Colonial First State Global Asset Management

Responsible
Investment
report 2007

Colonial First State Global Asset Management
Colonial First State Global Asset Management is the consolidated asset management business of the Commonwealth Bank of Australia group, and includes the First State Investments
and Property and Alternative Investments groups. It operates through a number of different legal entities depending on the circumstances. Each of these entities is a member of theCommonwealth Bank of Australia group, but no subsidiary has the benefit of a general guarantee from the Bank. In this report references to Colonial First State Global Asset Management
are references to that business as a whole except where specific activities and functions are described, or are attributed to specific entities. Colonial First State Global Asset Management
is also a registered business name of Colonial First State Asset Management (Australia) Limited ABN 89 114 194 311 (AFSL 289017).
Disclaimer
Neither Commonwealth Bank of Australia (the ‘Bank’) ABN 48 123 123 124 nor any of its subsidiaries guarantees or in any way stands behind the performance of thefunds mentioned in this document or the repayment of capital by them. Investments in the funds mentioned in this document are not deposits or other liabilities of the
Bank or its subsidiaries, and investment-type products are subject to investment risk including possible delays in repayment, and loss of income and principle invested.
The information provided in this document is given in good faith and is derived from sources believed to be accurate. Neither Colonial First State Asset Management (Australia) Limited,
any associated companies, nor any of their employees or directors give any warranty of reliability or accuracy nor accept any responsibility arising in any other way including by reasonof negligence for errors or omissions. This disclaimer is subject to any contrary provisions of the Corporations Act 2001.
This document is not financial product advice and is intended to provide general information only. It is not a recommendation of any securities offered by Colonial First State AssetManagement (Australia) Limited or any other company or person. It should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It does
not take into account any person’s individual objectives, financial situation or needs. Any investor accepting this information should consider whether the information is appropriate for themand consider talking to a financial adviser before making an investment decision.
This document is for information purposes only and does not constitute or form part of an offer, solicitation or invitation, to buy or subscribe for any securities, nor should it or any partof it form the basis of, or be relied in any connection with, any contract or commitment whatsoever.
All information is as at 31 December 2007 unless otherwise stated.
© Colonial First State Asset Management (Australia) Limited 2008.

This document has been printed on 100% recycled paper.

1
Contents
Foreword

3

Business overview

4

Our Responsible Investment journey6

Principle 1

8

Principle 2

12

Principle 3

17

Principle 4

19

Principle 520

Principle 6

21

Focus on Global Emerging Markets

23

Looking forward

29

Useful references

30

Further information

32

Responsible Investment report 2007

“Implementing the PRI and ultimately
enhancing our Responsible Investment
practices is a long-term goal forour business.

“

3
Foreword by Neil Cochrane
I am delighted to present Colonial First State Global
Asset Management’s Responsible Investment Reportfor 2007.
This report provides a concise version of theinaugural response by Colonial First State Global
Asset Management to the United Nations Principles
for Responsible Investment (PRI) annual survey forthe calendar year of 1 January to 31 December
2007, covering the period of our membership since
1 March 2007.
The key philosophy behind Colonial First State Global
Asset Management’s membership of the PRI is that we
believe Environmental, Social and Governance (ESG)
issues have the potential to impact investment returns;
and for us as one of Australia’s largest asset managers,
the implementation of the framework provided by
the PRI makes good investment sense. Additionally,by becoming a signatory to the PRI, Colonial First
State Global Asset Management believes it will act
in greater alignment with our clients’ long-term
investment interests.
In addition to the rigorous research that has long been
undertaken by our investment teams, we believe the
PRI provide a formal framework for the considerationof ESG issues when making investment decisions.
Ultimately, we think our investment managers will
be better informed to make long-term investment
decisions, leading to an enhanced risk/return outcome
for our clients.
During 2007, we demonstrated our commitment tobeing amongst the leading Responsible Investment
asset managers globally by appointing a Headof Sustainability and Responsible Investment.

In this report we have aimed to outline what weare doing under each of the Principles and how a
Responsible Investment framework helps our business.
We have not shied away from outlining the difficulties
of implementation across a business with the size,
scope and geographical dispersion of Colonial
First State Global Asset Management.
The format of this Responsible Investment report for2007 follows the format of the PRI questionnaire forthe 2007 calendar year. As well as providing a moretransparent account of our first year as a PRI signatory,
we have also issued this report in the hope that itprovides valuable insight to our clients, our consultants
and our fellow asset managers.
Implementing the PRI and ultimately enhancing
our Responsible Investment practices is a long-termgoal for our business. We are focused on making
continuous improvements and we look forward to
keeping you informed of our progress. While we haveproduced a limited number of hard copies of thisResponsible Investment Report, in the future thesereports will be produced in electronic format on thecompany’s website, with hard copies only provided
specifically where requested.

Neil CochraneActing Chief Executive Officer

Responsible Investment report 2007

4
Business overview
Colonial First State Global Asset Management is
the consolidated asset management business ofCommonwealth Bank of Australia, one of the largest
financial institutions in Australia and a leading global
banking group. The business offers tailored investment
solutions for retail, wholesale and institutional investors
and aims to create wealth for its investors by applying
an active and disciplined approach to managing
investments and assets.
Colonial First State Global Asset Management isAustralia’s largest asset manager of Australiansourced funds, employing more than 200 investment
professionals located in Sydney, London, Auckland,
Edinburgh, New York, Singapore, Hong Kongand Jakarta. The business manages more than
A$164 billion across a diverse range of asset classes
including Australian and global shares; cash and shortterm investments; fixed interest and credit; property
securities and listed infrastructure securities; direct
property; global resources and infrastructure.
Colonial First State Global Asset Management
operates through a number of different legal
entities depending on the circumstances. Each ofthese entities is a member of the CommonwealthBank of Australia group, but no subsidiary has thebenefit of a general guarantee from the Bank. In thisResponsible Investment report, references to Colonial
First State Global Asset Management are references
to that business as a whole except where specificactivities and functions are described, or are
attributed to specific entities.

Responsible Investment report 2007

The asset management functions contained within
Colonial First State Global Asset Management operate
as a ‘house of boutiques’, with each of the fundteams having investment autonomy and dedicatedinvestment processes tailored to meet their objectives.
For example, in the Australian equity space, thebusiness runs two separate, dedicated Australian
equity teams – a Core (or style neutral) team anda Growth team. Each team has autonomy over its
investment process and decisions even down to thedealing desk functionality and corporate governancevoting practices. This provides the teams with theability to make judgement calls in line with their fundobjectives, while still benefiting from the support andgovernance structures provided by the wider business.
Colonial First State Global Asset Management
became a signatory to the PRI on 1 March 2007,
and is undertaking a process to further embedResponsible Investment processes and practices
within the investment disciplines of each asset
class or investment team in which we manage
investments. The business defines ‘Responsible
Investment’ as investment decision-making which
gives full consideration to Environmental, Social andGovernance (ESG) issues. This includes engagementwith companies for disclosure of their ESG practices
to identify sustainable business investments.
As at 31 December 2007, Colonial First State Global
Asset Management had a total of A$164 billion infunds under management (FUM). An overview of theseassets, by nearest whole percentage of funds undermanagement, is shown in the table opposite.

5
Asset mix as at 31 December 2007

% of FUM

Listed equity (developed market, active)

27

Listed equity (developed market, passive)

2

Listed equity (emerging market, active)

19

Listed equity (emerging market, passive)

0

Fixed income – developed markets

17

Fixed income – emerging markets

0Real estate or property

11

Private equity

0

Hedge fund1

Infrastructure

1

Currency

0

Commodities

0

Cash

22

TOTAL

100%

Notes to table:
1.	‘Cash’ figure incorporates cash at bank, cash funds and short-term investments managed by the Short Term Investments team.
2.	‘Private equity’ has been listed as 0% of funds under management; however, there are some small (A$114 million) investments within the groupwhich may be considered private equity. These assets have been shown under the heading of infrastructure.
3.	While the ‘Commodity’ figure has been listed as zero, it should be noted that we hold equity in listed commodity companies on behalf of ourinvestors, and these holdings are shown under the ‘Listed equity, developed market, active’ category.

Of the total assets managed by Colonial First State Global Asset Management, the vast majority are managed
internally. All listed equity funds, real estate or property, infrastructure and cash are 100% managed internallywithin Colonial First State Global Asset Management. Within the fixed income (developed markets) category,a small percentage (approximately 1%) of funds under management is externally managed.

Responsible Investment report 2007

6
Our Responsible Investment journey
Colonial First State Global Asset Management
became a signatory to the PRI because the businessbelieves that ESG issues have the potential to impact
investment returns. As an asset manager, the businesswants to understand and manage those potential
impacts. Colonial First State Global Asset Management
believes the PRI provide the framework to further
embed Responsible Investment practices acrossour business.
Since Colonial First State Global Asset Management
signed the PRI, the business has focused its initialefforts on implementing, from the six Principles,
those concerned directly with the investment
process – namely, principles 1, 2, 3 and 6. These
Principles concentrate on investment process,industry collaboration and engagement. Colonial
First State Global Asset Management believes thatby encouraging the listed and unlisted companies inwhich we invest to look at their own ESG practices,
we are encouraging higher levels of transparency
and responsibility from the business community,
which will ultimately help protect investor returns.
By signing the PRI, Colonial First State Global AssetManagement believes it will achieve greater alignment
with our clients’ long-term investment interests.
Additionally, as one of Australia’s largest investment
managers, the business recognises the important role
it can play in global efforts to improve ESG practices.

Responsible Investment report 2007

One of the benefits the business has experienced
since becoming a signatory to the PRI has
been the increased level of engagement from
employees across our firm, regardless of country
or investment expertise. As a business thatwas restructured in 2005, Colonial First State
Global Asset Management has gained, throughthe PRI, a channel through which to encourage
collaboration across the organisation, including theattraction of new employees. By implementing anenhanced governance framework as part of the PRI
implementation process, employees have broadly
accepted the importance of ESG issues in all aspectsof the business and its investments.
Since becoming a signatory in March 2007, Colonial
First State Global Asset Management has noticed apronounced increase in awareness in the Australianinvestment community of the potential that ESG
issues have to impact long-term investor returns.
We believe the PRI have been a significant driver inindustry debate – from superannuation funds, asset
consultants, through to investment managers andbrokers – about what making the consideration of ESG
issues mainstream actually means and the issues thatthe investment community should be factoring into
their collective investment considerations.

“We believe that byencouraging the companies
in which we invest to lookat their own ESG practices,
we are encouraging higher
levels of transparency andresponsibility from thebusiness community, which
will ultimately help protect
investor returns.

8Principle 1
We will incorporate ESG issues into investment analysis
and decision-making processes.
Principle 1 has been a key area of focus for Colonial
First State Global Asset Management since becoming
a signatory to the PRI. In many ways, our process
has been to first understand what to what extent
we already consider ESG issues and how that canbe improved and better communicated. The otherfocus area for the business has been the governancefoundation for implementation.

Responsible Investment oversightWithin Colonial First State Global Asset Management,
the Acting Chief Executive Officer Neil Cochrane
has overall responsibility for Responsible Investment
and ESG issues within the firm. Mr Cochrane chairsa Responsible Investment Steering Committee
which has responsibility for the implementationand management of ESG factors across the business.

Reporting into the overarching Responsible Investment
Steering Committee are separate sub-committees forboth the listed and unlisted (asset) investments thatare chaired by executives from these areas. These
committees work collaboratively to find ways tointegrate ESG issues into the investment processes.
In addition, the boards responsible for the direct
property funds receive quarterly board reports on ESG
initiatives implemented in the direct property funds.
For such entities, it is one of the boards’ functions toensure that the funds are managed in line with theirinvestment processes.

Steering
Committee

Workplace
Committee

Responsible Investment report 2007

Listed (Investments)
Committee

Unlisted (Assets)
Investment
Committee

9Supporting policies
Colonial First State Global Asset Management has
issued an independent Responsible Investment Policy
Statement, which makes reference to the integrationof Responsible Investment/ESG issues within
investment decision-making and ownership practices.
This was first issued in 2007 and is publicly available
on our website at cfsgam.com.au/unpri.
Colonial First State Global Asset Management has
undertaken to review this Policy Statement on anannual basis. Our direct property business (formerly
known as Colonial First State Property) has had aformal sustainability policy since 2001. This policy
is available on the listed property trusts’ website,
including colonialfirststate.com.au/cfx/Aboutcfx/
cfspPolicy.

Internally managed assets
The consideration of ESG factors is integrated into theinvestment decision-making process for all internal
assets under management within Colonial First State
Global Asset Management. We do not suggest that
we are covering and systematically ‘pricing’ all of
the ESG issues that could impact the performanceof our investments over the longer term. However,
we believe that considering ESG factors in all assets
managed internally reflects our firm commitment
to making a consideration of ESG issues simply partof the way in which we manage investments.
Within Colonial First State Global Asset Management,each asset class and investment team is at a different
stage of this process. We believe there will always beroom for increased understanding and knowledge,
as there is with any investment issue. Therefore, theextent to which we consider ESG issues have been
implemented for internally managed assets, as broken
down by asset class, is shown in the table below.
It is important to note that Colonial First State Global
Asset Management does not ‘screen out’ or exclude
stocks or sectors from any of our portfolios based on
ethical criteria. Rather, through engagement on ESG
issues with the companies in which we invest, we
believe we are better able to identify potential risks
and opportunities in companies and therefore better
able to determine which of those risks are material
and what is being done to manage them.

Resourcing
Within Colonial First State Global Asset Management,
our stated intention during 2007 has been to
implement the consideration of ESG issues acrossall portfolios. For the most part, this has become
the responsibility of our existing investment analysts,
research analysts, portfolio managers and investment
managers. Formal assessment of the capabilitiesof our investment staff continues to be conductedon the basis of their investment abilities including
Responsible Investment issues. However, in order tosupport our investment staff to be better equipped toconsider ESG factors, Colonial First State Global AssetManagement has commenced regular internal training
sessions for investment staff. Additionally, staff areencouraged to participate in other ESG conferences,
briefings or programs as appropriate.

Degree of implementation

Asset class

To a large extent

Listed equity (emerging markets, active)
Direct real estate or property

To a moderate extent

Listed equity (developed markets, active)
Direct infrastructure

To a small extent

Fixed income (developed markets)

Responsible Investment report 2007

10
Principle 1
During 2007, the business has also continued to build
its resources dedicated to Responsible Investment.
These have included dedicated investment analysts,
Responsible Investment policy advisers, engagement
specialists and the appointment of Amanda McCluskey
to the position of Head of Sustainability andResponsible Investment.

Non-proprietary ESG tools
During 2007, Colonial First State Global AssetManagement supported the development of various
non-proprietary ESG issue-related tools. These wereprimarily through our involvement in the Investor
Group on Climate Change, which produced a seriesof sector-specific reports on the potential impactthat climate change may have on unlisted assets
and listed investments. These reports are available
at igcc.org.au/.
We have also started the process of engaging ourbrokers to provide our listed equity teams with ahigher level and improved quality of ESG research.
Making the delivery of ESG research mainstream
through our broker channels is a priority forour business.
Several key research papers covering sustainability
in the environment were developed and issued
by Colonial First State Global Asset Management’s
Property and Alternative Investments Research team.
Examples of these can be found at cfsgam.com.au/
Research.

Significant achievements during 2007
The most significant achievement for Colonial First
State Global Asset Management during 2007 was
the global implementation of a formal Responsible
Investment governance structure, strategy andpolicy statement. This included the establishmentof our executive-led Responsible Investment
Steering Committee, along with two investment
implementation committees for unlisted assets
and listed investments.

Responsible Investment report 2007

Under this governance framework, each listed
investment team is responsible for implementing
the PRI into its investment process. Teams have now
completed the first of future quarterly surveys on
implementation of the PRI. In this survey, each of theinvestment teams reports on its progress towards
embedding the PRI into its investment process,barriers it has faced in implementation and highlights
for the quarter. This report is then provided to theChief Investment Officer, to ensure transparency andcontinuous improvement.
In our direct property business, we are well advanced
in valuing some of the sustainability issues in ourinvestment and governance process. This is a resultof this area of our business having had sustainability
policies and programs in place since 2001. Evidenceof this includes our hotel fund being recognisedfor best practice sustainability performance, thecontinued presence of our listed property trustsin the Dow Jones Sustainability World Index (DJSI)
and the FTSE4Good Index, as well as the ongoing
ESG reporting by two of our core infrastructure
investments.

Barriers to implementationof Principle 1
The largest barrier faced by Colonial First State Global
Asset Management during 2007 in relation to Principle
1 was the size and scale of our business. As a fairly
recently reconfigured company with operations
globally, the breadth of our investment offeringand the autonomy of each of our investment teams
have meant that the implementation of a uniform
framework for implementing the PRI across different
teams and regions has been challenging.
To overcome this barrier, in late 2007 the businessappointed a Head of Sustainability and Responsible
Investment and a supporting team who will coordinate
the effort globally to drive continuous improvement.
We believe our clients, and Australian superannuation
funds in general, who are signatories to the PRI
may also face similar issues and barriers to theimplementation of Principle 1, and we look forward tocollaborating and sharing our experiences with them.

“During 2007, we implemented a formal
Responsible Investment governancestructure, strategy and policy
statement, including the establishmentof an executive-led Responsible
Investment Steering Committee.

“

12Principle 2
We will be active owners and incorporate ESG issues into
our ownership policies and practices.
To be active owners in 2007, Colonial First State
Global Asset Management continues its focus on proxyvoting and continued direct company engagement(conducted privately) for our listed investments.
For our unlisted investments, we continue to be
active via the board representation we have forthose investments or through the equivalent joint
venture committees, or via company engagementfor our small shareholdings.
During 2007, Colonial First State Global AssetManagement did not engage in filing or cofiling any shareholder resolutions, nor conductedcollaborative engagement with other managers.
Similarly, the business did not undertake any directpublic engagement. Co-filing of resolutions is not
as much of a feature of the Australian market as
it is in international markets.
As regards collaborative engagement, to date Colonial
First State Global Asset Management has preferredto undertake private and confidential company
engagement. Given our size and weight of ownershipin the Australian market in particular, we believe
we are making good progress with companies.

Aggregate voting history

Proxy voting
Colonial First State Global Asset Management has hada publicly disclosed proxy voting policy since 2002,
available at cfsgam.com.au/CorporateGovernance.
The business ensures that all proxy voting is conductedin accordance with this policy. For the international
offices in the UK and Asia, a detailed investment
management handbook covers all investment
management policies, procedures and practices,
including a proxy voting policy and guidelines.
Proxy voting is conducted by Colonial First State Global
Asset Management on behalf of our clients, andvotes will be cast in accordance with our policy unlessotherwise advised by our clients. In these situations,proxy voting can be executed in accordance withclient-specific or mandated policies.
Currently, the Colonial First State Global AssetManagement proxy voting policy directs action on
governance issues to a large extent, and the businesshas since expanded this policy to incorporate direction
for environmental and social aspects during 2008.
Comprehensive reports detailing our proxy voting
history during 2007 can be found on our website
at cfsgam.com.au/CorporateGovernance.

January –June 2007

July –
December 2007

Total
2007

# company meetings

93

268

361

# resolutions voted

457

1,455

1,912

% resolutions supported

96%

87%

91.5%*% resolutions opposed

2%

7%

4.5%*

% resolutions abstained

2%

6%

4%*

% resolutions no action

0%

0%

0%*

* Annualised average % of resolutions.

Responsible Investment report 2007

13
Engagement
Investment teams from Colonial First State Global
Asset Management engage portfolio companies
directly. Responsible Investment issues that wereaddressed in our shareholder engagement initiatives
include benefits and compensation, bribery andcorruption, climate change, environment, governance,
health and safety, human rights and labour issues.
It should be noted that engagement is conductedacross the company on an individual portfolio level,
so not all themes or issues are applicable to all asset
classes or investment teams within the business.
Responsible investment issue-related engagementtargets and topics are identified by sector exposure,risk profile and reactive methods. We have not yet
attempted to quantify the level of our engagementin the listed equity areas, predominantly due totechnology and operational limitations. The businesshas not yet reached a final decision on the definitionand capture of engagement activities across different
asset classes and investment teams. Most investment
managers have communicated that they haveincreased the level of engagement with companies
regarding ESG issues significantly since the businessbecame a signatory to the PRI, and each investment
team has provided examples of engagement in theirquarterly PRI implementation report.
There have been examples of what we believe
has been effective engagement. This has been
demonstrated through portfolio companies’
governance practices changing and written
commitment by these companies to improveparticular ESG issues.

Significant achievements during 2007
During 2007, Colonial First State Global AssetManagement’s most significant achievement in
the listed investments has been the expansion of
our corporate governance policy to now coverenvironmental and social issues and engagement(albeit still in final draft form at 31 December2007). This policy is now available on the Colonial
First State Global Asset Management website at
cfsgam.com.au/UNPRI. In developing this policy,

broad sectors of the business have been engaged
to define engagement and what is a reasonable
expectation for investment managers regardlessof asset class.
In our direct infrastructure investments area, wehave also been active in overseeing our governance.
We are active managers and take board seats for manyof the assets we own. We aim to use our governanceoversight to ensure the management of ESG issues forthe assets and appropriate board and public reporting.
Likewise, in our direct property investments we takea longer-term view, allowing us to systematicallyconsider many of the environmental and social issues
for the assets. Our continual improvements in thisarea and the ongoing inclusion of our Australian Real
Estate Investment Trusts (A-REIT) in the Dow Jones
Sustainability World Index (DJSI) and the FTSE4Good
Index also are significant achievements.

Barriers to implementationof Principle 2
As with Principle 1, the size and scope of our business
was one of the largest barriers to the implementationof Principle 2 during 2007. The structure of Colonial
First State Global Asset Management is best described
as a ‘house of boutiques’ and therefore, individual
asset classes and investment teams are autonomousand do not necessarily share common investment
processes or house views. As a result, the largest
barrier faced in the implementation of Principle 2 hasbeen the volume of work required to implement ESG
issues into our ownership policies and procedures
globally. To address this, our main focus during 2007
has been the construction of, and enhancement to,
our governance framework.
As discussed briefly above, capturing and measuring
the levels of engagement, while not a barrier,is an issue of ongoing debate in relation to ourimplementation of Principle 2. Given the independent
nature of our investment teams and the sheer scale,capturing this information in a comparable form
across the investments is challenging.

Responsible Investment report 2007

14
Principle 2 (continued)
CASE STUDY:
Engagement
examplesActivity One – Norilsk Nickel

Activity Two – Oakton

Norilsk Nickel mines base and precious metals
in Russia. The company is the world’s largest
producer of nickel and palladium and also mines
platinum and copper. As part of regular due
diligence on prospective investments, a site visit
was made to company operations in Russia.

Oakton provides professional IT consulting services
in Australia. As part of regular research into thecompany, the analyst noticed a deteriorating
trend in staff turnover ratios, sick days andretention rates. As part of our commitment toensuring that our investments adhere to goodsocial policies and operate in the best interests of
employees, this trend was raised with company
management. After investigation and questioning,
it was found that Oakton lacked quality humanresource policies and a dedicated humanresources team, resulting in high staff turnover.

During the visit, our portfolio manager witnessed
first hand the high level of pollution emitted by
the operation and the resulting impact on the
nearby township. Given this high level of pollution,mine workers were experiencing a lower thannormal life expectancy. As a result, our portfolio
manager decided not to invest in the company,
given its environmental and social issues andthe risk this presented with the stock. Potential
impacts on the company’s licence to operate
as a result of the poor environmental and social
performance and the potential future liability
associated with its actions meant we could not
see the long-term upside in the stock. We also
believe it demonstrates poor management
quality. It is interesting to note that theseenvironmental issues were present despite Norilsk
Nickel having a social policy, a social mission andprinciples in the area of sustainable development
and corporate social responsibility. It is always
important to view company operations anddirectly engage with companies to ensure thatthe highest standards of social, environmental
and governance matters are being met.
In this example, we have not owned the stock,and the site visit was undertaken several years
ago. However, during 2007 we continued toraise our concerns with senior management
and outline that they are a key reason for us notholding the stock. We believe this encourages thecompany to improve its environmental and social
performance. The company has improved overtime, but is still below world’s best practice on
environmental and corporate governance issues.

Responsible Investment report 2007

After this was raised with the company,
Oakton introduced a new human resources
team, improved work-life balances and improved
communication with employees. This resulted
in a dramatic turnaround in staff morale andreduced the staff turnover.

15
Activity Three – Ramsay Health Care
A key area of corporate governance is thecomposition of the board of directors. In thesecond half of 2007 we voted against a proxy
resolution for a nominee for the Board of Ramsay
Health Care.
Our concern was the high number of board
members that were affiliated with the
majority shareholder of Ramsay Health Care.
Independent directors did not represent a
majority on the board and there had been alack of renewal amongst board members in
the last decade. Our Corporate Governance
Policy states that membership of the audit
committee and nomination committee shouldbe held by independent directors. In the caseof Ramsay Health Care, this was not the case,given the number of affiliated board members.
We classified them as non-independent. It was
because of the relatively poor board composition
that we voted against the election of thisnominee, as we did not perceive the necessarylevel of independence that is our preference
being achieved.
With all our ‘against’ votes cast, we attempted
to raise contentious issues with company
management and their boards. We feel this is oneof the best ways we can communicate the highstandards of corporate governance we desire.
If Colonial First State Global Asset Management
has an issue with a company’s corporate
governance principles, we will raise the issue
directly with the company and not just rely on
the use of proxy votes to get our message across.

Responsible Investment report 2007

“

There is a need to obtain consistentand comparable data to enable
us to best consider the risks andopportunities of investment.

17
Principle 3
We will seek appropriate disclosure on ESG issues
by the entities in which we invest.
During 2007, Colonial First State Global AssetManagement has asked that investee companies
and other investment entities produce standardised
reporting on their ESG issue policies, practices or
performance. This reporting has been requested invarious formats – whether integrated with regularfinancial reports or as part of the Carbon Disclosure
Project (CDP). We have sought information on the
adoption of the Equator Principles, the Organisation
for Economic Co-operation and Development (OECD)
guidelines for multinational enterprises, and the
Universal Declaration of Human Rights.
Throughout the year, Colonial First State Global AssetManagement also encouraged companies in which
we invest to adopt the Global Reporting Initiative(GRI) – G3 Reporting Framework. The G3 Reporting
Framework is an example of best practice disclosure,providing companies with principles and indicators tomeasure and report their economic, environmental
and social performance. For our unlisted assets
business, reporting has been supported bytheir boards.
The business expects to increase its efforts in thisarea in 2008. Colonial First State Global AssetManagement recognises the need to obtain consistentand comparable data from companies to enable
us to best consider the risks and opportunities ofinvestment. For our unlisted investments, we also
recognise the need for transparency to protect
the licence to operate for those entities.

Significant achievements in 2007
In 2007, Colonial First State Global Asset Management
had a number of significant achievements in relation
to Principle 3.
WW As a board member of Anglian Water Group
Limited (AWG), a direct infrastructure asset,
we actively supported the adoption by, andparticipation of AWG in, sustainability practices
during the year. This included those ESG practices
mandated by the UK industry regulator. AWG
also proactively contributed to the developmentof sustainability policy within the UK and thebroader European Union. AWG’s ESG performance
information is available at anglianwater.co.uk
WW Brisbane Airport, another direct infrastructure
asset, is an example of the way in which theGroup proactively reported environmental impactsof our investments. Details of its programs can befound at brisbaneairport.com.au
WW Commonwealth Property Office Fund, one of our
A-REITs, published its first stand-alone sustainability
report: colonialfirststate.com.au/cpof
WW Both of our A-REITs – Commonwealth Property
Office Fund and CFS Retail Property Trust –responded to the CDP, and retained membershipof the Dow Jones Sustainability World Index and
the FTSE4Good Index
WW We experienced an increase in the level ofengagement across all our listed investment
teams with listed companies regarding theirsustainability reporting and expanded the CDP
to cover S&P/ASX 200 companies (from S&P/ASX
100 last year), andWW The level of engagement with investee companies
on the part of our emerging markets investment
teams was very high.

Responsible Investment report 2007

18
Principle 3 (continued)
Barriers to implementationof Principle 3
One of the largest challenges faced by Colonial
First State Global Asset Management in implementing
Principle 3 is the independence of each of ourinvestment teams. While this is an integral part of
how we function as an asset management business,the lack of a ‘house view’ means that disclosure
requirements for each area of our business differ.
Compounding this is that different global markets
and sectors are in different phases of the ESG cyclein terms of understanding, adoption and maturity.
As a result, the disclosure we require for reporting
purposes also varies. Strategies for managing ESG
issues across all these disclosure requirements areincluded in our expanded corporate governancepolicy, and company engagement will be a focus
in 2008. With the appointment of a Head of
Sustainability and Responsible Investment, we believe
we will be able to better manage opportunities forcollaboration across our investment teams.

Responsible Investment report 2007

19
Principle 4
We will promote acceptance and implementation of the
Principles within the investment industry.
Colonial First State Global Asset Management
considers RI/ESG requirements when searchingfor and selecting external investment managers,
proxy voting specialists, investment research andinternal operations, such as travel, purchasing andoffice space. Service providers (where relevant) are
encouraged to become PRI signatories. We haveencouraged clients and peer organisations, suchas other Australian institutional asset managers,
to become signatories.
At present, no service provider relationships,
such as broker arrangements, have been reviewed
in light of RI/ESG principles.
During 2007, the business has actively engaged
in dialogue, lobbying and initiatives pertaining togovernment policy and industry regulations as they
relate to RI/ESG issues. This has been primarily throughthe Investor Group on Climate Change (IGCC) and theInvestment and Financial Services Association (IFSA).

Significant achievements in 2007
Colonial First State Global Asset Management isvery proud of a number of initiatives undertaken
in relation to the implementation of Principle 4,
including the Group’s:
WW active participation in the IGCC
WW work with the IFSA Board to encourage othermembers to become signatories to the PRI
and for IFSA to take a greater role in the funds
management industry in relation to ESG issues

WW active engagement with the broker community
to encourage greater delivery of ESG research
WW industry engagement to raise the profile
of ESG issues
WW proactivity in providing our approach to ESG
issues in tender documentation, andWW work with clients to raise their awareness of ESG
issues through ’non-traditional’ forums suchas our sponsoring of the UN High Commission
on Refugees.
Colonial First State Global Asset Management believes
that by encouraging the asset management industry
to think more broadly about our impacts and longerterm societal issues we can increase the capacity
to think more broadly about ESG issues.

Barriers to implementationof Principle 4
Most of the peer organisations of Colonial First
State Global Asset Management in the Australian
institutional funds management industry, along withmany of our clients within Australia, have now become
signatories to the PRI. The challenge for 2008 andbeyond for our business centres on the successful
implementation of the PRI, and on working with ourclients to understand exactly what their expectations
are and what is deliverable by us to assist in achieving
those expectations.

Responsible Investment report 2007

20
Principle 5
We will work together to enhance our effectivenessin implementing the Principles.
In 2007, Colonial First State Global Asset Management
participated in a number of Responsible Investment
and ESG-themed collaborative engagement initiatives
and associations. These included:
WW Carbon Disclosure Project
WW Investor Group on Climate Change, Australia/
New Zealand
WW Investment and Financial Services Association
WW Property Council of Australia, andWW Green Building Council of Australia.
Highlights of the collaborative engagement conductedby Colonial First State Global Asset Management are
detailed below.

Investor Group on Climate
Change (IGCC)
Through the IGCC, the business was able to encourage
brokers to collaborate with Monash Sustainability
Enterprises to produce detailed sector-based reportson the impacts emission trading would have on
different sectors of the Australian economy.
Colonial First State Global Asset Management wasalso able to collaboratively engage with the Australian
regulators in relation to the nature and form ofemission trading schemes and greenhouse reporting
frameworks for Australian companies.
More information about the Investor Group on
Climate Change is available at igcc.org.au

Carbon Disclosure Project (CDP)
In 2007, Colonial First State Global Asset Management
was involved indirectly in the Australian CDP throughthe IGCC. As a result of the IGCC’s involvement, the
CDP was extended to cover the top 200 companies
on the Australian Securities Exchange (S&P/ASX 200).
Previously, the CDP had been limited to the top 100
listed companies (S&P/ASX 100) only.
More information about the Carbon Disclosure Projectis available at cdproject.net.

Responsible Investment report 2007

Investment and Financial Services
Association (IFSA)
During 2007, the Acting Chief Executive Officerof Colonial First State Global Asset Management
presented to the Investment and Financial Services
Association (IFSA) Investment Board Committee
on the Principles of Responsible Investment, andencouraged all members to become signatories.
Through the business’ engagement with IFSA, theGroup continued to campaign in 2007 to implement
electronic proxy voting in Australia, to ensure a moretransparent and accurate voting system.

Significant achievements in 2007
We believe that by reviewing our internal processes
for our investment teams, we are better able toengage the investment sector more broadly in thelonger term. The high levels of engagement from ourinvestment teams since our becoming a signatory to
the PRI provides us with a solid foundation for further
industry engagement and collaboration.

Barriers to implementationof Principle 5
As a large and global asset management business,
Colonial First State Global Asset Management’s focus
in relation to Principle 5 has been to concentrate
initially on internal collaboration, before extending
to the wider investment management industry.

21
Principle 6
We will each report on our activities and progress towards
implementing the Principles.
Colonial First State Global Asset Management has
issued a public statement to clients and the public
on how Responsible Investment and ESG issues
are integrated into our investment processes.
This Responsible Investment Policy Statement isavailable on the Colonial First State Global AssetManagement website at cfsgam.com.au/UNPRI
Similarly, our commitment to Responsible
Investment has been distributed to our investors,
clients and consultants in the form of regularcommunication updates.

Proxy voting
Colonial First State Global Asset Management
discloses a summary of its proxy voting, including
votes cast by the business on behalf of our investors.
Bi-annual corporate governance updates, including an
aggregate voting history and a six-monthly summary
are available on the company website at
cfsgam.com.au/CorporateGovernance

Additional reporting activities

Significant achievements in 2007
Our most significant achievements in relation to Principle
6 during 2007 were the increased communication to,and disclosure for, stakeholders of Colonial First State
Global Asset Management in relation to Responsible
Investment, and the implementation of ESG issues into
all investment portfolios. Examples of this increased
communication include marketing communications,such as flyers and information on the company website,
the issue of policy statements and public statements
on Responsible Investment, available at cfsgam.com.
au/uploadedFiles/CFSGAM/About_Us.

Barriers to implementation
The most pronounced barrier to implementationof Principle 6 was the fact that our clients are still
determining what they want to achieve from the PRI.
During the latter part of 2007, and in 2008, we havereceived an increased level of requests from clients for
information on how we are implementing the PRI, andthis is helping us shape our response to Principle 6.

Colonial First State Global Asset Management has
undertaken additional efforts to raise awareness of the
ESG issues among our stakeholders. This has included
seeking to determine what impact our Responsible
Investment issue-related efforts, requests andguidance have had on the consideration of ESG issues
by external service providers such as research providers
and consultant firms.

Responsible Investment report 2007

“We believe Responsible Investment
is about investing in good quality
management teams with theability to successfully manage ESG
risks and opportunities.

23
Focus on Global Emerging Markets
In the 2007 PRI survey, there was a specific section
on the approach to investing in global emerging
markets. In many ways, the Colonial First State Global
Asset Management Global Emerging Markets businessis one of the most sophisticated in its approach tointegrating ESG into the investment process. It should
be noted that other listed investment teams may also
invest in emerging markets and may take a slightly
different approach to what has been detailed below.
In our dedicated Global Emerging Markets business,
Colonial First State Global Asset Management has fully
integrated the consideration of ESG issues within theinvestment decision-making and ownership practices.
We believe RI is about investing in good quality
management teams with the ability to successfully
manage ESG risks and opportunities. At the heartof our approach is the concept of stewardship.
We believe our role is to allocate our clients’ capitalto good quality companies with sound growthprospects, ensuring we pay sensible prices. We focus
on management integrity and corporate governance,
attitude to ESG risks and the ability to executelong-term strategies. As long-term investors, we aim
to make investment decisions with at least a three
to five-year time horizon. As a result, sustainability
issues become investment issues. We define risk as
losing money for our clients, rather than in terms ofdeviation from any benchmark index. We focus asmuch on the potential downside of our investment
decisions as on the anticipated upside.
In 2007, our active ownership strategy for
emerging markets involved the continuation of
our comprehensive RI/ESG engagement capability
through utilising the following tactics:
WW proxy voting
WW direct engagement conducted privately, andWW collaborative engagement.

From our shareholder engagement initiatives, thethree most addressed RI/ESG-related issues were:1.	environmental and social impact of mining
practices2.	human rights issues in China, Burma and Sudan,
and3.	land clearance issues.
We believe that ESG factors are increasingly being
considered in the emerging markets investment
universe. Our emerging markets engagement
program has produced substantial evidence that
we have played a role in the improved integrationof ESG issues by external parties investing inemerging markets. In 2007, we sought informationfrom companies regarding their adoption of andadherence to norms, standards, codes of conduct
or international initiatives related to RI/ESG issues
in emerging markets.
Similarly, throughout the year we have noticed
consultants beginning to factor ESG issues into theirshort-listing process of emerging markets managers
and have worked together with other investors to
improve the effectiveness of implementing the
PRI in emerging markets. Because of these factors,
combined with our efforts to raise awareness of RI/ESG
issues in emerging markets, we believe the industry
is becoming increasingly aware of the importance ofResponsible Investment practices in this asset class.
During 2007, we have encouraged two emerging
markets companies, against their initial judgement,
to take part in GRI sector groups. However, we havedecided not to sign a recent group letter to emerging
markets companies requesting GRI reporting, as we
do not feel GRI is appropriate for every emerging
markets company. A greater focus on the timeframeof portfolio investment into emerging markets
would help.

Responsible Investment report 2007

24
Focus on Global Emerging Markets (continued)
Engagement activities

Voting

1,634 companies met

While we do not table our own shareholder
resolutions, we do take our voting responsibilities
seriously. During 2007 we undertook 88 proxy votes
for companies held within the Global Emerging
Markets Fund. Out of these 88, we voted 23 times
against specific resolutions, either due to corporate
governance concerns or where management had
failed to provide sufficient rationale. Our mostcommon complaint was against poorly designed
incentivisation programs.

During the year we engaged senior management
on a wide range of ESG issues. The majority of ourengagement work is during face-to-face meetings.
Indeed, since the assessment of ESG issues is a
key part of our investment process, a significant
proportion of most meetings is spent discussing ESG
issues. We conducted 1,634 one-on-one meetings
with companies across the region in 2007. This
compares with 1,614 companies met during 2006.
We always prefer face-to-face engagement where
possible, as it becomes much easier to have an open
dialogue about the issues in hand and how they relate
to long-term shareholder value. For us, engagement
is about encouraging change rather than simply
making our point. Our strategy is to be constructive
rather than confrontational, and to ensure we do notback managements into a corner from which they
are unlikely ever to emerge.
Written word sometimes required
Writing to the management of companies is used
occasionally – either we would like to raise an issue
ahead of our next meeting, or we feel the need tounderscore the importance of the issue to us asshareholders by putting fingers to keyboard andformalising the engagement process. Following are
two case study examples, containing emails andletters written during 2007.1

Looking forward
We believe the short-term mindset of clients,
investment managers, consultants, investment banks
and companies is a major barrier to better corporate
practice. We would question whether the PRI could
focus on the measurement of investment managers,
with emerging markets fund managers incentivised
on a minimum rolling three-year time period, insteadof on an annual basis. We believe that short-term
incentive schemes can be a major barrier to theobjectives of the PRI.
In 2008, our top priority is to demonstrate thatsustainable investment in emerging markets
works; that is, that it can deliver strong investment
performance. We believe concern over performanceis the biggest barrier preventing greater ESG
integration in the emerging markets sphere.

1	In keeping with the spirit of our engagement, we have removed reference to names and have not published the full responses received.
Although some replies are no more than a cursory acknowledgement of our concerns, more often than not we receive very frank and full responses.
Please note that only one of the company examples is held within our dedicated Sustainability Fund.

Responsible Investment report 2007

“In 2008, our priority is todemonstrate that sustainable
investment in emerging markets
works and can deliver strong
investment performance.

26
Focus on Global Emerging Markets (continued)
Engagement case studies
Case study 1 – An Asian palm oil company
From: Colonial First State Global Asset Management
Sent: Thursday, 1 November 2007
Hi XXX
Many thanks for setting up the meeting with XXX and XXX this week. Sounds like they have identified a very interesting
asset in XXX! We did have a few concerns, though which, we thought we should share with you as a future director.
WW We have some reservations about the incentive scheme for XXX and XXX. The triggers are easy ones – surely
anyone can start a nursery or plant bushes etc. Their money will be made well before the fresh fruit bunches start
appearing and we can tell whether the yields will be competitive. Also the number of options being granted bore
minimal relationship to relative size of two plantations. The reason given was that the package was designed bytheir nomad broker! Also, they are given at £0 I think?
WW Why no industry-based palm oil expertise on the Board? It’s a shame that two of the directors seem to be there
purely for regulatory reasons – XXX has 48 CURRENT directorships, XXX has 50!
WW Key operational team member was identified as ‘XXX’ – former senior controller of the XXX Group – who as weknow have struggled on the environmental, social and governance front in the past and present! Also, XXX is
primarily a logging company not a palm oil company?
WW We were a bit worried about the native claims on the land. According to XXX there are 70 ‘squatters’ currently
present on the land, but ‘they have no rights to be there’. The prospectus is more vague – according to one part‘numerous village settlements are noted on the subject land’ although elsewhere it states the concession will be freefrom settlements – why the discrepancy, does that imply clearances? We would be interested to know how you plan
to deal with the ‘squatters’ – I imagine just because they haven’t taken legal action in the past, it doesn’t mean they
don’t have a right to be there?
WW We were also a bit concerned about how hilly the land is …again information is a bit vague – for example, according
to the prospectus, while 35% of the Sabah land is ‘undulating’, a further 50% of the land is ‘slightly hilly terrain’
while the remaining 15% is very steep (25% gradient or above). We’re not sure what ‘slightly hilly’ means in termsof environmental risks and impact on yields. It would be interesting to know out of that 50%, what percentage
is over say 15% gradient. Some of the photos in the prospectus look quite steep. Likewise for the Sarawak plot
(another 4,000 hectares), the ‘slightly hilly’ percentage is 60% and only 10% is deemed to be too steep. However,
the independent report in the prospectus states: ‘It is estimated that about 70% of the land is plantable.’ Why thedifference?
WW From the photos it looks as though not all the land has yet been logged – some of the trees will be new growth,
but it looks as though there are some old growth trees too. Management claim it is fully logged?
WW We would be interested to know what XXX thinks of the environmental and social aspects of this project, and how
they compare to others in the sector?
WW Any chance Management will give a commitment to share the full environmental impact assessment with themarket, please?
Hope these comments make sense – am sure there are good answers for them all!
Best wishes
Company reply:
Reply received 6 December 2007, thanking us for the email and informing us that the deal has been postponed until early in 2008,
which allows time for them to ‘fine tune the structure’ as per some of our suggestions.
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27
Case study 2 – An Asian forestry company
From: Colonial First State Global Asset Management
Sent: Friday, 28 September 2007
Dear Mr XXX and Mr XXX
A quick email to say thank you very much for coming to visit us in Edinburgh this week. Scott and I really appreciatedthe chance to meet you both and get a better understanding of XXX’s vision and long-term strategy. We are also keen
to follow up on some of the sustainability issues we discussed in the meeting:
WW Certification: As you can imagine, sitting in Edinburgh as non-specialists, it is extremely difficult for us to tell thedifference between those logging companies who have adopted sustainability best practices and those who
simply talk about them, while continuing unsustainable practices on the ground. One of the few ways for us tomake this crucial distinction is through certification schemes. While we understand that there is no such thing as
the perfect certification scheme, it would provide us with much greater comfort if XXX was able to demonstratea higher level of compliance, either with XXX or international certification schemes. Given that the company isalready doing so much good work in this area, the small additional costs of greater certification would surely
be outweighed by the benefits of being able to demonstrate global leadership in this area to a wide range
of investors, customers and suppliers.
WW China and India: We accept that commercial interest in certification schemes remains limited at present.
However, we do believe that the current shift in mindset in both China and India towards a more harmonious
and sustainable model of economic development will lead to a much greater focus on certification and thesustainability practices of logging companies amongst buyers from these countries in coming years.
WW Workforce: Another of the measures we try and use to assess commitment to sustainable forestry relates toworkforce practices. For example, if loggers are incentivised only on volume extracted are they are less likely to
reduce logging activities during rainy seasons when sustainability problems are most acute, particularly wheresuch decisions are taken by local work teams? Also, how do accident rates and fatality rates for logging compare
to industry averages etc? It would be great to see more information on such issues on the website or in theannual report.
WW Greater openness: We also understand that sustainability is a journey and that it is unrealistic to expect any
company to achieve all its sustainability goals in the very short term. However, there is still an opportunity
for XXX to communicate its sustainability strategy more openly. For example, it would be interesting to readon your website why less than 5% of your XXX natural forest is certified under XXX – what are the biggest
obstacles to overcome, do you have a target date for 25%, 50%, 100% certification? Why do you feel Forestry
Stewardship Council (FSC) is an inappropriate certification for your XXX forestry operations compared to your XXX
operations etc?
We hope that these comments make sense and look forward to discussing these issues further with you in future
meetings. Meanwhile, we wish you all the best with your current plans.
Best wishes
Company reply:
Reply received on 19 October 2007 thanking us for our interest and discussing the difficulties of forestry certification.

Responsible Investment report 2007

“

Our approach to Responsible
Investment has always been driven by
a commitment to providing the best
possible outcome for our investors.

29
Looking forward
During 2008, Colonial First State Global AssetManagement is committed to focusing its Responsible
Investment efforts on those Principles which are
specifically investment-related.
We are recognised as a leader among our peers inregard to ESG thinking and action and have beenaware of ESG issues for some time. We continue tofocus on all critical themes for our business including
health and safety, employees and the benefits that
we can bring to communities.
Our approach to corporate responsibility has
always been driven by an ethos of doing and ourcommitment to providing the best possible outcome
for our investors. We are committed to continuing tointegrate the PRI into all aspects of our business andare focused on incremental improvements in eachstakeholder area.
Priorities for the business during 2008 will include:

WW sourcing the necessary data to ‘price’ ESG issues
WW proactively engaging clients and the industry atlarge, to better understand their expectations andaspirations in relation to Responsible Investment,
andWW enhancing an internal staff education
series to continually build the capacity ofinvestment managers across our business in theconsideration of ESG factors.
We believe that by focusing on making continuous
improvements, we will enhance our Responsible
Investment practices and ultimately achieve
our long‑term goal of being among the leading
Responsible Investment asset managers globally.
We are looking to the future to determine the issues
that will impact upon the business in the futureand establishing a series of corporate responsibility
objectives to address these issues.

WW the encouragement of our investment teams
to further incorporate the PRI into theirinvestment philosophies

Responsible Investment report 2007

30
Useful references
Anglian Water Groupanglianwater.co.uk
Brisbane Airport
brisbaneairport.com.au
Carbon Disclosure Project
cdproject.net
Commonwealth Property Office Fund: Sustainability Reportcolonialfirststate.com.au/cpof/
Colonial First State Global Asset Management: Corporate Governance and Proxy Voting
cfsgam.com.au/CorporateGovernanceColonial First State Global Asset Management: Policies
cfsgam.com.au/Policies
Colonial First State Global Asset Management: Researchcfsgam.com.au/Research
Colonial First State Global Asset Management: Responsible Investment
cfsgam.com.au/UNPRI
Investor Group on Climate Change
igcc.org.au

Responsible Investment report 2007

“We are focused on making continuous
improvements to our Responsible
Investment practices and believe
this will lead to enhanced risk/returnoutcomes for our clients.

32
Further information
For further information about Colonial First State Global Asset Management’s commitment to the
PRI and activities in 2007, please visit cfsgam.com.au/UNPRI or contact
Amanda McCluskey
Head of Sustainability and Responsible Investment
Telephone: +61 (2) 9303 7971
Email: amccluskey@colonialfirststate.com.au

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