasalleged that a Singapore-listed agricultural company
commissioned over 700 paramilitaries to attack an
indigenous community in Indonesia. Apparently 40
people went missing as a result of the attack, which
was intended to clear land for palm oil cultivation.
One man was allegedly shot in the back several times
by the paramilitaries. CFSGAM contacted the company
to ask for its response to these allegations. CFSGAM
also contacted possible customers of the company tounderstand their response to the allegations.

The Extractive Industries Transparency Initiative(EITI) was established in 2003 to support improved
governance in resource-rich countries through thefull publication and verification of company payments
and government revenues from oil, gas, and mining.
The EITI arose following public concerns about how
much companies are paying, and what countries are
doing with the funds. About 30 countries are currently
participating to help protect their social licence tooperate, including Yemen, Peru, Albania and Nigeria.
The EITI helps companies improve stakeholder andcommunity relations, mitigates reputation risk and helps
provide transparency to investors.

The allegations demonstrate the ongoing persistent
challenges of the industry, and it is not only the palm oil
producers that are being targeted. Purchasers of palm oil
are potentially exposed to even greater reputation risk.
While CFSGAM is engaging companies, it has also been
looking at what collaborative initiatives it may be able toparticipate in with other investors. CFSGAM has agreed tojoin the PRI working group Sustainable Palm Oil Investor
Working Group. The primary objective of the group will
be to support the development of a sustainable palm oil
industry through the active support of the Roundtableon Sustainable Palm Oil. The two main activities of theGroup will be to get broader investor interest and also
to engage companies up the supply chain. CFSGAM seesan opportunity to add value through engagement with
Chinese and Indian purchasers of palm oil.

CFSGAM is a signatory to the EITI because it contributes
towards improvements in governance and transparency
in emerging markets in which CFSGAM invests. Country
reporting is expected to provide a better understandingof sovereign and political risk which may be particularly
useful for our Credit and Fixed Interest investment
teams. As well as writing in collaboration with 20 otherinvestors to the European Union Commissioner tosupport enhanced disclosure for extractive companies,
CFSGAM continued to engage with companies on
EITI-related disclosure.
In late 2010, CFSGAM wrote to 35 of the largest
Australian resources companies that operate in
EITI countries or countries listed by Transparency
International as having a perception of corruption,and encouraged them to report to the EITI framework.
This engagement continued in 2011, and representatives
from CFSGAM met with many of the large companies
exposed. Some companies conveyed a tendency of not
wanting to participate in EITI if their host country was
not yet a participant; others felt too much disclosure
was risky from a competitive positioning perspective.
We emphasised the general direction of regulation andencouraged companies to be more proactive.

51

Viewpoint

India insightThis was my first trip to India. The thing that surprisedme the most was how much companies seemed
to genuinely want to grow their business in a waythat was addressing the wealth gap. Either throughphilanthropy or growing ‘responsibly’, the approach
was more genuine than you typically see in otherglobal companies.
The common question I tried to ask all the people
I met was, ‘What are the biggest sustainable
development challenges for your company andfor India?’ I was really struck by how much thegood company leaders had thought about theissues. Particularly impressive responses were from
Mr Godrej, from Godrej Industries, who said thatpeople in India waste too much and Ms Shikha
Sharma from AXIS and Sunil Duggal from Darbur
who argued that inequality was the big challenge.
Having more than 50% of people without accessto basic financial services creates major sustainable
development challenges. Mr Duggal eloquently put
it that ‘poverty is the biggest polluter’.
The waste aspect was interesting. Consistently, people
claimed that the Indian population just wastes toomuch. Some of this was due to ‘silly government
policy’ like free power to the agricultural sector:‘farmers just leave the water pumps running all night
because the power is free’. The waste is also a result ofa lack of awareness about the environmental impactthat occurs through people’s activities.
The importance of a social licence to operate in thecontext of land acquisition challenges was a surprise.
It was a theme that cut across sectors. Even thecompanies with a poor approach like Jindal Steelrecognised that this was the biggest challenge, but
it’s relevant to everyone.
I was surprised that water issues did not come up
more. It was only when I asked that companies
admitted that India’s reserves were seriously underpressure. I suspect it’s just not a priority. Gujurat
seems to be taking some innovative approaches tomanaging salinity in the coastal rural areas that have
led to some significant improvements in agricultural
yield. Otherwise, there was not much from thecompanies in terms of innovation.

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Responsible investment report 2011

It was the opposite with energy. I suspect this is partly
driven by the regulatory reporting requirements in
India, which I think are some of the best in the world.
With 35% of the population still without access toelectricity, it seems energy conservation emerged
as a major policy objective. The Energy Conservation
Act was passed in September 2001 and requires large
energy consumers to adhere to energy consumption
norms and to report on use and efficiency gains.
The challenges at the company level were obviously
broad and varied. Some of particular note andfrequently mentioned include:–– bringing people along the sustainability journeyand convincing them it’s good business–– education and making people understand they
have an impact–– lack of regulatory certainty, and–– human capital and finding skilled labour.
The other real take-out from my trip was theoverwhelming sense of ‘India pride’. ‘Tata pride’ fromthe staff at Taj was quite wonderful. Our guide spoke
so fondly of the way the staff where treated post theterrorist attacks. Tata continued to pay its 1,500 staff,
including contractors, full wages for the two years it
took to rebuild the hotel. The loyalty that this fosters
certainly cannot be bought.
Some of the more concerning things should be no
surprise. Obvious pollution challenges. Poverty likenowhere else I have seen. Corruption. Corporate
governance; how many boards are too many?
All these issues create massive challenges forcompanies and are barriers to achieving sustainable
development. More specifically, I think the multinational corporations that are run as divisions, as
opposed to even proper subsidiaries let alone publiccompanies, could also be of concern.
In summary, I learnt more in this trip than I can possibly
put down on paper and I am sure I will develop moreopinions over time. There was certainly the good
(Dabur, Godrej) the bad (YES Bank and Gujurat) and theugly (Jindal and Gateway), but I suspect this is a theme
across everything in India. The approach companies
take to ESG issues is potentially more insightful in India
than in many other markets.
Amanda McCluskey
Head of Responsible Investment

Bhutan dharma
We are sitting in a cold, brightly lit room, staring at alarge pair of hairy knees. The knees belong to the CEOof the Bhutanese Stock Exchange (BSE). He is wearing
his traditional dress, a knee length gho, tied at the
waist and complemented by a particularly thick pair oflong, woollen socks. ‘Our biggest problem’, he sighs,‘is that people only want to invest for the long term in
Bhutan, thinking only about the dividend each year.’
To us, this seems like a nice problem to have. Most
stock markets have the opposite problem. Whatis the point of a stock market, we ask him? Why
does Bhutan, the land of Gross National Happiness(GNH), want to have a stock market? He regards
this question as odd. Bhutan is not anti-growth,anti-globalisation nor anti-capitalism. The beauty of
GNH is that it lacks any of the aggression, hostility
or political association of these virulent ‘anti’
movements. It recognises the benefits of the market
economy and is happy to incorporate them whereappropriate. It is a successor to, rather than the
antithesis of, capitalism. As such, it is less – far less –threatening and much more potent.
‘Our vision is to become an integral part of thefinancial system and participate in the nationbuilding. Our mission is to develop and establish afair, orderly and transparent securities market withthe objective to facilitate efficient mobilisation andallocation of capital.’ In Bhutan, the stock exchange isacutely aware of its social licence to operate. It has asense of purpose, or dharma.
Elsewhere, the reverse is true. A cursory look at how
other, much larger, stock exchanges regard their role isrevealing. For example, the New York Stock Exchange
describes itself simply as a leading global operator of
financial markets and provider of innovative trading
technologies. The Hong Kong Stock Exchange states,‘as an infrastructure provider, HKEx is essentially an
IT-based enterprise.’ Its explicit mission statement is ‘tocreate and operate active international public financial
markets in Hong Kong.’ The Mexican stock exchange
aims to ‘be a leader in financial markets in service,profitability and innovation in each of our segments.’
There is no mention of purpose or the positive rolethat stock markets can play in helping savers, large andsmall, allocate their capital to investors for the future

benefit of all. Most stock markets seem too long on
innovation and too short on purpose.
We are standing in a cold, brightly lit room of adeveloped-market stock exchange, surroundedby anonymous computers. The brand names andspecifications have been removed to avoid disclosing
sensitive information amongst competing clients.
Above us, metal cages hang from the ceiling, along
which different coloured bunches of wires are running.
Our guide is explaining to us how this new, state-ofthe-art, high frequency trading room works. “Ourbiggest challenge is latency. We have reduced the time
between client orders and the exchange computer toaround 300 microseconds, but we still have some way
to go.” One microsecond is one millionth of a second.
Great care is taken to ensure that computers at the far
end of the room have the same length cables as thosenearest the stock exchange servers. Although not all
clients here are equal. This particular facility offers atiered service. ‘Gold Level’ clients pay significantly more
for a few extra microseconds in which to execute theirtrades. We wonder why these extra microseconds are
so advantageous? Is it ethical? Our guide laughs at ourquestions. “Put it this way. So long as it remains legal
we will do it. Our clients demand it.”
Arguably this “so long as it’s legal” mindset has been
responsible for many of the less socially desirable
financial market developments over the past two
decades. Any search to strengthen and nurture
fiduciary duty, stewardship or social purpose has been
overtaken in the scramble for short-term profits. The
listing of stock exchanges and fund managers has nothelped.
What can be done? In Chiapas, Mexico, they talk about
the importance of preguntando caminamos. Asking,we walk. The proliferation of ideas being put forward
suggests the finance industry has finally started toask. But it has yet to start walking. Perhaps Bhutan’s
greatest contribution to sustainable development is
its willingness to both ask and walk. As a country it has
been unafraid to experiment and put into practicewhat most other countries are still only talking about. It
is time the investment industry did likewise and took afew, small, bold steps in a different direction.
David Gait
Senior Portfolio Manager

53

Chapter 4
Looking ahead

Hand-drawn African textile

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Responsible investment report 2011

Looking ahead

Since the launch of the PRI, many industry participants havemade significant advances in the incorporation of longer-term
ESG issues into their investment processes. However, there isalways more to do. With the objective of continuing to improve
the approach to responsible investment, CFSGAM has continued
to reflect on the progression of sustainable development as aconcept, and the role of finance markets.
CFSGAM is increasingly of the view that the financial
services industry needs to ensure it broadens its focus
to include Responsible Asset Management. The industry
needs to find better ways to work with clients to improve
the long-term focus of the industry.
A common frustration expressed by those managing
leading companies and long-term capital is the shorttermism of financial markets. However, the incentive
structures in place throughout the investment supply
chain continue to be short-term in focus. The financemarkets play a major role in the allocation of capital, yet
the decision-making frameworks behind them are basedon incentives that are predominantly short-term in focus
and rarely include environmental and social externalities.
The Occupy movement around the world is highlighting
frustrations of the public with the financial sector,
which regulators are acting upon; and asset managers
will not remain immune. The continued short-termism
and hesitancy to change the way capital is allocatedjeopardise the finance sectors’ own licence to operate.

The four key areas that emerged from the discussion as
potential areas of focus include:
1. Changing the way performance is measured
2. 		 Focusing back on the individual
3. 		 Changing remuneration structures
4. Engaging beneficiaries
These four points will involve a raft of possible
initiatives, with some including: examining the focus onbenchmarks, considering responsibility in our sector ora ‘Financial Hippocratic Oath’, looking to bring salaries
back in line with the true value of what is delivered, andcatalysing the long-term investor voice. CFSGAM looks
forward to working with the industry to progress this
discussion.

To change this, the industry needs to have more honest
and open debate and agree ways forward. To start this
discussion, in late 2011 CFSGAM hosted a roundtable ofleading thinkers from within the investment sector, andalso those doing innovative work outside the sector.
CFSGAM asked participants to come prepared to share
their ideas for investors wishing to shift the playing fieldback to investing for the long-term interests of theirultimate beneficiaries, what role PRI signatories play inreclaiming the investment markets and what role they
thought governments should play.

55

Appendix

Traditional Scottish tartan

56

Responsible investment report 2011

Appendix

Investment policies and statements
There are a number of entities within CFSGAM, and these
may have their own responsible investment policies,
reports and statements. These documents are publicly
available on CFSGAM’s website.
Supporting policies, reports and statements include:–– Responsible investment policy statement–– First State Investments stewardship statement–– Climate change position statement–– CFSAMAL guidelines and principles for corporate
engagement on governance, environment andsocial issues–– Direct property sustainability policy–– CMIL and its corporate governance practices –listed funds: CFX and CPA–– CFSMPL and its corporate governance practices –unlisted funds–– Direct infrastructure corporate engagement guidelines
summary

The scope of ESG considerations
CFSGAM broadly takes the following approach to ESG
considerations, although there is no exhaustive list, as
ESG issues are continually evolving and changing.

Environmental issues
CFSGAM takes a broad consideration of environmental
issues, such as considering the track record of how
companies have dealt with past environmental issues,
how companies have acted in environmentally-sensitive
areas and whether companies have shown sound publicleadership on environmental issues. ‘Environmentallyfriendly’ companies are not preferred; rather, evidence
is sought that companies have effective management,
processes and behaviours in place to mitigate any
environmental impacts. Where CFSGAM has the ability
to influence outcomes in its unlisted property andinfrastructure businesses, environmental impacts areminimised through resource efficiency and recovery.
Examples of specific environmental issues include:–– physical impacts of climate change and related
regulatory risks–– environmental pollution and waste – ongoing supplyof natural resources–– new regulation expanding the boundaries ofenvironmental liability with regard to products
and services–– increasing pressure by civil society to improve
performance, transparency and accountability,
leading to reputational risks if not managed properly–– emerging markets for environmental services andenvironment-friendly products, and–– the impact of carbon pricing on future
investment returns.

Social issues
It is important that companies are supported by thepeople they affect, in order to be able to operate
without undue interference or hindrance. This concept
is referred to as a ‘social licence to operate’ and is
especially important in large organisations, direct
property and infrastructure operations.
As a shareholder in many large organisations, and a
direct owner of large property and infrastructure assets,
a social licence to operate is an important part of
CFSGAM’s operations.
Good corporate citizenship, strong community relations,
good employee safety records, sensitivity aroundvulnerable communities and public leadership on social
issues are considered.
Examples of social issues include:–– human capital and associated metrics such as staff
turnover, engagement and absenteeism–– customer and consumer relationships–– workplace health and safety–– community relations–– human rights issues at the company and supply chain level–– government and community relations in the context
of operations in developing countries, and–– society increasing pressure to improve performance,transparency and accountability, leading to
reputational risks if improperly managed.

Governance issues
The scope of governance, in relation to ESG considerations,covers the impact that company management, processes
and behaviours have on the long-term interests of thebusiness, its investors and the community in which it
operates. It complements the required standards ofgovernance as mandated by regulation.
Examples of governance issues include:–– board structure, diversity and accountability–– accounting and disclosure practices–– audit committee structure and independence of auditors–– executive compensation, and management ofcorruption and bribery issues

57Appendix
continued

The six Principles for Responsible Investment
Principle 1
We will incorporate ESG issues into investment analysis
and decision-making processes.
Possible actions–– Address ESG issues in investment policy statements–– Support development of ESG-related tools, metrics,
and analyses–– Assess the capabilities of internal investment managers
to incorporate ESG issues–– Assess the capabilities of external investment
managers to incorporate ESG issues–– Ask investment service providers (such as financial
analysts, consultants, brokers, research firms or ratingcompanies) to integrate ESG factors into evolving
research and analysis–– Encourage academic and other research on this theme–– Advocate ESG training for investment professionals

Principle 2
We will be active owners and incorporate ESG issues into
our ownership policies and practices.
Possible actions–– Develop and disclose an active ownership policy
consistent with the Principles–– Exercise voting rights or monitor compliance withvoting policy (if outsourced)–– Develop an engagement capability (either directly or
through outsourcing)–– Participate in the development of policy, regulationand standard setting (such as promoting andprotecting shareholder rights)–– File shareholder resolutions consistent with long-term
ESG considerations–– Engage with companies on ESG issues–– Participate in collaborative engagement initiatives–– Ask investment managers to undertake and report on
ESG-related engagement

Principle 3
We will seek appropriate disclosure on ESG issues by theentities in which we invest.
Possible actions–– Ask for standardised reporting on ESG issues (using
tools such as the Global Reporting Initiative)–– Ask for ESG issues to be integrated within annual
financial reports–– Ask for information from companies regarding
adoption of/adherence to relevant norms, standards,
codes of conduct or international initiatives (such as

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Responsible investment report 2011

the UN Global Compact)–– Support shareholder initiatives and resolutions
promoting ESG disclosure

Principle 4
We will promote acceptance and implementation of the
Principles within the investment industry.
Possible actions–– Include Principles-related requirements in requests for
proposals (RFPs)–– Align investment mandates, monitoring procedures,
performance indicators and incentive structures
accordingly (for example, ensure investment
management processes reflect long-term time
horizons when appropriate)–– Communicate ESG expectations to investment
service providers–– Revisit relationships with service providers that fail tomeet ESG expectations–– Support the development of tools for benchmarking
ESG integration–– Support regulatory or policy developments that enable
implementation of the Principles

Principle 5
We will work together to enhance our effectiveness in
implementing the Principles.
Possible actions–– Support/participate in networks and information
platforms to share tools, pool resources, and make useof investor reporting as a source of learning–– Collectively address relevant emerging issues–– Develop or support appropriate collaborative initiatives

Principle 6
We will each report on our activities and progress
towards implementing the Principles.
Possible actions–– Disclose how ESG issues are integrated within
investment practices–– Disclose active ownership activities (voting,engagement, and/or policy dialogue)–– Disclose what is required from service providers in
relation to the Principles–– Communicate with beneficiaries about ESG issues andthe Principles–– Report on progress and/or achievements relating to
the Principles using a ‘Comply or Explain’ approach–– Seek to determine the impact of the Principles–– Make use of reporting to raise awareness among a
broader group of stakeholders

Contact details

AucklandJakartaParis

Kiwi Income Property Trust
Level 14, DLA Phillips Fox Tower
National Bank Centre
205–209 Queen Street
Auckland
New Zealand
Telephone: +64 9 359 4000
Facsimile: +64 9 359 3997
Web: www.kipt.co.nz

First State Investments
29th Floor
Gedung Artha Graha
Sudirman Central Business District
Jl. Jend. Sudirman Kav. 52–53
Jakarta 12190
Indonesia
Telephone: +62 21 2935 3300
Facsimile: +62 21 2935 3388
Web: www.firststateasia.com

First State Investments
14, avenue d’Eylau,
75016 Paris
FranceTelephone: +33 1 73 02 46 74
Web: www.firststateinvestments.com

First State Investments
Level 3, 33–45 Hurstmere Road
Takapuna
Auckland 0622
New Zealand
Telephone: +64 9 448 4922
Facsimile: +64 9 486 7131

Edinburgh
First State Investments
23 St Andrew Square
Edinburgh EH2 1BB
United Kingdom
Telephone: +44 (0) 131 473 2200
Facsimile: +44 (0) 131 473 2222
Web: www.firststate.co.uk

Hong KongFirst State Investments
6th Floor
Three Exchange Square
8 Connaught Place Central
Hong Kong
Telephone: +852 2846 7555
Facsimile: +852 2868 4783
Web: www.firststateasia.com

LondonFirst State Investments
3rd Floor
30 Cannon Street
London EC4M 6YQ
United Kingdom
Telephone: +44 (0) 20 7332 6500
Facsimile: +44 (0) 20 7332 6501
Web: www.firststate.co.uk

Melbourne
Colonial First State
Global Asset Management
Chadstone Shopping Centre
1341 Dandenong Road
Chadstone VIC 3148
Australia
Telephone: +61 3 9936 1222
Facsimile: +61 3 9936 1333
Web: www.cfsgam.com.au/assetmanagement

New York
First State Investments
599 Lexington Avenue, 17th Floor
New York, New York 10022
United States of America
Telephone: +1 212 848 9200
Facsimile: +1 212 336 7725
Web: www.firststateinvestments.com/us

SingaporeFirst State Investments
1 Temasek Avenue#17–01 Millenia Tower
Singapore 039192
Singapore
Telephone: +65 6538 0008
Facsimile +65 6538 0800
Web: www.firststateasia.com

SydneyColonial First State
Global Asset Management
Ground Floor,
Tower 1 Darling Park
201 Sussex Street
Sydney NSW 2000
Australia
Telephone: +61 2 9303 3000
Facsimile: +61 2 9303 3200
Web: www.cfsgam.com.au

TokyoFirst State Investments
8th Floor, Toranomon Waiko Building
12–1, Toranomon 5-chome
Minato-ku
Tokyo 105-0001
Japan
Telephone: +81 3 5402 4831
Facsimile: +81 3 5402 4839
Web: www.firststateasia.com

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