For Professional Investor / Institutional
Investor Only

Responsible Investment
and Stewardship
Annual Report 2015

First State Investments operates as Colonial First
State Global Asset Management in Australia.
The entire company is collectively referred toas First State Investments in this report.
Important Information
This material is not for distribution in the US.
This material is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive
or to render specific advice.
No person in any such jurisdiction should treat this material as constituting an offer, invitation, recommendation
or inducement to distribute or purchase securities, shares, units or other interests or enter into an investment
agreement unless in the relevant jurisdiction, such an offer, invitation, recommendation or inducement could lawfully
be made to them. No person should act on the basis of any matter contained in this material without obtaining
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The value of investments and any income from them may go down as well as up and are not guaranteed.
Investors may get back less than the original amount invested and past performance information is not a guideto future performance.
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, we do not warrant that it contains no factual errors. We would like to be
told of any such errors in order to correct them. No part of this material in whole or in part, may be reproduced,
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Colonial First State Global Asset Management (CFSGAM) is the consolidated asset management division ofCommonwealth Bank of Australia. It includes a number of entities in different jurisdictions, operating in Australia as
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This document should not be copied, reproduced or redistributed without prior consent.
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Limited ABN 89 114 194 311 AFSL 289017.
Hong Kong
In Hong Kong, this document is issued by First State Investments (Hong Kong) Limited and has not been reviewed by
the Securities and Futures Commission in Hong Kong or by any regulatory authority in Hong Kong. If you are in any
doubt about any of the contents of this document, you should obtain independent professional advice. Some of thefunds mentioned herein are not authorised for offer/sale to the public in Hong Kong.
First State Investments and First State Stewart are business names of First State Investments (Hong Kong) Limited.
The First State Stewart team manages equities in Asia Pacific, Global Emerging and other international markets.
SingaporeNot an offer and confidential: This communication is provided for your internal use only. Some of the funds
mentioned herein are not authorised for offer/sale to the public in Singapore. The information contained herein
is proprietary and confidential to First State Investments and may not be disclosed to third parties or duplicatedor used for any purchase other than the purpose for which it has been provided.
Any unauthorised use, duplication or disclosure of this material is prohibited by law. In Singapore, this document
is issued by First State Investments (Singapore) whose company registration number is 196900420D.
First State Investments (registration number 53236800B) and First State Stewart (registration number 53236764B)
are business divisions of First State Investments (Singapore). The First State Stewart team manages equities in Asia
Pacific, Global Emerging and other international markets.
EuropeIssued by First State Investments (UK) Limited which is authorised and regulated by the Financial Conduct Authority(registration number 143359). Registered office Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB,
number 2294743. Telephone calls with First State Investments may be recorded.
First State Stewart is a trading name of First State Investment Management (UK) Limited, First State Investments
International Limited and First State Investments (UK) Limited (‘First State Stewart’). The First State Stewart teammanages a range of Asia Pacific, global emerging market equity and worldwide equity funds.

Contents
Foreword

2

Our Organisation

4

About Us

4

Our Approach to Responsible Investment and Stewardship52014 in Review – Progress Against Our Strategic Goals

6

Responsible Investment and Stewardship in Practice11

Investment Team Profiles

12

Global Listed Infrastructure

12

Global Resources

14

Global Property Securities

16

Australian Equities, Core

18

Australian Equities, Growth20

Indonesian Equities

22

First State Stewart

24

Global Fixed Income and Credit

26

Asian Fixed Income

28

Emerging Markets Debt

32

Unlisted Infrastructure34

Responsible Investment and Stewardship in Focus

36

Stranded Assets Working Group36

Company Assessment Case Study – Santos Limited

37

Appendices38

Appendix 1 – Important Information on our RI and Stewardship Measures

38

Appendix 2 – Industry Collaboration

40

Appendix 3 – Progress Against Goals Reported in the 2014 RI Report

41

Appendix 4 – Companies Subject to the Cluster Munitions Policy

42

Appendix 5 – GRIC and ESG Committees

43

Responsible Investment and Stewardship – Annual Report 2015 | ri.firststateinvestments.com

1Foreword

Responsible investment (RI)
and stewardship touches every
aspect of our business. The
foundations of our approach
to RI are built on aiming for thehighest professional and ethicalstandards of behaviour and area key part of the stewardshipof our clients’ capital.

2

The financial services industry is in a constantstate of change, particularly in the area ofgovernance. Many of the changes, suchas the introduction of stewardship codes
globally, are positive steps and we welcome
any developments that demand greater
accountability from asset managers andenhance the service our industry provides
to its clients.
Codes and regulation are only part of thepicture however. Our industry should always
be focused on the interests of end investors
and must work hard to earn their trust. The
most recent Edelman Trust barometer again
shows financial services and banking among
the least trusted sectors; our industry must
do better.
An effective way of improving standards in
our industry is by being held to the highest
standards of practice by our clients. There
has been a marked increase in scrutiny andengagement from our clients, and the broader
community, on a range of issues relating to RI.
This can only be positive for our business andthe broader investment industry.
We are constantly looking for more effective
ways, including through publishing this report,
to respond to our clients’ demand for increasedtransparency and accountability.

Leading by example
This year we undertook a survey of our staff
to gain an understanding of our role andambitions as a responsible investor. It waspleasing to see the support of our colleagues
for our approach to RI. Particularly pleasing
was the desire to be bolder in our long-term
ambitions. This process has been importantin helping us set more challenging goals which
will, over time, set the standards by which ourclients and other stakeholders will hold us to.
Setting goals by themselves, however, achieves
little without the support and commitmentof our people. To ensure we have a common
purpose and approach to RI and stewardship,
we have committed to an RI training programfor all of our staff and will engage new staff aspart of their induction program. We are also
focused on hiring people who fully support
our approach by highlighting our commitments
and expectations in all job advertisements andduring the interview process.
We have continued to make progress in
integrating high quality environmental, socialand governance (ESG) information with ourdiverse investment capabilities. During 2014,
we have worked hard to integrate the datafrom our service providers with Bloomberg,
FactSet and our own proprietary databases.
This has enabled seamless and flexible accessto high-quality information for all of ourinvestment professionals.
Taken together, these improvements will makeus a more accountable, engaged, resilient andsuccessful investment management firm.

Collaboration
Collaboration has always been a key part ofour approach to RI. Through collaboration,
not only can we can be part of a wider voice
pushing for change, but we can learn fromothers and share our experiences to increase
the effectiveness of RI in our industry as
a whole.
In 2014, our Global Head Responsible
Investment, Will Oulton, chaired the Universityof Cambridge Investment Leaders Group’s
work on mandates for long-term investment
and sustainability. This is a project to promote
active equity mandates that complement
the long-term interests of asset owners
and investment managers.
During the year, we also supported the
Financial Services Council of Australia withthe development of an Australian stewardshipcode. Our Chief Investment Officer for equities,
David Dixon, co-chaired the Committee which
led the development of the code. This follows
on from the first formal stewardship code
introduced in the UK in 2010.
In March this year, we became a memberof the inaugural Thinking Ahead Institute,created by global investment consultancy
Towers Watson to help inform our own
strategy and thought leadership work.

Transparency and engagement
Transparency and engagement are key tenets ofeffective stewardship. We strive to incrementally
improve the quality of our reporting, to provide
our clients and stakeholders with greater insight
into our RI and stewardship practices.
This year, we are focusing on providing moredetail on how RI and stewardship adds value toour investment processes by proving additional
metrics for each of our investment teams andsignificantly improving the depth and interactivityof the report online. There are no current bestpractice standards for this type of reporting,and so we expect the mix of indicators to
evolve over time.
However, notwithstanding any limitations,they are a genuine attempt at improving the
dialogue with our clients on these important
issues. I hope our integrated reporting achieves
this goal and we welcome suggestions for
improving our reporting further.
Performance
Finally, one of the longstanding goals of ourbusiness is to achieve global best practice in
RI. In 2014, we were pleased to receive the‘ESG Implementation of the Year’ Award at the
UK Financial News Asset Management Awards.
I am proud that our investment teams continue
to deliver excellent investment performance,
while being highly-rated for their RI andstewardship practices and am encouragedby the results of last year’s pilot PRI Assessment
Report, which showed good progress. This RI
and Stewardship report captures much of thework that has gone into achieving these results.
We look forward to continuing to share thisjourney with you and, as always, welcome
your feedback.

Mark Lazberger
Chief Executive Officer

Responsible Investment and Stewardship – Annual Report 2015 | ri.firststateinvestments.com

3About Us

First State Investments (First State, known as Colonial First State
Global Asset Management in Australia), is the consolidated asset
management subsidiary of the Commonwealth Bank of Australia.
We are a global asset management business with experience
across a range of asset classes and specialist investment sectors.
We are one of the largest managers of Australian sourced funds,
with a growing presence in international markets.

Edinburgh

First State and Colonial First State Global AssetManagement (CFSGAM) are stewards of over
US$156.9 billion on behalf of institutional
investors, pension funds, wholesale distributors
and platforms, financial planners and theirclients worldwide.
We have offices located in Sydney, Melbourne,
London, Dubai, New York, Louisville, Paris,Frankfurt, Edinburgh, Hong Kong, Singapore,
Tokyo, Jakarta and Auckland; and are represented
in Beijing and Shenzhen through the First State
Cinda joint venture.

LondonFrankfurt

New York

Beijing

Paris

Tokyo
Louisville

ShenzhenDubai
Hong Kong

Singapore
Jakarta

SydneyMelbourne

Auckland

Joint venture

Assets under stewardship

Investment staff

UK, Europe and Middle East

US$46.4 billion

58

Asia (include Japan)

US$15.4 billion

35

Australia and New Zealand

US$90.8 billion*

95

North America

US$4.3 billion^

10

Total

$156.9 billion

198*	Total assets under stewardship indicated above includes Realindex Investments which is a wholly owned investment management subsidiary of the Colonial First State group ofcompanies. During the 2013/14 financial year, we divested our direct property and asset management business. As a result of these transactions the Funds under stewardship have
reduced by A$17 billion from 30 June 2013. These transactions related to: the internalisation of the management of the Kiwi Income Property Trust by Kiwi Property Management
Limited on 13 December 2013; the internalisation of CFS Retail Property Trust Group on 24 March 2014; and the takeover of the Commonwealth Property Office Fund by DEXUS
Funds Management Pty Ltd on 14 April 2014.
^	USA assets managed through CFSAMAL (Australia-based non-domiciled), FSII (UK-based non-domiciled), FSI Singapore (Singaporean-based non-domiciled), USA SEC Registered
Investment Advisers.
Source: First State Investments as at 31 December 2014.

4

Our Approach to Responsible
Investment and StewardshipWe became a signatory to the UN backed
Principles for Responsible Investment (PRI) in
2007 and since that time we have systematicallyand progressively improved our RI practices
across our investment teams globally.
First State employs teams of investors who are
specialists in their respective fields and set
their own investment style. Each investment
team is structured so that portfolio managers
and analysts have a strong sense of portfolio
ownership. Incentive structures are directlyaligned to the results they deliver for clients.
Information on the investment philosophy
and approach for each team can be foundin the team profiles in this report andon our website.
While different investment teams havedifferent investment approaches, all teams

believe that markets are not completely
efficient and that value can be added for ourclients through careful investment analysis
and prudent decision-making.
Our commitment to RI and stewardshipis a common thread which runs throughthese diverse investment capabilities. In
particular, all teams believe that ESG issues
impact investment value and that as a large
institutional investor we can achieve betterlong-term investment outcomes throughactive engagement with companies and by
exercising the ownership rights we hold on
behalf of clients.
Each investment team’s approach toincorporating these factors into their investment
process has evolved over time and we believe
the diverse approaches are a key strength ofour business as it allows us to share ideas andlearn from each other. The governance of
responsible investment and the systems forcross-collaboration are critical in this regard.
Our governance framework includes ourGlobal Responsible Investment Committee(GRIC) which is chaired by our CEO and has
ultimate oversight of our RI and stewardshippractices including approval of all policies andthe business’s RI strategy. We also have an ESG
Committee comprised of investment professionals
from each of our investment teams.
More detailed information on our approach
including our governance structures and policy
framework are available on our website.

Assets under stewardship by investment team:as at 31 December 2014

US$ billion

First State Stewart (Asia Pacific, Global Emerging Markets and other worldwide equity strategies)

56.8

Global Listed Infrastructure

4.9

Global Resources and Agribusiness

2.0

Global Property Securities

2.7

Australian Equities

20.6

Indonesian Equities

0.5

Realindex Investments (global and Australian equities)*

8.1

Total Equities

95.6

Global Fixed Income and Credit

18.1

Asian Fixed Income

1.9

Emerging Markets Debt

1.4

Short-Term Investments

35.9

Total Fixed Income

57.3

Unlisted Infrastructure

3.9

Total Alternatives

3.9

Multi-Asset**

6.2

Total Multi-Asset Solutions

6.2

Interfund holdings***(6.1)

Total assets under stewardship156.9* Realindex Investments is a wholly owned investment management subsidiary of the Colonial First State group of companies.
** In addition to investment management services, the Multi-Asset Solutions team also provide investment advisory services on a further US$5.2 billion in assets.
*** Multi-Asset Solutions assets under stewardship invested in underlying investment capabilities listed above.
Source: First State Investments as at 31 December 2014.

Responsible Investment and Stewardship – Annual Report 2015 | ri.firststateinvestments.com

5

2014 in Review –Progress Against Our Strategic Goals

Strong governance frameworks
Strategy review
Our three-year RI strategy, set out and agreed
in early 2013, reached its mid-point in late 2014.
A number of the key objectives and milestones
we set have been achieved with most others
on target for completion. We have madeprogress in developing a common understanding
and shared belief of the value that leadershipin RI and stewardship can bring.
This mid-point in the strategy provided an
opportune moment for reflection on our
progress to date and for us to identify
and agree a set of objectives, targets anddeliverables for the business in the years
ahead. The review involved an assessmentof our progress against the original plan, areview of the current business environment,
and a consultation process with investment
and business leaders where we sought tochallenge their current assumptions and beliefs
about what leadership in RI really means.
The consultation addressed:–– Beliefs and commitment to RI
and stewardship;

Following this process, the GRIC noted theprogress made to date and approved thereprioritising of a number of areas and added
some new initiatives, including:–– Employee engagement components of thestrategy be prioritised, with RI and stewardshipbecoming part of the behaviours assessment
for all staff and be included in the induction
training for all new staff;–– Develop a set of responsible investment
principles which build on our Global
Stewardship Principles;–– Incorporate RI into the investment risk
and product development andmanagement processes;–– Focus performance reporting on timeframesappropriate to the assets, specifically bypresenting long-term investment performancefirst rather than last, and avoid reporting
monthly performance wherever possible; and–– Set standards for simplifying our language
when communicating both internally andexternally so that we can be clearer andmore concise in our communications.

–– Culture and behaviours;

Linked to the strategy review process wasan all staff consultation. The purpose of thissurvey was to help us assess the level ofawareness and understanding of our RI andstewardship activities and goals across thebusiness and to gather insights on issues ourpeople are particularly interested in. We will
be conducting the survey every two years tobenchmark our progress and identify any areasof opportunity or concern.
Policy review
In last year’s RI report, we committed toreviewing our policies in 2014. While thisprocess has commenced, it is yet to becompleted. To date we have:–– Performed a benchmarking assessmentof policies across the industry;–– Incorporated policy discussions into ourstrategy review consultation process andall staff survey;–– Reviewed our existing practices andpolicy set;–– Drafted new RI principles and RI policy(which will include active ownershipand proxy voting); and–– Initiated consultation across the Groupon the policy.

–– Investment capabilities and products;–– Client relationships;

Once we have completed this consultation
process, it will be approved by the GRIC.
We expect this process to be completed
by the end of June 2015.

–– Client engagement/communications/
reporting; and–– Industry leadership.

QualityHigh quality
investment practices andprocesses

Stronggovernanceframework

GlobalResponsible
Investment
Leadership

Engagement

Stewardship
Strong client focus andlong-term relationships.
Global and local
industry voice

6

Stronggovernanceframework

Stronggovernanceframework

Culture which supports
principles of stewardshipand responsibility.
Strong RI knowledge
and skills

Quality investment processes
ESG Committee update
Each of our investment teams has an RI
representative who coordinates information
flows across their respective teams. The RI
representatives sit on an ESG Committee
which plays a key governance role byrepresenting their teams, reporting onteam progress, contributing to thought
leadership and looking at new approaches
to addressing current and emerging ESG risks
and opportunities. The ESG Committee is an
important part of ensuring that we have thehighest quality of ESG integration embedded
within our investment processes.
In 2014, the ESG Committee met six times andduring the course of the year they focused on:–– Developing an accountability and assessment
framework for evaluating each team’s RI andstewardship practices;–– Considering best practice approaches for
integrating human rights considerations into
investment decision making. This included
reports from HESTA following a benchmarking
study they conducted and Oxfam’s report‘Banking on Shaky Ground’;–– Providing feedback on the work of theStranded Assets Working Group (SAWG);–– Overseeing the implementation of the ESG
information management plan;–– Considering our approach to proxy voting inshare blocking and power of attorney markets;–– Monitoring the growth in stewardship codesand UK Law Commission’s review of fiduciary
duty; and–– Information sharing and case studies.
Stranded asset risks
During the year, the SAWG concluded theresearch phase of their work and developed
a toolkit for investment teams. This toolkit
will allow investment teams to assess whether
their investment processes adequately testcompanies, exposure to stranded asset risk
across three areas (baseline analysis, resilience
testing, and management approach).
We will be rolling out the toolkit throughout
2015 and incorporating assessment of eachteam’s approach to stranded asset risk within
our investment assurance framework. While
investment teams are not required to adopt
the toolkit in full, they will be required todemonstrate how their existing processes
adequately address the issues highlighted.
Where investment teams believe thatenhancements to their processes are required,
the toolkit is sufficiently flexible to allow themto mix and match different elements in a
way which can be integrated with existing
investment processes.
More details on the toolkit and the work of thegroup are provided in the RI and Stewardshipin Focus section on page 36.
Approach to sanctions monitoring
During 2014, the Risk and Complianceteam reviewed our approach to monitoring
sanctions globally. Following the review, newprocesses have been put in place to provide
additional assurance.
Current process for investments
In both fixed income and equity systems, we
enforce country level restrictions based on theconstituents of the Australian Department of
Foreign Affairs and Trade (DFAT) Sanctioned
Countries List and similar lists issued byGovernments in other jurisdictions where ourfunds are domiciled. The constituents on eachsystem are regularly reviewed and updated.
Within this list, a two-tier system is in operation,
whereby some countries are completely
blocked (such as Iran, North Korea, Syria) andothers are heavily restricted. Any potential
investments in companies domiciled in thesecountries would be rigorously screened toensure that there is no association with any
sanctioned individual, entity or regime priorResponsible Investment and Stewardship – Annual Report 2015 | ri.firststateinvestments.com

7

2014 in Review –Progress Against Our Strategic Goals (cont.)

to investment. No investment is possible incompanies domiciled in any country on the
DFAT list without clearance from Investment
Compliance personnel as the system controls
do not allow it.
Enhancements
During 2014, a project was launched toassess our approach and identify areas for
improvement. In response we implemented
a more stringent framework to extend ourcontrols to include any potential investment
from a country deemed to be ‘very high risk’in relation to politically exposed persons,sanctions and ultimate beneficial ownershipcontrols. The scope of this framework will be
wider than the sanctioned countries list andthe countries deemed to be ‘very high risk’
will be updated where appropriate. The system
was implemented on 31 March 2015.
ESG information management
In late 2013, we developed a plan to enhance
the quality, relevance and timeliness of ESG
information provision to our investment
professionals. The plan addresses service
providers, access to information, integration of
information with existing systems and training.
During 2014, we made significant progresson our ESG information management plan,
the highlights of which include:–– Integration of Sustainalytics and GMI Ratings(GMI) data with Bloomberg which was thenmade available to all Bloomberg users;–– Developed an Excel-based ESG dashboard
which draws on Sustainalytics, GMI and
Bloomberg data to provide a comprehensive
view of a company’s ESG performance;–– Integration of Sustainalytics and GMI datawith the Australian Equities Growth team’s
proprietary database;–– Made GMI data available through FactSet
which is being used by three investment
teams including our smart beta team
Realindex. Access has allowed the teamto undertake research which culminatedin a recent paper.
In 2015, we plan to finalise the main elementsof our information management plan,
which includes:–– The launch of a new intranet site which will
provide training material, research, policy
guidance and other information neededto effectively exercise our responsible
investment and stewardship obligations;–– Finalise the integration of ESG information
on FactSet and our data warehouse;–– Develop portfolio level ESG reporting foruse by Investment Assurance, the Investment
Committee and investment team heads; and–– Enhance our client and public reporting.
8

Proxy voting
Historically we have not voted proxies inshareblocking and power of attorney (POA)
markets, which is common practice in theindustry. Shareblocking markets are markets
where a shareholder is prevented from trading
a company’s shares for a period after they havelodged their proxy votes, while POA markets
are markets where POAs must be lodged inorder for the votes made to be counted.
We believe proxy voting is an importantinvestor right and asset and should be exercised
wherever possible. During 2014, we reviewed
the practice of not voting in these markets
and have made the following changes:–– We will be lodging POAs for markets where
we hold shares in order to vote in thesemarkets; and–– We will provide portfolio managers with theoption to vote in shareblocking markets sothat they can weigh the benefits of votingwith any risks of not being able to trade ona case by case basis.
These new procedures are currently being
implemented and will be fully rolled out
across all equity teams by the end of 2015.
For Realindex, voting will be rolled out for
POA markets but not shareblocking markets.

Engaging our people
All staff consultation
We conducted an employee survey as partof our RI strategy review process. The response
rate for this exercise was a very high 62%, withmost respondents providing detailed feedback.
We are now using the results as a baseline for
improving our engagement with all employees.
Of all respondents, 35% were from investment
teams, representing approximately 60% ofinvestment staff globally. There was also agood mix from other areas of the business,
including all of the Executive Committee.
We plan to conduct the survey every two years
and will share the key highlights in this report.
The key highlights of the staff survey were:–– 76% believe that RI and stewardship isembedded in our culture; and–– 77% ‘believe’ or ‘strongly believe’ that as a
firm we should have a firm and public stanceon issues that may have a medium tolong-term impact on investment returns.
The consultation also told us that over the next
12 to 18 months our people would like us to:–– Enhance our communications with clientsand investment consultants and work toincrease our colleagues’ understanding
and knowledge of RI;–– Establish our views on what is best practicefor the companies that we invest our clients’money in; and–– Share more examples of companies thatinvestment teams decide not to invest infor ESG reasons.
Our culture
As reported last year, we have been reviewing
our HR processes and incorporating our RI andstewardship principles across the employee
lifecycle. We have made good progress in thisregard and expect 2015 to finalise the key
elements of this plan. During 2014, we
implemented the following:–– RI Report and Stewardship Principles are now
provided to all new hires;–– Our commitment to RI and stewardship is now
highlighted in all job advertisements globally.

Ensuring that our commitments have been
fully appreciated by new hires through training
and induction programs is now underway. In
addition, we are working towards integrating
behaviour assessments for implementationin 2015/16. This work is being done as partof a broader review of HR processes and has
been prioritised by the GRIC as part of the
RI strategy review.
Diversity and inclusion in theinvestment industry
Like many responsible investors we recognise thebenefits of diversity and inclusion for company
senior management and boards. We believe
the same holds true for the investment industry.
Gender is the most common prism throughwhich we consider diversity and inclusion but
more broadly it also focuses on characteristics

such as cultural diversity, disability, age, sexual
orientation and experience.
In this year’s report we have chosen to disclose
the gender split of our investment professionals
and we have done this for three reasons:–– To disclose information similar to what we
expect companies to disclose;–– To highlight the challenge of gender
diversity with investment professionals;–– In our hiring practices we actively include
diversity as a benefit to be sought; however,
we believe there is a larger role the industry
can play in attracting more women into
investment roles.
We hope that our disclosure of the gender split
will encourage others to do the same and as aresult, focus the industry’s attention on rectifying

this imbalance. As at 31 December 2014,
21% of First State’s investment professionals
were women.

Stewardship and thought leadership
CFA Institute’s Code of Ethics andStandards of Professional Conduct
During 2014, we assessed our investment
practices against the CFA Institute’s Code of
Ethics and Standards of Professional Conduct
for asset managers and found that ourpractices are fully compliant with the code.
We believe the CFA code is an excellent
framework for assessing an investment
manager’s approach to internal governance,
ethical conduct and a fiduciary mindset.
We will be reviewing our adherence to the code
annually through our compliance process andmore formally every two years when we review
our Global Stewardship Principles. The code isavailable to view on the CFA Institute website.
NAPF Stewardship Framework
During 2014, we also assessed our stewardshipapproach against the NAPF Stewardship
Framework. NAPF represents more than 1,300
pension schemes in the UK and has developed
the framework to allow funds to consider the
stewardship practices of managers at a glance.
The framework provides assets managers witha maturity matrix against which they can assess
their practices. Our self-assessment is available
in the Policy and Reports section of our website
and as well as on the NAPF website.
Investment Leaders Group (ILG)
Long-Term Mandates Working GroupIn 2014, our Global Head of Responsible
Investment became chair of the ILG Long-Term
Mandates Working Group. We believe a criticalissue exists where short-term mandates, useof benchmarks and performance monitoring
are driving short-term investment decisionmaking, herding behaviour and a failure toproperly incorporate long-term environmental
and social challenges into investment practice.
The Working Group has been established to
explore opportunities to break down this barrier
and open the way for long-term partnerships
to be built between asset owners and asset
managers. We believe these types ofrelationships will allow for the investment
implications of these long-term challenges
to be worked through together.
Towers Watson – Thinking Ahead InstituteWe have become one of the inaugural membersof a new initiative launched by global investment
consultancy Towers Watson. This initiative isthe establishment of a ‘Thinking Ahead Institute’(TAI) which is headed by senior consultants
Tim Hodgson and Roger Urwin.

Responsible Investment and Stewardship – Annual Report 2015 | ri.firststateinvestments.com

92014 in Review –Progress Against Our Strategic Goals (cont.)

The TAI is a limited membership group which
has been established to “provide a forum
where likeminded parties can meet to discuss,challenge and, ultimately, bring about positive
industry change for the benefit of the end
saver”. The TAI has three pillars, research,roundtable meetings and one-to-one meetings.
The research plan for 2015 includes workon the following topics:–– The state of the industry;–– What is investment success?;–– Market efficiency;–– Rethinking compensation;–– Industry outlook;–– Money-weighted returns;–– Culture and leadership;–– Limits to growth; and–– Time horizons.
Our membership of TAI, along with that of
the Cambridge University Investment LeadersGroup, are the two main components of
our industry thought leadership strategy.
Collaborative engagements
During 2014, we reviewed the range of industry
initiatives that we were involved with. The
purpose of this review was to ensure that any
initiatives we committed to supporting met anumber of criteria. These criteria are based upon
the interest of and long-term value to our clientsand our ability to provide sufficient resources toeffectively support such initiatives. The initiatives
that we remain engaged with are detailed inAppendix 2 on page 40.
During 2014, we were involved in a numberof collaborative engagements including:Financed emissions disclosure
We worked with other investors and key
industry groups (Investor Group on Climate
Change, Responsible Investment Associationof Australasia, Australian Council ofSuperannuation Investors and Regnan) to
engage with Australia’s four largest banks(including our parent, the CommonwealthBank of Australia) on carbon disclosure.
The engagement included a workshop withthe banks, meetings between our two
Australian equity teams and the banks, andother correspondence which led (along withpressure from other interested groups) toimproved disclosure practices for financed
emissions. We believe that this constructive
engagement has created good momentum
for Australian banks to lead the world on
financed emissions disclosure.
Remuneration in the mining industry
We contributed to a PRI-led working groupfocused on the integration of ESG issues
into the remuneration practices of mining
companies. This project has led to a reportbeing published which will help investors
to better assess pay practices in utilities andextractives companies. Our Global Resources
and two Australian Equities teams wereinvolved in the project.
Fixed income engagements
Our Fixed Income and Credit team supported
an engagement led by the Asian Corporate
Governance Association with Hyundai Motors.
We were the only fixed income investor to
support the engagement and believe there
is significant scope for fixed income andcredit investors to be involved in collaborative
engagements in the future.
Our Fixed Income and Credit team also
produced a case study of the semi-government

engagement program the team embarked
on last year, in the hope of encouraging otherinvestors to also engage with sovereign andsemi government issuers. We have submitted
this case study to the PRI and hope it will be
published shortly.
Reporting improvements
Transparency and client engagement are key
components of effective stewardship. Eachyear we seek to improve our reporting toprovide our clients and stakeholders greater
insight into our responsible investment andstewardship practices.
Over the last two years, we conducted asurvey at the time of the report’s launch
and a reoccurring theme has been that theindustry is still not linking RI activities toinvestment outcomes.
In this year’s report we have included anumber of additional pieces of information
to begin to address this. These include:–– More clearly drawing the links between
each team’s RI and Stewardship practices
and their investment philosophy;–– Being more specific on how ESG issues areincorporated into investment processes;–– Including new sections in the team profile
including team, fund and performance
information;–– Providing a full proxy voting record andrelevant statistics; and–– Improving the presentation and interactivityof the RI Report on our website.
These improvements follow greatertransparency in our Proxy Voting andCorporate Governance report and newclient reporting for the European Diversified
Infrastructure Fund. We hope that theseenhancements will engage our clients andconsultants to a greater degree and provide
a deeper understanding of the strengths of
our investment teams.
We welcome feedback and further
suggestions for improvement as we continue
our reporting journey.
Australian Stewardship CodeAs a member of the Investment Committee ofthe Australian Financial Services Council (FSC),
our Chief Investment Officer for equities wasinvolved in the FSC working group whichdeveloped the soon-to-be launched FSC
Stewardship code.
In working on the code, we advocated forhigh standards and believe we have achieved
a world class disclosure standard for asset
managers, both in relation to their internal
governance and stewardship practices. We
congratulate the FSC and the other membersof the working group on the outcome.

10

Responsible Investment
and Stewardship in Practice

The following pages contain profiles for eachof our investment teams. In this year’s profiles,
we have included a number of new sections
and metrics to more fully reflect the philosophy,
processes and performance of each team.
Our website has also been enhanced fora more detailed and interactive experience.
Many of the indicators are new and to ourknowledge have not been used in this way
before. There are inherent limitations withsome of the metrics we have provided
and so in order to understand them in theirappropriate context, please read the general
qualifications and limitations provided inAppendix 1.

In addition, we are providing additional
contextual information for each team on
our website including country and sector
characteristics as relevant to the team’s
investment universe. The online version of
the report also includes additional casestudies and proxy voting information.
When taken in aggregate, we believe thatthese new measures provide a fuller and moreobjective view of the RI and stewardshipperformance of the teams and how they
influence investment outcomes over time.

While there are many reasons to invest
responsibly, we could not do it if we did not
believe that it was in the long-term interestsof our clients. The chart below shows theweighted average outperformance of ourinvestment teams over the last five years.
While separating out the contribution of
our responsible investment and stewardshippractices in these numbers is difficult, wehope that this report clearly demonstrates
the value it adds.

Extent of outperformance by team (5 years) – 31 December 2014^
7.0%

5.9%

6.0%

5.0%

5.0%
4.0%

3.2%
2.7%

3.0%

2.0%

2.1%

2.0%

1.0%

1.0%

0.5%

0.4%

0.3%

0.0%
Global Listed
Infrastructure

GlobalResources

Global Property
Securities

Australian
Equities,
Core

Australian
Equities,
GrowthFirst State
StewartGlobal Fixed
Incomeand Credit

Unlisted
Infrastructure

Cash

CFSGAM
Average^ Please refer Appendix 1 for details of these performance statistics.

Responsible Investment and Stewardship – Annual Report 2015 | ri.firststateinvestments.com

11

Global Listed Infrastructure>	Inception Date
2007>	Location
Sydney>	Strategies	Global Listed
Infrastructure

Investment philosophy and approach
We are conservative investors. We believe
investing in long-dated assets requires along-term view, and recognise that capitalpreservation is critical to achieving long-term
capital growth. We are active managers of
our clients’ capital. Our investment approachis primarily bottom-up, with a sensible
consideration of macroeconomic risks.
Our investment process combines directcompany contact with proprietary research,a consistent valuation framework and acomprehensive 25-point quality assessment.
This structured process reduces bias andsupports repeatable outperformance.

Stewardship and ESG integration
Peter Meany
Head of Global Listed
Infrastructure

ESG issues are fundamental to infrastructurecompanies, given they have significant
service obligations and moral accountability
to the communities in which they operate.
We therefore believe ESG issues should befully integrated into an investment process.
We do not screen companies on ESG criteria
but seek to understand the risks and capturethem in our proprietary quality ranking.

Team profile

Rebecca Sherlock
ESG Committee member

12

Led by Peter Meany, our investment teamconsists of seven infrastructure specialists
with complementary skills and experiencein both infrastructure and equities markets.
This experience is enhanced by over 500
company visits each year. We meet with company
management, competitors, suppliers, customers,
regulators, government officials and industry
bodies. The information and insights gleaned
from these meetings are our most importantsources of idea generation and risk management.
Stock coverage is split by sector to maximise
the team’s specialist knowledge and to identify
global best practice. Team members areencouraged to contribute views on all stocks,
not just those under direct coverage, and all
stock calls are openly discussed and debatedon an ongoing basis.

Rebecca Sherlock, a Senior Investment
Analyst with 13 years’ experience, is theteam’s RI Representative.
Number in Team

7

Average experience

13 years

Average years in team

6 years

AusNet Services
Governance and capital management
Australian regulated utility AusNet Services
owns and operates electricity transmission
and electricity and gas distribution networks
in Victoria. The company recently proposedthat it should be granted the authority to issue
significant amounts of additional equity – upto the equivalent of 15% of shares on issue– without shareholder approval.
As shareholders, we wanted to better understandthe reasoning behind this proposal so that we
could decide whether or not to support it. We
were concerned that our clients’ money could
be used for non-shareholder friendly activities
such as dilutive acquisitions or transactions.
During engagement with the company, it
explained that this authority would give it theability – if necessary – to secure accretive deals
within a short timeframe. It also assured us thatwere it ever to exercise this authority, the newshares would be priced at a minimal 1% discountto the current market price.
Whilst we understood the reasoning behind
its argument, we did not believe that it would
be prudent to vote in favour of this motion.
As stewards of our clients’ capital, we feel that
it is crucial for us to retain the ability to express
our views to the companies we invest in, andto vote against any potential acquisitions
or transactions that we do not believe arein shareholders’ best interests.

ESG implementation
Assessment and monitoring

Duke Energy
Environment and social, pollution and spills

Infrastructure companies are assessed on abroad range of ESG-related factors. All three
categories are relevant for every company welook at. Some notable examples include:–– Environmental issues are key drivers forelectric utilities, energy infrastructure (oiland gas pipelines and storage) and railways.
–– Social issues are particularly important toutility companies as they have obligations
to the communities to which they provide
essential services.
–– We consider governance issues to beimportant performance drivers for all
infrastructure stocks. Board composition
and alignment of interests are considered
to be so important that they are rated
separately in our ESG scoring process.

Integration
ESG analysis is integrated into our investment
process through our quality assessment andranking model.
This model consists of 25 criteria that
influence stock returns in general andinfrastructure securities in particular. A scoreis assigned to each criterion; where a lower
quality score makes it harder for a stock
to be included within the overall portfolio.
ESG criteria account for 20% of the overall
quality score.
Incorporating ESG considerations into theinvestment process in this way helps to informour decisions of whether or not to holdshares in a specific company.

Duke Energy is one of the largest regulated utility companies in the US, operating primarily in the Carolinas,
Indiana and Florida.
In February 2014, a storm water pipe burst beneath a coal ash pond at Duke’s retired Dan River Power
Station in North Carolina. This led to coal ash waste being released into the river.
We wanted to review the measures Duke had taken to ensure an incident like this does not re-occur; and tounderstand what impact this spill could have on company earnings in the medium and longterm.
After the spill, the company carried out a comprehensive risk assessment of all its coal ash basins in North
Carolina, which determined that four of its basins were deemed high risk. The company then presented anumber of solutions. The solutions ranged from full excavation for all basins, to excavating the four ‘at risk’basins and putting a hybrid cap in place on the others. A hybrid cap involves draining the basin and putting
a liner inside it to avert the possibility of future spills.
It is expected that by the end of 2015, the Department of Environment and Natural Resources (DENR) will
categorise the basins, determine which solution is required and set the timeframe that should apply. Until adecision is made, the company will be unable to assign a more accurate cost estimate against this plan. The
company is confident that it will be able to recover any associated costs through rate base growth. The legislator
made no comment on cost recovery, implying that it will be treated as any other rate base investment.
We will monitor this issue on an ongoing basis. The decision from the DENR is expected to have industry-wide
rather than merely company-specific ramifications. Environmental risk factors such as this one were alreadyreflected in the quality score for this company. As a result, no change was needed post our engagement.

Investment information and performance^
As at 31 December 2014

Investment characteristics
Average turnover

20.4%

Stock retention

52.4%

Top five holdings

Transurban Group
Vinci SA
Scottish and Southern Energy PLC
East Japan Railway
Atlantia SPA% of companies met with

100%

Industry split
Engagement

Electric Utilities 23.34%
Highways & Railtracks 20.41%
Railroads 11.28%
Multi-Utilities 9.95%
Gas Utilities 7.32%
Oil & Gas Storage & Transportation 7.20%
Airport Services 5.62%
Marine Ports & Services 5.36%
Specialised REITs 4.90%
Cable & Satellite 1.91%
Water Utilities 1.59%
Wireless Telecommunication Services 1.13%

We look to positively influence companies
towards ESG best practice. Through company
engagement, we seek to highlight areas forpotential improvement, encourage disclosure
on ESG issues, and commend companies thatare making progress in this area. We typicallyengage companies on material issues toachieve specific outcomes, namely to ensure
good ESG practices and thereby protect
investor interests.
Proxy voting statistics, voting records
and additional case studies are available
on our website.

Five-year performance
Portfolios outperforming benchmarks

100%

Weighted average outperformance

2.0%

Absolute return
Wholesale Global Listed Infrastructure
Securities Fund

16.9% pa

^	Figures are representative of all team portfolios. Refer to Appendix 1 for all definitions and further important information.

Responsible Investment and Stewardship – Annual Report 2015 | ri.firststateinvestments.com

13

Global Resources>	Inception Date
1997>	Location
Sydney, London>	Strategies
Global Resources	Global Agribusiness(known as Global
Soft Commodities
in Australia)

Investment philosophy and approach

Number in team

We invest for the long-term in a diversified
portfolio of high quality and growing energy,
metals, mining and agribusiness companies
from around the world.
Our portfolios are actively managed using
a fundamental, bottom-up stock selection
process. The team’s investment philosophy isconsistent across each of the global resources
and agribusiness portfolios that it manages.
We construct a diverse portfolio, that displays
the characteristics of larger-than-averagemargins and resilient balance sheets combinedwith exploration and development stage
companies with strong growth potential.
Our experience since 1997 (the time ofinception of our Global Resources flagshipstrategy) is that this approach delivers positive
returns over the full commodity price cycle
without taking on excessive risk.

Average experience

15 years

Average years in team

7 years

Stewardship and ESG integration
Dr Joanne Warner
Head of Global
Resources

Tal Lomnitzer
ESG Committee member

By engaging on ESG issues with the companies
in which we invest, we believe that we are able
to identify potential risks and opportunities incompanies, determine the materiality of thoserisks, and what is being done to manage them.
We believe that there is a correlation between
companies with good governance practices
and strong, sustainable shareholder returns.
Consequently, we seek to positively inﬂuencecompanies towards ESG best practice forthe ultimate beneﬁt of our investors. Thisis primarily achieved through direct meetings
with company management.
An assessment of companies’ commitment
to sustainability, the integration of governancepolicies in the organisation and the adoptionof appropriate disclosure practices provides
an additional view of management quality.

Team profile
Our Global Resources team, led by Dr Joanne
Warner, consists of 11 investment
professionals and is one of the mostexperienced in the industry.
We are a technically-oriented team withbackgrounds spanning multiple sectors, including
mining and petroleum engineering, metallurgy,
physics, agriculture, economics and chemistry.
We operate in a collegiate environment andsector responsibilities are allocated to eachteam member, in addition to their portfolio
management roles. All members of theteam understand the key reasons forinvesting in every stock in the portfolio
and are aware of any stock specific catalysts
for share price movement.
Tal Lomnitzer, a portfolio manager withover 16 years’ investment experience,is the team’s RI Representative.

14

11

Petroleo Brasileiro (Petrobras)
Governance, related party transactions
and corruption
In September 2010, Brazilian oil company
Petrobras undertook one of the largest
capitalisations in corporate history by raising
BRL120.2 billion to fund the acquisition of
5 billion barrels of oil equivalent from theBrazilian government to help plug a funding
gap estimated at US$58 billion, as part of thecompany’s five year plan to commercialise thevast resources it had discovered in 2006-2010
in the pre-salt of Brazil’s deep water.
However, as part of the transaction, thegovernment acquired BRL80 billion of the total
funds raised. Petrobras subsequently used
BRL75 billion to purchase the barrels from thegovernment in a deal called the ‘Transfer ofRights’ (ToR). The net effect was to increase thegovernment’s stake in Petrobras from 40% to52%. In effect, minority shareholders were being
asked to give up more control of the company
and pay for barrels of oil which had, at the time,
not even been proven to exist.
In our view this sent a clear message thatminority shareholders would not be treated onan equal footing. As part of the deal with thegovernment there would also be a re-evaluationof the price paid for the undiscovered barrels,
which in all probability carried a significant
risk of being revised upwards in favour ofthe government. Therefore, Petrobras could
potentially be required to make an additional
material cash payment to the government
or forgo future production from the assets
acquired in the ToR. This situation resulted
in a material risk that minority shareholders
would be further diluted in the future.
In response to the above concerns identified
in 2010, the team’s Senior Energy Analyst met
with Petrobras’ management team at theiroffices in February 2011 with follow up meetings
in London in 2012. This due diligence resulted in
the divestment of all our holdings in Petrobras.
We have continued to monitor developments
at the company over the past few years,
despite retaining our zero-weighting in thisstock, and remain concerned about thecompany’s corporate governance.
Petrobras has changed its accounting measuresover the last two years. The company also failed
to submit its full audited accounts for Q3 14
and has since applied for an extension with its
creditors. Corruption allegations against Petrobras
have been widely reported in the media,
including in 2014, a major corruption scandal
emerged centred around the former head ofPetrobras’ downstream division, Mr Paulo Roberto
Costa, which engulfed company management
and prominent Brazilian politicians.

ESG implementation
Assessment and monitoring
Rigorous analysis of ESG factors and risks has
been a core part of our investment process
and philosophy since the flagship fund’s
inception in 1997. The framework is focusedon better understanding the risks related
to health and safety, industrial relations,community, environmental performance,board structure, compensation and thealignment of all stakeholders.
Although we use various independent ESG
research tools, we find that the clearest
understanding of ESG risks comes from oursite visits. We have conducted over 1,400
site visits across 70 countries since theinception of our flagship fund. These visits
enable us to use our expertise to gain amore detailed and comprehensive insight
into the magnitude of these issues and risks.
For some companies the key risks will be
external and need to be considered in aregional context, eg political risk, permit
challenges, lack of infrastructure etc.

Integration

WH Group
Governance, capital management
Hong Kong-based meat producer WH Group participated in an IPO in July 2014, raising US$2.4 billion.
We reduced our holding in the company when the private equity firm, CDH Investments, sold down its
position via a pledge, which was a way of monetising a portion of their holding that theoretically was inescrow (common directors in CDH Investments and WH Group).
Subsequently, its China business reported a poor result that surprised the market. We contacted thecompany to arrange a telephone conference immediately and were told that management was toobusy to engage with us as they were travelling on a marketing roadshow. Following a lengthy exchangeof emails we were asked to submit our questions. We have not received a response despite ourpersistence. We exited our holding of this name.

Areas for development
We utilise the capabilities of new ESG service providers, GMI and Sustainalytics, and incorporate
their data into our tailored ESG framework that is fed by data supplier Bloomberg. It is notuncommon for our first hand assessment to differ significantly from that of the ESG research
providers, which tend to be based upon company supplied information and media reports.
Whilst the quality of this external data has its limitations, it can be a useful tool to assess trends
over successive years of 35 ESG factors – including energy consumption, CO2 emissions, accidents
and environmental incidents. In general we find that large companies tend to allocate moreresources to this kind of ESG reporting and their results tend to be better represented andmore extensive than small to medium sized companies.

Investment information and performance^
As at 31 December 2014

ESG assessment forms an integral partof the formal stock review process. These
reviews are undertaken annually and aresupplemented by ongoing monitoring ofcompany announcements and meetings.
We believe that this will lead to better risk/
return outcomes for our funds and deliver
improved long-term returns for our clients.

Investment characteristics
Average turnover

42.6%

Stock retention

36.2%

Top five holdings
Wholesale Global Resources FundBHP Billiton
Rio Tinto
Exxon Mobil
GlencoreVale% of companies met with

100%

Engagement
Engagement on ESG issues is primarily carriedout directly with company management andindirectly through our proxy voting process.
Where company management does not
respond adequately to our engagement, it may
impact negatively on its valuation assessment
and could result in the team divesting its
holding of the particular company.
As a result of being part of a large and highly
regarded organisation, we find that we tend
to get good access to management. In
general we prefer to engage in a constructive
two-way dialogue with key decision-makers in
a company. This way our opinions are taken
into consideration and we are able to develop
a deeper understanding of the issues andthe constraints.
Proxy voting statistics, voting records andadditional case studies are available on
our website.

Industry split
Diversified Metals & Mining 38.67%
Oil & Gas Exploration & Production 16.25%
Integrated Oil & Gas 10.76%
Gold 7.53%
Precious Metals & Minerals 6.75%
Steel 4.12%
Coal & Consumable Fuels 2.76%
Fertilisers & Agricultural Chemicals 2.49%
Silver 2.40%
Other 8.27%

Five-year performance
Portfolios outperforming benchmarks

100%

Weighted average outperformance

1.0%

Absolute return
Wholesale Global Resources Fund

–3.6% pa

^ Figures are representative of all team portfolios. Refer to Appendix 1 for all definitions and further important information.

Responsible Investment and Stewardship – Annual Report 2015 | ri.firststateinvestments.com

15

Global Property Securities>	Inception Date
1994
>	Location
	
Sydney, London,
Amsterdam,
New York andSingapore>	Strategies	Global Property
Securities, Asia
Pacific Property
Securities andAustralian Property
Securities

Stephen Hayes
Head of Global Listed
Property Securities

Investment philosophy and approach

Areas for development

We believe that real estate security returns are
driven by a combination of local real estate
fundamentals and capital market conditions.
To allocate capital efficiently requires avery clear understanding of the current andanticipated real estate fundamentals at a local
level, and of the macroeconomic conditions
which can influence real estate market cycles
and expectations.
The investment process is driven by active
stock selection based on stock specific factors.
These factors include the quality of the assets,management expertise, strength of thecompany’s capital structure and accessto capital markets.

–– The integration of third party ESG researchscores into ESG valuation models.

Stewardship and ESG integration
We have implemented sustainability
considerations into our investment process.
We believe the consideration of ESG issues
will lead to better risk return outcomes,
which will ultimately improve long-term
returns for clients.
Corporate governance is a particular focus,
where board independence as well as respect forshareholder rights is of paramount importance.
We also consider any specific sustainability
initiatives implemented by a company and theenvironmental impact of existing assets anddevelopments. A company’s history as a good
corporate citizen is taken into account as well
as evidence of any meaningful contributions
it might have made which benefit society
as a whole.

Team profile

Joseph Daguio
ESG Committee member

Led by Stephen Hayes, the team members
are located across the world’s major property
markets with offices located in Sydney,
Singapore, New York, London and Amsterdam.
This gives the team a truly global reach andon the ground local property access.
Team members are experienced industry
experts, focused solely on investing in publicly
traded property securities.
Joseph Daguio, Senior Analyst with 13 years’
experience, is the team’s RI Representative.
Number in team

16

12

Average experience

14 years

Average years in team

4 years–– The development and implementation of
an ESG tracker across global teams which
will track company specific ESG related
issues and engagements.

Westfield
Governance, board independence,
related party transactions andtreatment of minority shareholders
In December 2013, Westfield Group andWestfield Retail Trust announced their intention
to merge Westfield Retail Trust with Westfield
Group’s Australian and New Zealand business.
We were positive on the long-term strategic
merits of the restructure proposal, which willsee Westfield Group spin out its Australianand New Zealand Portfolio and Management
Platform to merge with Westfield Retail Trust,creating a new entity named Scentre Group.
However, we had concerns relating to the termsof the restructure. Specifically we had concerns
in relation to the calculation of the merger
ratios of 51.4% and 48.6%, being Westfield
Retail Trust’s and Westfield Group’s ownershipinterest in Scentre Group respectively. We also
had issues with the very high leverage ofWestfield Group’s Australian and New Zealandbusiness that had been proposed to be mergedwith Westfield Retail Trust.
We met with the CEO and Independent
Directors of Westfield Retail Trust several
times to communicate our concerns with therestructure, and to gain further clarity on thedetails of the proposed deal. We also met with
the Chairman and CEO of Westfield Group.
Subsequent to these meetings, Westfield Groupand Westfield Retail Trust announced in earlyMay 2014 their intention to improve the merger
terms, by reducing the net debt contributed byWestfield Group’s Australian and New Zealandbusiness. Although the $300 million reduction
improved the deal terms to Westfield Retail
Trust’s unit holders, in our view it did little toaddress the price being paid for Westfield
Group’s Management Platform or reduce theleverage of Westfield Group’s Australian and
New Zealand business to prudent levels.
Even after taking into account the marginally
improved restructure terms outlined in early
May, from our engagements with managementof both companies, as well as through ourreview of the security holder booklets and their
supplements, we could not find any material
new information that justified the price being
paid by Westfield Retail Trust shareholders forthe debt-laden Australian and New Zealandassets of Westfield Group. For these reasons,we voted against the merger proposal at thedeferred meeting. However, there were notenough votes against the restructure proposal
and the motion was passed with a 76.1%
approval from shareholders, just above the
75% needed.

ESG implementation
Assessment and monitoring

Investment information and performance^
As at 31 December 2014

We have developed a tailored ESG
framework that is part of the stock review
process. When an analyst reviews a property
company, an ESG review will also be done.
While the primary source of ESG informationis company dialogue, the team also utilises
Sustainalytics and GMI to streamline thesourcing of data and information. Despite
sourcing third party research, in-house researchremains the most important source ofreference when integrating ESG considerations
into the investment process.

Integration

Investment characteristics
Average turnover

43%

Stock retention

50%

Top five active holdings

Equinix
Hongkong Land
Brookdale Senior Living
Hyatt Hotels
American Campus Communities% of companies met with

100%

Industry split
Retail REITs 41.12%
Diversified REITs 15.97%
Office REITs 11.85%
Industrial REITs 7.81%
Real Estate Operating
Companies 5.93%
Residential REITs 5.76%
Other REITs 11.55%

We approach ESG issues in a two pronged
approach. Firstly, ESG considerations havebeen implemented into the investment
process as a variable in the initial screen to
determine our defined investible universe.
A low ESG score (in combination with lowscores on other factors) can lead to a stock
being excluded from the investment universe.
Secondly, each company in our universe is
rated on specific ESG factors which are usedin determining the beta in the capital asset
pricing model which directly impacts ourvaluation of a stock. The higher the team rates
a company’s ESG profile, the lower the beta
which leads to a higher valuation, this makes
it more likely that we will invest in the stock.

Five-year performance
Engagement
We are firm believers in investor rights andtake a pro-active stance on ESG issues,
especially with regard to corporate
governance. Communication with CEOs andboard members is undertaken where it isdeemed appropriate in order to influenceand to enforce change.
Also during our company meetings, as anagenda item, we will discuss any changes tothe company’s ESG considerations. We will
relay back our views on how the company
rates versus its peers. In abnormal
circumstances, where we believe that ESG
considerations are materially below par,we will directly seek to influence change.
Proxy voting statistics and voting records
are available on our website.

Portfolios outperforming benchmarks*

82%

Weighted average outperformance

0.4%

Absolute return
Wholesale Global Property Securities Fund

17.2% pa

* The portfolios were restructured after being taken over by the current team in November 2012.

^	Figures are representative of all team portfolios. Refer to Appendix 1 for all definitions and further important information.

Responsible Investment and Stewardship – Annual Report 2015 | ri.firststateinvestments.com

17Australian Equities, Core>	Inception Date
1993
>	Location
Sydney>	Strategies
	Australian Equities,
Tax Aware, Equity
Income, Geared,
Indexed, Small
Companies andSmall Companies
Long ShortInvestment philosophy and approach
Our strategies seek to create wealth for ourinvestors by taking an active and disciplined
approach to managing investments in thedomestic equity market.
Our investment process has no persistentstyle bias and seeks to add value regardlessof market cycles or thematics. We employ
a sensible, transparent investment process,which has been unchanged for more than
15 years. Disciplined and risk-aware portfolio
construction is a key feature of the team’s style.
The business has been built on people withsound judgement. The experience of working
through multiple business cycles over theyears provides the team with the knowledge
and expertise to outperform in a range ofmarket conditions.

Our incentive structures are directly aligned
to the results we deliver to our investors.
We believe this promotes commitment
and intellectual engagement, aligning
our interests and success with those of
our clients.
Robin Balcomb, Portfolio Manager, has 15 yearsof experience in the funds management
industry and is the team’s RI Representative.
Number in team

19

Average experience

14 years

Average years in team

7 years

Areas for development
We are seeking to improve the integrationof ESG data and information into our systems
to assist decision-making.

Stewardship and ESG integration

Matthew Reynolds
Head of Australian
Equities, Core

Robin Balcomb
ESG Committee member

18

An assessment of companies’ commitment
to sustainability, the integration of governancepolicies in the organisation and the adoptionof appropriate disclosure practices provides
an additional view of management quality.
By engaging on ESG issues with the companies
in which we invest, we believe we are able
to identify potential risks and opportunities
in companies, determine which of those risks
are material, and what is being done tomanage them.
We believe there is a correlation between
companies with good governance practices
and strong, sustainable shareholder returns.
Consequently, we seek to positively inﬂuencecompanies towards ESG best practice for theultimate beneﬁt of our investors.

Team profile
Led by Matthew Reynolds, the team is highly
experienced and has a mix of complementaryskills. Specialist investors within the teammanage a range of Australian equity strategies,
including active large and small cap, equity
income and passive.

Wesfarmers
Governance, sustainability disclosureand strategy
As long-term investors, we were pleased tohear about Wesfarmers’ intention to improve
the quality and transparency of its reporting
around ESG issues during a management
meeting in 2014. As a recognised expert in RI
in the Australian funds management industry,
we were invited to provide feedback on the
new report.
An improved and more comprehensive
Sustainability Report was published by
Wesfarmers in November 2014. The company
has identified 10 principles, which provide aframework for its approach to sustainability.
As well as covering traditional ESG factors suchas water usage, community engagement andcorporate governance, we were pleased tosee that relationships with suppliers are also
explicitly included within the new principles.
Wesfarmers has experienced some issues with
supplier-sourcing in its Coles supermarkets
business, which were acknowledged by the
Chairman at the 2014 AGM.
From a shareholder perspective, it is imperativethat companies maintain strong and respectful
relationships with their suppliers. It is also pleasing
to see Wesfarmers striving to source products in amore responsible manner and using its influence
to encourage suppliers to improve their own
social and environmental practices.
Members of the Australian Equities, Core teamhave since met with Wesfarmers in order toprovide formal feedback on the report andsuggest areas where it could be further
improved to meet global best practicestandards. We applaud Wesfarmers’ initiativein improving its reporting of sustainability
issues but believe further improvements canbe made, particularly around sourcing andrelationships with suppliers. We look forward
to seeing these improvements incorporated
in future reports.

ESG implementation
Assessment and monitoring

Transurban Group
Governance, executive remuneration

We have adopted a bottom-up approach toidentifying key ESG risks. Our internal analysis
is supplemented by company disclosures,
media and external research. Analysts consider
ESG and sustainability issues as one of six
factors in the stock research and selection
process. A consideration of a company’ssustainability and governance policies andpractices is therefore an explicit part of thestock research process, and has been in placesince 2007.

The Australian Equities, Core team has been a long-term shareholder in Transurban Group, which
operates a high quality portfolio of toll roads in Australia and overseas.
In our view, Transurban Group recognises the importance of sustainability issues and is at an advanced
stage of ESG policy development and implementation. The company is also utilising technology tomonitor accident rates and has implemented measures to reduce accidents, including preventative
accident/driver warning systems. We have discussed these issues with the company on several occasions.
During 2014, Transurban Group was part of a consortium that acquired Queensland Motorways
Group. Following the completion of this transaction, we met with the company to understand thatappropriate performance hurdles remained in place for members of the senior management team.
Following this meeting, we were satisfied that the acquisition would not impact the company’s FY15
long term incentive growth hurdle rate and that Transurban’s performance hurdles provided robust
stretch targets that are aligned with shareholder interests.

Integration
Where ESG and sustainability factors are
determined to have a material impact on
profitability, they are quantified and impliedin all other factors; most directly in thevaluation and financials of the stock.

Engagement
We engage with all companies held in our
portfolios and many others in the investment
universe and beyond. We collectively
completed more than 1,500 company visits
during 2014.
Issues for engagement are identified throughthe detailed company research and analysis
described above.
Progress on ESG issues is monitored by analysts
through a review of the company visitshistorical record. Subsequent meetings withmanagement provide opportunities to monitor
progress on particular topics of concern.
Engagement activities are designed to improve
our understanding of the policies and practicesof companies and assess their effectivenessin managing ESG risks. The outcomes of ourengagement with companies flows throughto proxy voting decisions and, ultimately,
investment decisions.
Proxy voting statistics, voting records
and additional case studies are available on
our website.

Investment information and performance^
As at 31 December 2014

Investment characteristics
Average turnoverLarge cap 52%
Small cap 97%

Stock retention

Large cap 48%
Small cap 10%

Top five active holdings

National Australia Bank
Medibank Private
Twenty-First Century Fox
GPT Group
Rio Tinto% of companies met with

100%

Industry split
Financials 48.18%
Health Care 4.92%
Industrials 6.69%
Information Technology 0.68%
Materials 15.91%
Telecommunication Services 6.47%
Utilities 1.34%
Consumer Discretionary 6.70%
Consumer Staples 4.99%
Energy 4.11%

Five-year performance
Portfolios outperforming benchmark

100%

Weighted average outperformance

2.1%

Absolute return
Wholesale Australian Share, Core Fund

8.1% pa^	Figures are representative of all team portfolios. Refer to Appendix 1 for all definitions and further important information.

Responsible Investment and Stewardship – Annual Report 2015 | ri.firststateinvestments.com

19Australian Equities, Growth>	Inception Date
1989>	Location
Sydney>	Strategies
	Australian Equities,
Imputation,
Concentrated
Equities, Industrials,
Geared, Small-mid
Caps and Micro Caps

Investment philosophy and approach
Our team is one of the largest in the Australiansharemarket and has the resources to complete
deep industry analysis to understand the driversof return on invested capital. While listedcompanies tend to be well covered by thesell-side broker community, they are notwell researched. Accordingly, we maintain asignificant level of contact with listed companies,
unlisted competitors, suppliers, customers andindustry experts.
Our philosophy is that:–– Growing companies which generate consistentlong-term returns and can reinvest above
their cost of capital provide the greatest
shareholder value;–– Changes to company returns on invested
capital have high explanatory power for
stock outperformance; and–– Understanding industry drivers is critical tounderstanding what drives stock performance.

Marcus Fanning
Head of Australian
Equities, GrowthAlex Gallard
ESG Committee member

Stewardship and ESG integration
ESG risks are factors that may place businessvalue at risk. Companies at risk are identified
using both external providers and our own
internally driven research, which is basedon a systematic company meeting program.
Company meetings provide us with theopportunity to engage on ESG issues andgain greater insight into potential risks. It also
provides us with the opportunity to positively
influence companies towards ESG bestpractice where appropriate.
Identified ESG risk factors are used to assist
in developing the quantitative and qualitative
assumptions used by analysts in their assessmentof industries and stocks. This analysis is vigorously
stress tested and screened under a peer review
process. This process seeks to highlight theanalyst’s and team’s conviction in the target
price and buy/sell recommendation.

Team profile
The team is one of the largest and mostexperienced in the Australian market, with
16 members. Current members each havean average industry experience of morethan 18 years.
The team is led by Marcus Fanning, who has
ultimate responsibility for the performanceof all portfolios.

20

The team is organised into four sub-groups; largecaps, small caps, dealers and investment systems.
Alex Gallard, Senior Analyst, is the team’s RI
Representative. Alex has 24 years of experience.
Number in team

16

Average experience

18 years

Average years in team

10 years

Areas for development–– We are in the process of implementing
a database of company engagements tobetter capture the outcome of individualand collaborative engagements.
–– We are streamlining our proxy voting
system by moving from a manual toan automated process.

Sino Gas and Energy
Governance, board composition andconflicts of interest
Imdex was a founding shareholder in Sino Gas
and Energy. In late 2013, it sold around halfof its shareholding, realising $24 million, andretained approximately a 10% holding in Sino.
The CEO of Imdex was a Director on the Sinoboard. We believed it was unsatisfactory that
this Director remained on the Sino board whilerunning another public company. We thoughtin the best interests of Sino shareholders
that the Director should leave the Sino board.
Our dissatisfaction with the board composition
was communicated to the Chairman on anumber of occasions.
Our team conducted a site visit to China in
May 2014 and was able to meet and discuss
our issues with a potential new director,
Phil Bainbridge, ex-Oil Search. Mr Bainbridge
impressed us on the trip and gave us theconfidence that he would join the board andprovide much needed expertise, while theissue with the board structure was resolved(Mr Bainbridge is not affiliated with CFSGAM).
Ultimately, Imdex sold out their remaining
holding. While the Director remains on theboard, we were able to assist in instituting
board improvement by communicating ourconcerns regarding the existing structure.
Mr Bainbridge is now Chairman and as such
our assessment of the company’s governanceand management has improved significantly.

ESG implementation
Assessment and monitoring
ESG risks are primarily identified by the team’s
own internally-driven research, which is basedon a rigorous company engagement program.
Analysts assess how companies are managing
ESG issues and encourage the entities in which
they invest to improve their ESG performanceand disclosure.

Integration
ESG considerations are used to help develop
quantitative and qualitative risk assumptionsin analysts’ assessment of industries andstocks, and are overlayed in target priceand stock recommendations.

Origin Energy
Governance, strategy, environment, climate change and renewable energy
Over the past year, we have been actively engaging with senior management from Origin Energy,
including the CEO and CFO, regarding our view on the need to take a more active position in the
renewable generation space. Origin, to date, has primarily relied on traditional generation (albeit witha higher tilt towards gas fired generation than the broader market) when the main gains in generation
share have occurred with rooftop solar where Origin’s positioning is weak.
Given the cost reduction in solar generation, combined with advances in battery storage technology,
traditional generation looks set to become increasingly marginalised. We feel, and have communicatedstrongly, that Origin needs to carve out a position in this market rather than just defend an incumbent
traditional generation position that is being competed away. We are seeing the first tentative steps fromthem into the renewable space by offering domestic customers a rooftop solar solution, plus Origin isalso looking at utility-scale renewable projects.

Investment information and performance^
As at 31 December 2014

Investment characteristics
Engagement
We have active dialogue with many
Chairpersons and/or senior company
management on material ESG issues which
we identify through our consideration of
ESG risks. We try to gain comfort that thecompany’s senior management and board
are aware of, and accountable for, themanagement of material issues.
Where we feel material issues are not being
appropriately addressed it can ultimately flow
into our proxy voting and investment decisions.
Proxy voting statistics, voting records andadditional case studies are available on
our website.

Average turnoverLarge Cap: 44%
Small Cap: 44%

Stock retention

Large Cap: 44%
Small Cap: 15%

Top five active holdings
Wholesale Australian Share Fund

CSL Ltd
Transurban Group
Twenty-First Century Fox
James Hardie Industries
Henderson Group% of companies met with

100%

Industry split
Financials 40.06%
Health Care 7.58%
Industrials 9.74%
Information Technology 0.76%
Materials 17.30%
Telecommunication Services 3.73%
Utilities 0.05%
Consumer Discretionary 8.77%
Consumer Staples 7.87%
Energy 4.15%

Five-year performance
Portfolios outperforming benchmark

92%

Weighted average outperformance

2.7%

Absolute return
Wholesale Australian Share Fund

8.3% pa^ Figures are representative of all team portfolios. Refer to Appendix 1 for all definitions and further important information.

Responsible Investment and Stewardship – Annual Report 2015 | ri.firststateinvestments.com

21

Indonesian Equities>	Inception Date
2005
>	Location
Jakarta>	Strategies
Indonesian Equities

Hazrina Dewi
Head of Indonesian
Equities and ESG
Committee Member

Investment philosophy and approach
The three key foundations to our investment
philosophy are:
1. Active management strategy	Our ability to manage large amounts of
information and successfully apply it to our
individual security selection process gives
us a competitive advantage.
	We make investment decisions based on
our continual assessment of which assets
are likely to maximise wealth creation. In
applying this active approach, a mediumto-long-term decision-making frameworkhas been adopted.
2. Invest in quality assets
	We believe in buying good assets at
sensible prices rather than mediocre assets
at perceived bargain prices. To identify
quality assets we combine solid researchwith sound investment judgement.
3. Disciplined investment process	We continuously monitor and control
various investment risks. As a professional
investment manager, our role is not to avoid
risks, but rather to understand the relationshipbetween risk and return, and to manage risk
appropriately. Our disciplined methodology
also conveys our practice of not relying
on short-term predictions in our decisionmaking process. Instead, we focus on
the medium-to-long-term ones.
	We place strong emphasis on high quality
proprietary research and direct contacts
with the companies in which we invest.

Stewardship and ESG integration
In a fast growing and volatile environment,such as Indonesia, we believe that companies
with a good understanding and managementof ESG risks and opportunities are more likely
to succeed over the long-term.
The consideration of ESG factors from bothan investor and corporate perspective is still
fairly new in Indonesia, with standards lower
than in more developed economies. While
this means that we must be flexible in ourconsideration of ESG factors, we believe thatas the understanding and adoption of leading
approaches to ESG issues grow, the market
will adopt higher standards.

22

In this regard we appreciate companies that
communicate openly with investors and whocarry out their business plans as disclosed.
We have incorporated our ESG scores withcompanies’ financial forecasts and also usedthem to influence the discount or premiumof company valuations. However, given thedepth of the Indonesian equity market, weare limited in how fully we can integrate thismethod. We do use our understanding ofa company’s ESG risks as a flag to monitor
the company more closely.

Team profile
Our investment team has a balanced
composition of both senior and younger
members that allows marrying deep knowledge
and experience in the market with the energy
and vigour to deliver outperformance.
Hazrina Ratna Dewi is the Head of Indonesian
Equities and is responsible for equity analysis,
strategy, and portfolio management as well
as sector and stock selection. She has beenworking in the financial industry since 1993
and she has experienced several economic
cycles, including the Asian financial crisis in 1998.
The team is based in Jakarta, Indonesia.
Number in team

6

Average experience

13 years

Average years in team

6 years

Areas for development
Implementing CGI Glass Lewis’ proxy voting
platform to allow for the efficient votingof stock.

Holcim Indonesia (SMCB)
Governance, investor engagement
and transparency
The company has a poor investor relation
function and management has a lack ofwillingness to meet with investors, which has
resulted, in our view, in very low earnings
feasibility. As a result, our internal valuationon the company used a lower multiple
compared to its peers and we also have a sell
recommendation. The issue so far has resulted
in no investment in the stock. Performance ofthe stock in the last 12 months was lower thanits peers and the index.

ESG implementation
Assessment and monitoring

Sri Rejeki Isman (SRIL)
Governance, capital management and transparency

We tailor our ESG analysis to the individual
stock. Our analysts write a separate ESG reportto supplement the company report and ourinternal analysis is supplemented by company
disclosures, media and external research. We
are highly focused on corporate governanceas we believe this is still the main concern
when investing in Indonesia. Considerationof ESG issues is still a relatively new concept
for Indonesian investors; however, we believe
it will soon be adopted more broadly.

On 15 April 2014, SRIL issued a five-year, USD bond amounting to US$200 million at coupon of 9%. Even
though the bond received a rating of B1 from Moody’s and BB- from S&P, the purpose of this issuanceremains unclear. We believe the company did not really need to refinance its existing Rupiah-denominateddebt with USD bond as it will put the company at risk due to stretching the balance sheet and will result ingreater earnings volatility due to currency movement.
As a result of this transaction, the company changed the stated usage of its IPO proceeds without theconsent of minority shareholders and aggressively increased its debt and related transaction. In our view,
these issues raised doubts as to management’s ability to run the company in a prudent manner. In response
we voted against the management on this transaction and lost, following which we sold our holding.

Investment information and performance^
Integration
We use ESG analysis to determine whether astock valuation should be discounted as a resultof a higher risk. If the ESG and sustainability
factors can be quantified and have a material
impact on profitability, we will integrate thenumbers into our forecast.

As at 31 December 2014

Investment characteristics
Average turnover

43.2%

Stock retention

42.3%

Top five active holdings

Telekomunikasi Indonesia
Bank Central Asia
Unilever Indonesia
Bank Mandiri
Bank Rakyat Indonesia% of companies met with

100%

Engagement
We have visited every company in our
portfolio and we are in regular contact
with management and/or investor relations.
We collectively completed around 100
management meetings and company visits
during 2014.
Issues for engagement are identified throughthe detailed company research and analysis.
Progress on ESG issues is monitored by analysts
through a review of the company visits record.
Subsequent meetings with management
provide the opportunity to monitor progresson particular topics of concern.
Engagement activities are designed to
improve our understanding of the policies
and practices of companies.
Up to now, we have not utilised our proxyvoting; however, we intend to start using therights in 2015.

Industry split
Financials 25%
Consumer Staples 15%
Consumer Discretionary 11%
Telco Services 7%
Industrials 16%
Basic Materials 10%
Energy 3%
Utilities 3%
Health Care 2%
Liquidity 7%

Five year performance
Portfolios outperforming benchmarks0%Absolute return
First State IndoEquity Sectoral Fund

19.1% pa

^ Figures are representative of all team portfolios. Refer to Appendix 1 for all definitions and further important information.

Responsible Investment and Stewardship – Annual Report 2015 | ri.firststateinvestments.com

23

First State Stewart>	Inception Date
1988>	Location
	
Edinburgh, London,
Hong Kong andSingapore>	Strategies
	Asia Pacific ex-Japan,
Emerging Markets,
Frontier, Greater
China, India, Latin
America, Worldwide,
Sustainability (Asia,
India, Emerging
Markets andWorldwide)

Investment philosophy and approach

Team profile

We believe our job is to entrust our clients’capital to good quality companies with strong
management teams and sound long-term
growth prospects.
Each investment is a decision to purchase, nota piece of paper or an electronic Bloomberg
ticker, but part of a real business with all therights and responsibilities that go with this‘share’ of the ownership of the company.
We take these rights and responsibilities
seriously. We also believe the way we behave
as investment professionals and the role weplay in the broader industry are importantfor our own sustainability.

Number ininvestment
team

Stewardship and ESG integration
Since the launch of the Asia Pacific andEmerging Markets team’s first product in
1988, sustainable investment has always been
an integral part of the team’s investment
philosophy and stock-picking process. All
the First State Stewart investment strategies
strive to integrate ESG considerations into
every investment decision. Our sustainability
strategies take this one step further by focusing
on long-term sustainability themes as a key
driver of the investment process. At the heartof this philosophy is the principle of stewardship.

35

Averageyears in team

We have a mix of highly
experienced leaders who
have been with the teamsince inception, however,most analysts have beenwith the team for 3-5 years
as the team has expanded
significantly in that time.

Location

Edinburgh, London, Hong
Kong and Singapore

Areas for development
We are always looking for ways to deepen
our understanding of ESG issues. We find thebest way to do this is through meetings andresearching companies. On occasion we also
commission external research by experts; someprevious examples include a Shipping reportby Sustainalytics on Industry Emissions, andSteel and Aluminium Sector reports by Trucost.

Investment information and performance^
As at 31 December 2014

Investment characteristics
Average turnover

All strategies
Asia PacificAsia
Sustainability
Frontier
GEM
Worldwide
China% of companies met with

100%

24%
24%
17%
22%
27%
23%
44%*
18%

* The Worldwide portfolios were restructured after being taken over by the current team.

Five-year performance
Portfolios outperforming benchmarks

99%

Weighted average outperformance

5.9%^ Figures are representative of all team portfolios. Refer to Appendix 1 for all definitions and further important information

Top five holdings
All strategies
Oversea-Chinese Banking Corp
Taiwan Semiconductor Manufacture
CSL Ltd
Unilever PLC
Cheung Kong Holdings Ltd

24

Guaranty Trust Bank

Giant Manufacturing

Governance and business ethics

Environment, low carbon transport,social, health and wellbeing

Company description: A Nigerian deposit-funded, commercial bank.
Investment rationale: GT Bank is an entrepreneurial bank with high levels of integrity. Its culture is conservative,
risk aware, has successfully transitioned past the first generation management team and survived the
Nigerian banking crisis of 2008/09 which demonstrated very clearly who was lending well, who was lending
badly and who was still engaged in corruption. GT Bank passed with flying colours.

ESG implementation
Assessment and monitoring

Engagement

ESG issues are identified through abottom-up company research process.
When we consider the quality ofmanagement, financials and franchise,
we think about the impact ESG could haveon the business and how management isaddressing risks and opportunities. The
primary source of ESG related informationis one-on-one meetings with senior
management. We are particularlyinterested in companies which embrace theunderlying spirit of ESG, rather than simply
taking a compliance driven, box-ticking
approach. The assessment of ESG issues isincorporated as part of the bottom-up
research process.

We engage on a wide range of issues including
strategy, governance, alignment of interests
and reputation. Engagement issues are
identified through the research process andthrough alerts received from RepRisk, ourcontroversy monitoring service.
We engage for two primary reasons. Firstly,
because we believe that the purchase of ashare in a business comes with both rights andresponsibilities. Should one of the companies
fail to meet international best practices on theenvironment, human rights or social issues, we
believe that we have a responsibility to engage
with senior management to persuade them toaddress the issue, rather than to walk awayfrom the problem.
Second, ESG issues are investment issues.
Positive engagement on ESG issues becomesa powerful tool in driving shareholder value
and protecting and enhancing the long-termvalue of portfolios. Engagement takes placethrough face-to-face meetings, informal
emails and formal written correspondence.
In order to facilitate effective engagement
the team spend a great deal of time building
relationships with company management.
As long-term shareholders, we are active
owners of the companies in which we invest
and aim to vote on all resolutions at annualand extraordinary general meetings. The
types of things that we find ourselves voting
against most frequently include:–– Executive remuneration packages where
there is a lack of alignment or the
incentives are too short term;

Integration
Sustainable investment has always been
an integral part of the First State Stewart
team’s investment philosophy and stock
picking process. ESG analysis is used as aqualitative tool to assess the risks and/or
opportunities a company might face. A
company’s approach to ESG issues is often
a proxy for its quality in other areas; forexample, franchise quality is impacted
by operational efficiency and theenvironmental efficiency provided
by its products.
We are fortunate enough to be able to
make the decision to not own a company
because of its approach to governance orsustainability issues, as we do not consider
or reference the benchmark whenconstructing portfolios.
Our sustainability strategies take the process
one step further by focusing on long-termsustainability themes as a key driver of theinvestment process. We classify potential
investment opportunities into one of three‘sustainability sectors’: sustainable goods
and services, responsible finance andrequired infrastructure.

–– Directors’ elections when the candidate
does not have the right character or skills
for the board, or they have not beenturning up to board meetings;

Company description: Established in 1972, Giantis one of the world’s largest bike manufacturers
in terms of revenue. It has the number one
position in China and is one of the top threebrands in Europe and the US. Giant operates
manufacturing bases in Taiwan, China and theNetherlands, manufacturing under the Giantbrand but also for Trek and Specialized.
Investment rationale: Excellent track recordof execution both in its original equipment
manufacturing business and development of its
own brand, a good history of paying dividends
and long-term backing from the Liu family.
We also see long-term opportunities for bikes
as people opt for healthier lifestyles andcommuting (Giant is also leading in thedevelopment of electric bikes).

China Mengniu
Social, product safety
Company description: China Mengniu is thecountry’s largest dairy company, producing
branded liquid milk, yoghurt, ice cream andmilk formula products.
Investment rationale: Following the melamine
scandal in 2008, a respected state-owned
consumer group, COFCO, stepped in. Since
then, the management team has beenchanged and there has been a concerted
effort to improve health and safety standards
and milk inspection procedures to global bestpractice. Europeans with decades of expertisein food safety and branding in the dairy industry,including Danone and Arla, have been integrated
closely as equity investors. The company has
been consolidating and integrating its supply
chain in order to guarantee the quality of its
liquid milk supplies. A cash generative franchisewith significant room for margin expansion,
Mengniu is focusing on strengthening its
branding, cost control, and on promoting
value-added dairy products like yogurt. We
as a minority shareholder are aligned with thestate and other equity holders in improving
safety standards in the Chinese dairy industry,and hope to benefit from long-term increases
in Chinese dairy consumption.

–– Resolutions that give the board totally
unfettered rights.
We rarely see environmental or social
issues appear on the ballot papers inemerging markets.
Proxy voting statistics and voting records
are available on our website.

Responsible Investment and Stewardship – Annual Report 2015 | ri.firststateinvestments.com

25

Global Fixed Income and Credit>	Inception Date
1986>	Location
	Sydney, Hong Kong,
Singapore, Jakarta
and London>	Strategies	
Global Credit,
Global Fixed Income,
Australian Fixed
Income, InflationLinked Bonds, Asset/
Liability Management
and Indexed Fixed
IncomeInvestment philosophy and approach
The key to our investment philosophy is‘Value for Risk’. We believe that fixed income
and credit markets are sometimes inefficient,as market participants approach investing withdifferent timeframes and different motivations.
By adopting a longer-term viewpoint, we areable to take advantage of shorter-term pricemovements to generate value for our clients.
We know that, to generate returns, we needto take on a degree of risk. As a result, weevaluate and measure risks carefully to makesure our investors are compensated.
For our credit-based strategies, we also believethat returns are asymmetric over the medium
term and that avoiding the losers is more
important than picking the winners. For
this reason, we construct a highly diversified,benchmark-unaware portfolio that seeks
to balance returns with lower tail risk.

Stewardship and ESG integration

Tony Adams
Head of Global Fixed
Income and Credit

We believe that ESG issues have a significant
bearing on risk. Poor corporate and regulatory
governance are recognised contributors inmost corporate failures. In addition, dangerous
environmental and social practices can leadto significant financial cost and reputation
and brand damage.
In our experience, companies and governmentsthat manage ESG risks poorly typically manageother risks poorly. This has a flow-on effect whichfilters through to most aspects of the company.

Aurizon Holdings Ltd
Environmental and governance

Yen Wong
ESG Committee member

26

Aurizon’s ESG risk was reassessed to high after
a review which was triggered following newsof a draft proposal for regulated revenue
determination. Even though the businessis largely exposed to take-or-pay contracts,
ie no volume risk, with large investment grade
counterparties, the bulk of its revenue and cash
flow is exposed to the coal sector, which faces
risk of ‘stranding’ by policy changes which
limit their use or where their investment value
takes a huge hit if the world increasingly limits
carbon emissions and moves to alternative
energy sources. The internal rating reflects
the high ESG risk and is below the rating by
the rating agencies.

Green bonds
Over the past year, we have seen an increased
issuance and also inquiry, by both banks andinvestors, for green and social bonds. In addition
to purchasing the two Australian dollar issued
bonds for our index funds, we also conducted
an extensive research project on green bonds
with the goal of better understanding thisgrowing sector.
Our research has found that liquidity, the size ofthe market and investor understanding remainchallenges for mainstream funds investing ingreen bonds. We believe that a consistent androbust framework to evaluate green bonds will
aid the growth of the currently small market.
As a result, we voiced support for the Green
Bond Principles published in January 2014 bysigning the Statement of Investor Expectations
for the Green Bond Market. Strong standards
and clear disclosure will be important for thefurther development of this area, especially withthe strong growth in corporate green bondissuance. Refer to the Ceres website forfurther information.

Team profile
Tony Adams is the Head of Global Fixed Income
and Credit. He is responsible for managing oneof the largest and most experienced teams inthis asset class in Australia. Tony brings 27 yearsof experience to his role, and is responsible formanaging our suite of global credit products.
Tony is also actively involved in the investment
processes across all of our diverse strategies.
Yen Wong, a Credit Manager with 17 yearsof experience, is the team’s RI Representative.
Yen provides support to the Head of Credit
Research, and together they are responsible
for ensuring the consistency and quality of
the inputs into the research process.
Number in team

29

Average experience

15 years

Average years in team

7 years

Areas for development
This year, we are focused on streamlining
the semi-government assessment process forengagement. This includes making sure that
our engagement is able to add worthwhile
insights. To this end, we have talked to
non-governmental organisations (NGOs) to
discuss either using their research or the
possibility of collaboration. We have also
submitted a case study to the PRI to encourageother investors to engage with these importantbond issuers.

ESG implementation
Assessment and monitoring
Analysts identify ESG risks during theirbottom-up credit research. We use
customised ESG rankings as a starting point
for assessments. Analysts consider thesealongside their own research with reference
to a variety of other external sources.
By analysing and assessing ESG issues within
a company, we can identify sources of
non-financial risk. In line with our credit
philosophy of avoiding the losers, we are able
to identify companies with a higher default
risk than the balance sheet implies. This gives
us greater insight than that offered by a ratingfrom a traditional credit agency.

Integration
The team assigns a proprietary internal credit
rating (ICR) to every bond we review. The ICR is
a forward-looking measure of default risk and is
one of the key outputs of our research process.
It reflects all risks relevant for that issuer,
including ESG risk. Our ICR is on the same scaleas ratings assigned by the ratings agencies but
is often materially different for individual issuers.
The ICR is also used by the credit portfolio
managers when making their decision to buy
or sell bonds and to determine position sizefor the funds that we manage. The Head of
Credit Research is responsible for ensuring
the consistency and quality of the ESG inputs.
Also see the case study of ESG and Corporate
bonds on page 30 for further evidence of this.

Petroleo Brasileiro (Petrobras)
Governance, corruption and business ethics
Our initial review on Petrobras, majority owned by the Brazilian Government, revealed a high level of ESG
risk from oil spills, as well as poor health and safety standards and human rights violations; none of which
led to weaker economic or financial performance for the issuer initially, but the company’s ESG risk wasa drag on our credit assessment for the issuer. The weakening of ESG performance, together with thecompany’s aggressive capital program and production targets, led to a downgrade of the internal rating
to below investment grade in early 2014. The growing negative influence by the Government on thecompany’s operations, including poor transparency on fuel subsidies, was a red flag that led to thatrevision. After our downgrade, the news stories and scandals grew, including the announcement that
Brazilian police and prosecutors were investigating former senior executives, as well as the country’s ruling
Worker’s Party, for siphoning off funds from Petrobras contracts. In the media, it has been reported that
more than two dozen executives from six large construction companies were arrested for inflating bids for
Petrobras’ contracts and paying bribes to members of parliament. In late 2014, PricewaterhouseCoopers,
the company’s independent auditor, refused to sign off the third quarter 2014 results because they did notadequately quantify the material impact these scandals had on the financial statements.

Investment information and performance^
As at 31 December 2014

Investment characteristics
Portfolio breakdown by bond types

Government
Corporate
Other

56.2%
30.0%
13.9%

Five-year performance
Portfolios outperforming benchmarks

34%

Global Credit portfolio outperformance100%

Weighted average outperformance

0.5%

Absolute return
Wholesale Global Credit Income Fund

7.2% paEngagement
The team’s key engagement is with banks
and counterparties to understand their ESG
risks and their approach to managing thoserisks; for example, climate change and otherenvironmental risks relating to the banks’loan books and financing, and aspects of
their lending policies.
A challenge for responsible credit investors has
been effective ESG engagement with issuers.
This is in part due to the contractual nature ofbond investments and the fact that a majority
of securities are purchased on secondary
markets. We do actively incorporate questions
into meetings with primary issuers. Our brokers
are aware of our ESG focus and facilitate ESG
discussions where possible.
We are increasingly conducting targeted
engagements and recently undertook a pilot
study to engage with semi-government bondissuers in Australia, including conducting ourown research to assess the ESG risks faced. This
assessment is an input to investment decisions.

^	Figures are representative of all team portfolios. Refer to Appendix 1 for all definitions and further important information.

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27

Asian Fixed Income>	Inception Date2014>	Location
	Hong Kong,
Singapore andIndonesia>	Strategies
Asian Fixed Income

Investment philosophy and approach

Team profile

Our team seeks attractive risk-adjusted returns
through an active approach to managing
investments in the region.
The investment philosophy is that an active
approach to managing Asian Fixed Income (AFI) is
best delivered through a factor-based assessmentof the drivers of credit spreads, foreign exchange(FX) and local government yields.
At the heart of our philosophy is a disciplined
risk management approach designed andsupported by a team of highly experienced
people. AFI has experienced many challenging
market cycles in recent decades. The experience
gained through these challenging cycles
provides the team with the experience andunderstanding of the factors that drive
markets in the region.

The Asian Fixed Income team, led by Jamie
Grant, comprises a total of seven highly
experienced investment professionals based
locally in Hong Kong, Singapore and Jakarta.
Jamie has more than 14 years’ industry
experience specialising in corporate credit.

Stewardship and ESG integration
Jamie Grant
Head of Asian
Fixed Income and
ESG Committee
member28

Our approach to investing is driven by acommitment to providing the best possible
outcomes over the long-term for our investors.
Our analysis focuses on the factors that we
believe drive outcomes in AFI, which, in our
experience, are the main drivers of investment
returns for Asian currency rates, credit and FX,
as well as USD credit. These are: valuations,
technicals, market sentiment, the politicalenvironment and the macro outlook.
ESG issues are identified and consideredin the course of the team’s credit analysis.
ESG factors are integrated into the process
for assigning an internal credit score. ESG
assessment has been extremely beneficial
in highlighting those non-financial risks that
could become financial and negatively impact
the credit quality of the issuer.

Number in team

7

Average experience

18 years

Average years in team

5 years

Times Property Holdings
Governance and business ethics
A Chinese property developer, Times Property
Holdings, issued US$280 million of five year
bonds at 11.6% yield on 2 March 2015. We
assigned a ‘very high’ ESG risk to the company
given the current anti-corruption campaign
initiated by China’s central government, against
the property sector and the short listing historyof the company. Despite the attractive yield, we
did not participate in the new bond issue. Times
Property’s bond price has fallen approximately
two points since it launched. On 8 March 2015,
the company announced the resignation of
the Chief Financial Officer, which is normallyconsidered a negative credit event by the market.

Areas for development
This year, our aim will be to improve our notes
and record keeping on companies’ ESG actions.

Investment informationand performance
The Asian Fixed Income team was establishedin 2014 and so there is insufficient history
available to provide this information.

ESG implementation
Assessment and monitoring
The credit assessment process is shared by the
Global fixed income and credit team and the
AFI team.
Analysts identify ESG risks during theirbottom-up credit research. We use
customised ESG rankings as a starting point
for assessments. Analysts consider thesealongside their own research with reference
to a variety of other external sources.
By analysing and assessing ESG issues within
a company, we can identify sources of
non-financial risk. In line with our credit
philosophy of avoiding the losers, we are able
to identify companies with a higher default
risk than the balance sheet implies. This gives
us greater insight than that offered by a ratingfrom a traditional credit agency.

Integration
The team assigns a proprietary internal credit
rating (ICR) to every bond we review. The ICR is
a forward-looking measure of default risk and is
one of the key outputs of our research process.
It reflects all risks relevant for that issuer,
including ESG risk. Our ICR is on the same scaleas ratings assigned by the ratings agencies but
is often materially different for individual issuers.
The ICR is also used by the credit portfolio
managers when making their decision to buy
or sell bonds and to determine position sizefor the funds that we manage. The Head of
Credit Research is responsible for ensuring
the consistency and quality of the ESG inputs.
Also see the case study of ESG and Corporate
bonds on pages 30 and 31 for further evidenceof this.

Agile Property Holdings Limited

Lodha Developments

Governance and business ethics

Governance, transparency
and capital management

ESG risk is an integral part of our investment
decision-making in the AFI team. In the midstof the current anti-corruption campaign initiatedby China’s central government against theproperty sector, we considered the ESG risk‘very high’ in the high yield Chinese property
sector. In October 2014, Agile Property Holdings
Limited’s Chairman and an Executive Director
were detained by authorities in the Yunan
province, which caused us to reduce ourinvestment in this company. Although thetwo individuals involved were later released,
we have avoided further investment.

An Indian property developer, Lodha
Developments, issued US$200 million of
five-year bonds at 12% on 5 March 2015. This is
the second attempt at a bond issuance by thecompany since it first launched the transactionin December 2014. We have concluded a ‘veryhigh’ ESG risk following a credit review andmanagement meeting, based on the company’s
debt restructuring history and our concerns overtransparency and disclosure given the company
is not listed. In 2007, Lodha defaulted on the
pre-IPO Deutsche Bank-led US$ debt, which was
finally paid in 2012 following many years of a
restructuring process. It was reported that there
were many alleged irregularities in this process.
We also have concerns about business dynamics
in the Indian property sector, which is highly
vulnerable to legal and regulatory risks. Despite
an attractive yield of 12%, we have notparticipated in the new bond issue. Lodha’sbond price has fallen approximately threepoints since it launched.

Engagement
Issues for engagement are identified
following our thorough company research.
A challenge for responsible credit investors
has been effective ESG engagement withissuers. This is in part due to the contractual
nature of bond investments and the factthat a majority of securities are purchasedon secondary markets. We do actively
incorporate questions into meetings withprimary issuers. Our brokers are aware of
our ESG focus and facilitate ESG discussions
where possible. We will continue to buildon this program of engagement over time.

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29

Global Fixed Income and Credit/
Asian Fixed Income (cont.)

Case study – ESG factors and corporate bonds
One of the challenges for responsible investors has been quantifying the contribution of ESG factor integration toinvestment outcomes. While many studies have looked at this issue, they have mostly focused on either socially
responsible investment (SRI) funds or specific ESG factors rather than broad ESG information integration approaches.
The challenge of demonstrating the contribution of ESG information integration has mostly related to:–– The idiosyncratic nature of different ESG risks for different companies depending on their industry,
countries of operation and conduct;–– The ‘integration’ of ESG considerations, by its very nature, makes it difficult to isolate the influence of ESG
issues from other factors;–– The differing time frames over which the issues can have a financial impact; and–– The inconsistency of available data which could support measuring investment outcomes.

“By comparing our internal
credit ratings to the rating
agency ratings, we can illustrate
the influence that ESG factors
have on credit ratings.”

Notwithstanding these challenges, our Global Fixed Income and Credit team and our Asian Fixed Income team,(who share the research process for analysing corporate bond issuers) wanted to test the relationship between
the consideration of ESG factors and the teams’ greatest concern – defaults. In order to do this we first needed
to identify the influence that ESG factors have on credit analysis.
Within our teams, we assign an internal credit rating to every issuer. This internal credit rating incorporates an
ESG risk assessment, which can influence the credit rating according to the materiality of those risks. We wereable to compare our internal credit ratings to the ratings of credit rating agencies, which typically do notconsider ESG factors. By comparing our internal credit ratings to the rating agency ratings (which are on thesame scale), we can illustrate the influence that ESG factors have on credit ratings.
Chart 1 below shows how our internal credit ratings differ from the credit rating agencies (which don’t typicallyconsider ESG factors).
Chart 2 shows the relationship between these differences and our ESG ratings.
As bondholders, our focus is on identifying the negative risks in companies, risks that may impair a company’s ability
to meet its obligations or contribute to default risk. These charts illustrate that our assessment of ESG risk is more
likely to be a factor contributing to a lower internal rating rather than a higher one when compared to credit rating
agency ratings. The converse is less apparent because while strong ESG practices are to be encouraged amongcorporates, it is not a benefit which bondholders often get rewarded for, unlike shareholders.

Chart 1: Aggregate internal credit rating vs Standard & Poors or Moody’s
39%

40%

Percentage of portfolio

35%
30%

28%
25%

25%
20%
15%
10%
5%
0%
Same

Lower

HigherChart 2: Aggregate internal credit rating vs Standard & Poors or Moody’s
split by ESG risk
Percentage in each category

100%

4%

5%

14%

80%

25%

32%
36%

60%
41%

28%

40%
37%

20%
0%

27%
14%

8%

Lower

Same

Very High Risk

High Risk

Moderate Risk

25%
5%
HigherLow Risk

Very Low Risk

Note: 8
 % of securities in portfolio are not rated by S&P or Moody’s or the ratings by S&P and Moody’s are split with
the ICR higher than one and lower than the other.

30

In addition to the companies we do assess and rate, there are many which we do not. There are a variety ofreasons for this, including ESG factors. Companies without ratings cannot be invested in.
By establishing that ESG factors have an influence over our internal credit ratings, we can then look at how
these factors also influence investment outcomes. For us, this can be inferred because our internal credit ratings
define the risk constraints to which our portfolios must be managed and it influences the return expectationsof portfolio managers given that higher returns are required for accepting additional levels of risk.
Chart 3 shows the default experience through time of our Global Credit Income Fund vs Moody’s and Standard
and Poor’s rated companies. The superior default experience is one aspect of assessing the role of ESG factors
in investment outcomes. Given that portfolio managers have the opportunity to sell out of securities prior todefault, it is also important to consider instances where losses were incurred selling securities at distressed levels
before their ultimate default. Chart 4 shows the loss experienced by the fund against what would be expectedbased on the default rates.
While our ESG assessment is only one part of a multi-factor risk assessment, we believe that the superior default
and loss experience of the Global Credit Income Fund is at least in part attributable to the integration of ESG
considerations into our research process. When taken together, the influence of ESG factors on our internal
credit ratings and the default experience of the fund demonstrate the benefits of robust ESG integration.

Chart 3: Global Credit Income Fund (GCIF) defaults vs. ratings agencies*
6“Our assessment of ESG risk
is more likely to be a factor
contributing to a lower internalrating rather than a higher one
when compared to credit rating
agency ratings.”“The superior default and loss
experience of the Global Credit
Income Fund is at least in part,
attributable to the integrationof ESG factor considerations into
our research process.”

Default Rate

5
4
3
2
1
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

GCIF

Moody’sStandard and Poor’s

Chart 4: Cumulative loss data for the GCIF – actual vs expected (bps)
700
600

Basis Points

500
400
300
200
100
0
May-01 Sep-02 May-03 Sep-04 May-05 Sep-06 May-07 Sep-08 May-09 Sep-10 May-11 Sep-12 May-13 Sep-14

Actual loss(inc. distressed sales)

Actual loss
(exc. sales)

Expected
cumulative loss

Source: Colonial First State Global Asset Management.
* Moody’s and S&P annual default studies, based on number of issuer defaults.

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31

Emerging Markets Debt

>	Inception Date
2011>	Location	
London>	Strategies	Emerging
Markets Debt – Hardand Local Currency

Investment philosophy and approach
The team believes that:–– Emerging markets are inefficient and slow to
price in developments; andPeru–– Experience and strong networks are essential
for adding value.

Peru is an economy that relies heavily on its
mining sector. The sector is important bothfor the Government (14% of fiscal revenue),and for the country (62% of exports).
Our analysis, based on the key factor model,
will capture these facts on the fiscal and external
sector factors.
In the assessment of Peru’s creditworthinessand balance of payment stability, thesustainability of mining as a source of income
for the Government and a source of hardcurrency for the country is crucial. The abilityof the Government to attract the necessary
capital to explore and develop the mining
resources is one part of the puzzle. The otherone is ensuring that the interests of the local
communities residing in the affected areas
are taken care of. The frequency of publicdemonstrations and legal initiatives seeking
to challenge the industry’s compliance withnational and local regulations are palpablemanifestations of the discontent of the local
communities and are vital in assessing the
likelihood of success of the projects.
In our last visit to Lima, we met senior
government officers, and we took theopportunity to raise the question of how they
were balancing the risk that any deteriorationin environmental conditions for the local
communities could impact support in otherregions where local communities may oppose
the granting of exploration rights. We alsosuggested that increasing the transparencyof the process by which permissions were
granted could go a long way in addressing
public concerns, and hence increase thechances of securing the sustainability of themining sector as an economic driver for Peru.

We use a disciplined and risk-controlled
investment approach based on our Key Factor
Model (KFM). This forms the basis for ourinvestment decision and is designed to
produce risk-adjusted outperformance.
The investment process has three stages:
1.	An assessment and forecast of the market
environment and individual emerging markets.
2. Portfolio construction and implementation.
3.	Portfolio monitoring and ongoing adjustment.

Stewardship and ESG integration
Helene Williamson
Head of Emerging
Markets Debt

Our approach to investing is driven by acommitment to providing the best possible
outcomes over the long term for our clients.
Our analysis of countries focuses on six factors,
which, in our experience, are the main driversof investment returns. These are: politics,
structural reforms, fiscal policy, monetary
policy, the external sector and technicals.
Three of these factors are intimately related
to RI and stewardship: fiscal policy, politics,
and structural reform.

Team profile
Manuel Cañas
ESG Committee member

The nine person Emerging Markets Debt (EMD)
team is led by Helene Williamson, who has
20 years investment management experience.
Manuel Cañas is the team’s RI Representativeand deputy head of the team with 16 yearsof experience.
Number in team
Average experience32

912 yearsSocial, governance, transparency
and environment

Areas for development
One area of ongoing development is an effort
to be more explicit and articulate in laying out
how ESG principles are embedded in ourinvestment process.
Secondly, we will revisit our engagements with
policy makers in our country visits. Although
we take these opportunities to address ESG
issues, we realise we could be more explicitin the engagement and when reporting our
findings internally.

ESG implementation
Assessment and monitoring

Integration

Engagement

ESG issues are identified and considered in
the course of the team’s investment analysis.
At the core of the process is the KFM, whichis comprised of six factors, from which weapproach the analysis of the issues in ourinvestment universe.
One of the key factors in our country analysis
is politics. In emerging countries, where
democracies are relatively fragile and young,
it is not uncommon for elections to be highlypolarised. The political spectrum can be quite
broad, and so is the range of possible outcomeswhen key elections are held. In this context,
we try to gauge social cohesion, to ensurethat whatever the election outcome, thegovernment will enjoy a broad and diversebase of support. To the extent that it may
not be the case, the willingness to service its
debt by the incoming government could bechallenged or questioned.

ESG issues are complex, and while the issues offiscal policy, politics and structural reform aresystematically assessed through the KFM, theapproach to incorporating ESG factors is still
evolving. Areas where we recognise the relevanceand are working to incorporate ESG factors into
our investment process include managing natural
resources, social issues and structural reform.
The World Bank produces the Worldwide
Governance Indicators. Of the six indices(Voice and Accountability, Political Stability and
Absence of Violence, Government Effectiveness,
Regulatory Quality, Rule of Law and Control
of Corruption), we found that Government
Effectiveness is statistically significant in
explaining the level of country spreads.
Although the indices are computed on anannual basis, they still provide us with a rangeof reference for what the spreads should befor each country.

We believe it is important for the analysts
to spend time on the ground and observe
country conditions first-hand to verify whether
the statistics or the news are giving the full
picture. This time spent on the ground can
include meetings with government officials
where ESG issues can be raised. However,a great deal can also be gauged simply byobserving the surrounding environment.
The team recognises the evolving nature of RI
and stewardship for fixed income investments,
and in particular for sovereign issuers. In orderto develop our own understanding as well as
to contribute to improvements in industry
practice we have been involved in the United
Nations Environmental Programme FinanceInitiatives E-RISC project phase 2, which isdeveloping methods for investors to incorporate
environmental factors into the assessment ofsovereign issuers.

Top 10 countries invested inCompany Example

1. Turkey
2. Mexico
3. Hungary
4. Indonesia
5. Argentina
6. Colombia
7. Croatia
8. South Africa
9. Kazakhstan
10. Dominican Republic

At a recent investor roadshow by an Asian company in preparation for the issuance of new bonds, a
range of questions were asked of senior management regarding the business, corporate governanceand transparency. Some of the answers provided were considered superficial. It was explained to senior
management that there had been recent corporate governance concerns within the region for similarly
owned companies, and for this reason investors required a higher level of transparency. It was suggested
that it was to the company’s benefit to be more forthcoming to address these concerns, or alternatively
it should expect to pay higher premiums for its new bonds in consideration for these risks. The company
acknowledged this view and confirmed that it was working to improve its transparency and corporate
governance. These concerns were a material reason why the new bond was not purchased.

Investment information and performance^
As at 31 December 2014

Investment characteristics
Breakdown of holdings

Hard currency
Local currency
Corporate debt

Country visits in the last year

22

86.3%
2.8%
10.8%

Performance
Portfolios outperforming benchmarks

100%

Absolute return
First State Emerging Markets
Bond Fund (VCC)

7.7% pa^ Figures are representative of all team portfolios. Refer to Appendix 1 for all definitions and further important information.

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33

Unlisted Infrastructure>	Inception Date
1994
>	Location
	
Sydney, Melbourne,
London, Paris>	Strategies
	Unlisted
Infrastructure

Perry ClausenManaging Partner,
Unlisted Infrastructure
Investments

Mark Rogers
ESG Committee Chair

Niall MillsGRIC member

Investment philosophy and approach
We invest directly in very long-lived assets overa very long-term investment horizon (typicallylonger than 20 years) in a diversified portfolioof critical infrastructure providing essential
services to the broader community.
Our approach to investment is governedby four key asset characteristics which areconsidered with every asset purchase:
1.	Category of infrastructure: we select assetsthat are vital to economic activity anddevelopment; such assets provide morestable, long-term returns;
2.	Asset life-cycle: we invest in brownfield
assets that have a proven need and future
usage expectations;
3.	Geography: we invest in assets locatedin stable, developed economies which
tend to offer more robust regulatory
and institutional safeguards;
4.	Market competition: assets within our
portfolio are by nature subject to little
or no competition within their markets.
These assets require active management
at board level. Our investment strategy is
to typically manage a large enough interestin each individual business to enable valueadded contribution via board and board
committee representation.
Through such representation, the teamprovides strategic input on ESG issues, businessstrategy, capital expenditure, capital structure
and other key drivers of value.

Stewardship and ESG integration
Our approach to responsible investment
and stewardship recognises that managing asignificant interest in an infrastructure businessresults in an obligation to ensure that theright policies and procedures are in place
to effectively manage ESG issues. There ispotentially significant value to be added, andan opportunity to reduce risk, by managing
ESG issues effectively.
The incorporation of ESG issues in theinvestment process requires a detailed value
attribution process to help quantify ESG risks.
However, a qualitative approach also helps put
the issues on the table. Integration of ESG
factors into everyday business processes(capital delivery programs, procurement
processes, business case development, risk
reviews etc) provides a valuable foundation
for creating additional value in our companies.

This approach gives ownership of ESG
performance to every individual in a company,a critical component of effective managementof ESG risks and opportunities.

Team profile
Our unlisted infrastructure investment teamconsists of 32 individuals with significant
operational management, investment skills
and experience within infrastructure businesses.
Led by Perry Clausen, who has over 20 years
of infrastructure experience, the team has
people located in countries in close proximity
to the assets which span Australia and Europe.
The RI Representative for the Infrastructure
team is Mark Rogers. Mark has over 17 years’
experience in the infrastructure sector and has
worked on significant projects in the energy andtransportation sectors. He holds directorships
on the boards of four of the team’s assets and isdeputy chair of the Infrastructure Sustainability
Council of Australia (ISCA).
Number in team

32

Average experience

12 years

Average years in team

5 years

The Australian Clean Energy
Infrastructure FundEnvironment, renewable energy
and climate change
In 2014, we established a new clean energy
infrastructure fund with cornerstone backing fromthe Clean Energy Finance Corporation (CEFC) for
institutional investors to gain access to renewableenergy investments such as wind generation andcommercial embedded solar generation.
Perry Clausen, Head of Unlisted Infrastructure at
CFSGAM said “Australian superannuation funds
and other institutional investors have expressedinterest in finding an attractive way to invest
directly into low carbon energy infrastructure.”
The CEFC cornerstone investment is a first stepin establishing a unique clean energy platform
and working with those institutional investors inachieving their investment objectives.

Performance*
Portfolio outperformance100%

We have been investing for over 20 years. Since inception the core assets have generated a grossinternal rate of return of 13.5% on behalf of over 50 institutional clients.** For the period from September 1994 to December 2014.

34

ESG implementation
Assessment and monitoring
Pre-investment

Integration

Prior to an investment being made in an asset,
the team aims to consider all the relevant
ESG issues for the asset. No checklist canappropriately cover all the possible issues, so
considerations are made on a case-by-case basis.
Risk assessment tools are used to help in thisanalysis. These tools also provide opportunities
for benchmarking against similar assets. One
example of such a tool is the ISCA IS Tool. This
Tool provides a risk and opportunity assessment
and benchmarking framework across relevant
ESG issues.

Our company boards are now well attuned
to ESG risk and opportunity, with ESG
considerations now included in standard
business case development. ESG considerations
are now also integrated into our supply chain
and contract management procedures toensure that we are pushing our contractors
to innovate in the ESG space and find ways
to do business better and more cleanly.

Ongoing asset management
Once an acquisition is made, the teamundertakes ongoing active asset management
as part of a continuous improvement process
to value-add to asset performance andeffectively manage risk. Our specialist fundmanagers and asset managers meet regularly
with infrastructure business management
teams to discuss various matters, including ESG
issues. They also visit business sites in theircapacity as shareholder, board member and/or
board committee member.
In addition, we seek to ensure thatmanagement provides an appropriate levelof information to the board to ensure that theapproach management takes in managing
potential risks and realising opportunities isunderstood by the board.

Adelaide Airport

Valuation
Appropriate management of ESG
considerations is undertaken as part ofthe ongoing valuation of assets and is aconsideration in decisions whether to divest
an investment. Notably in the appointmentof a valuation panel, its ability to include ESG
factors into valuations is a key consideration.

Governance, sustainability tools
and assessment
Adelaide is already a sector leader insustainability, being the first airport in Australia
to be recognised by Airports Council
International (ACI) for effectively managing
carbon emissions. Airport Carbon Accreditation
is an independently assessed global programthat recognises airports’ efforts to manage andreduce their CO2 emissions.
The Airport has a comprehensive and publicly
available sustainability master plan and has
worked hard to reduce resource consumption,
stormwater pollution and bird strikes, among
other relevant ESG issues.
In 2014, at the request of our director
representatives, the Airport commenced
a trial of the operational component of the
ISCA IS Tool. The trial will assess various ESG
components of the operating business and will
provide the business with benchmarked insight
into how the business is performing against
these ESG criteria.

Engagement
We have the distinct advantage of being able
to engage directly with our companies via ourboard representation. This direct involvement
drives cultural change and provides focus for
ESG management and allows a two-way
conversation between management andinvestors to ensure long-term alignment
on value creation and protection. We also
engage directly with our co-investment
partners to ensure that they understand thelogic for our focus on ESG issues and to also
learn from their approaches to these issues.

Investment information and performance
As at 31 December 2014

Investment characteristics

Current assets and offices

CarunaElectricity distribution

DigitaBroadcasting towers

NewhamHospital
Electricity North WestElectricity distribution
Anglian Water
Water andwaste water utility

Brisbane Airport
AirportAdelaide Airport
AirportInternational Parking
Parking
SydneyHelsingør-Helsingborg
Ferry Route

Adelaide
Somerton
Pipeline

LondonMelbourneBankstown Airport
AirportEtihad Stadium
SocialParis
Reganosa
LNG regasification plant

EVG and Ferngas
Gas distribution
Infrastructure Asset Locations
Office Locations

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35Responsible Investment
and Stewardship in Focus

Managing the risk from exposure
to potential stranded assets
The Stranded Assets Working Group (SAWG)
was formed in December 2013 and iscomprised of investment professionals fromthe ESG Committee to assess risks associatedwith potential fossil fuel asset stranding. The
purpose of the group was to provide guidance
and tools for investment teams to integrate theassessment of these risks into their investment
decision-making and ownership practices.
The SAWG assessment of the issues concluded
that the risks are real, complex and potentiallymaterial to long-term investment value. However,the SAWG also recognised that there are anumber of related and sometimes competing
forces which will manifest themselves in different
ways for individual companies. This makes
blanket top-down approaches ill-equipped to
predict or manage the extent to and speed bywhich these factors may impact individual fossil
fuel (or related) investments.
In such situations, there are a number ofways for investors to manage the risks andopportunities this complex dynamic presents.
For example, it is possible to identify andreassess the investment case for thosecompanies which would be least resilient tochanges in regulation or market demand.
This would include companies who sit further
up the cost curve and/or which lack theflexibility to transition their businesses togrow in a changing environment.
Stranded assets toolkit
To assist investment teams, the SAWG
developed a framework for assessing company
exposure to the issues and documented ourassessment of best practice management
based on a series of questions sent to a numberof our fossil fuel holdings. Lastly, we consideredpotential avenues and issues for engagement.
A key question for investors is ‘which companies
and assets will perform best over time?’
Our view is that the lowest cost operators withthe most operational and strategic flexibility arelikely to be the most resilient.
In considering the likelihood and impact ofthese risks to the value of different fossil fuelassets, the SAWG developed a risk assessment
toolkit to help analysts identify companies
which are most exposed. The assessment
process includes:–– Determination of the company’s baseline
position both on the cost curve and in termsof relevant market and regulatory dynamics;–– Use of scenario analysis to test thecompany’s resilience to different emissions
regimes by flexing commodity prices, costs
and timelines;–– Assessment of the company’s approach
relative to peers, including strategic
management, capital allocation and incentives.
The different elements of the toolkit arehighlighted in the diagram. Climate change
and related issues will influence energy
demand and use for decades to come.
As stewards of our clients’ assets, we have aduty to manage the risks and opportunities
associated with these changes while deploying
capital in line with our mandates. We believe
the toolkit provides a good framework which,as the name suggests, can be incorporated inpart or in full to strengthen existing
investment processes.
We will continue to monitor this issue throughthe ESG Committee will update the toolkit as
the issue evolves.

Fossil fuel companies (coal, oil and gas)

36

Determine thecompany’s baseline
position

Test the company’s
resilience withscenario analysis

Assess the company’s
approach

Assess the company
against the cost curve

Using lower commodity
prices or margins

Benchmarkthe company against
good practiceAssess the supply chain
and local regulatoryenvironment

Using higher capitalrequirements andcost of capital

Assess incentives
for misalignment

Assess capital plans
and exploration
activities

Using delayed starts
to planned projects

Engage withthe company

Australian Equities, Core –Santos Limited
In this case study, the Australian Equities, Core
team has sought to describe:–– The key ESG risks associated with coal seamgas projects operated by Santos;–– How the team incorporated these risks in
our investment decision-making process;–– How the team engaged with the company
to understand the management of these
ESG risks.
Like all extractive industries, coal seam gas ishighly exposed to a number of ESG factorsthat have the potential to materially affectfinancial returns and timelines for key projects.
The Australian Equities, Core team evaluates
every investment on sustainability (ESG) factors
and actively considers these in its investment
process. In the case of Santos, the research
process has included multiple site visits,
multiple meetings with management,
meetings with competitors and suppliers,
and meetings with communities, lawyers,and government officials.
The key environmental risks posed by coalseam gas arise from the collection, treatment,
storage, and release of water and, to someextent, fugitive gases. The first stage inproducing coal seam gas is the removal of large
volumes of water that are naturally present incoal seams. This water is then typically treatedthrough reverse osmosis and released for use
by agriculture, livestock or humans. This process
generates a by-product of brine, which is thenstored in large on-site ponds.
Through direct visits to Santos’ operationsin Queensland, New South Wales and South

Australia over multiple years, the team hasdeveloped a detailed understanding of thecompany’s operations. In general, the teambelieves the company spends considerable
effort complying with both state and federal
environmental standards, as well as industry
best practice.
The key social risks associated with the current
coal seam gas operations involve local
community relations and labour relations.
We recognise that coal seam gas operations
do have an impact on the local community
through increased use of roads andinfrastructure, and access required to
private and public property.
We have undertaken a number of visits to local
communities surrounding operations, whichgive us some sense of the balance of benefits
and costs, as viewed by residents. On balance,
we believe that most of these communities
are quite pragmatic in their approach todevelopment and see the knock-on economic
benefit that comes from increased employment,
rental payments, and increased property values
as more than sufficient to offset the costs
associated with the issues of these projects.
As a result, we assume continued community
support for the Queensland projects. In New
South Wales, where there is a more substantial
groundswell of opposition to fossil fuels anddevelopment broadly, and coal seam gas
specifically, we believe there will likely bematerial delays to the ultimate developmentof coal seam gas.
Environmental and social concerns increase
regulatory risk as politicians respond tocommunity opposition to projects. An
example of this was the exclusion zones
introduced by the New South Wales

Government in October 2013. A track record
for reactive policy changes such as thisintroduces increased uncertainty for investors.
In addition to the environmental and social
risks described above, there are a number ofmaterial governance issues that we monitor
with this investment, especially regarding
management compensation and capital
structure. None of these are specificallyrelated to coal seam gas.
As investors in Santos, we regularly balance
the material risks we have identified in ourinvestment decisions. The magnitude of therisks causes us to take a more prudent approachto valuation. That is, we demand a higher
discount in order to have a positive view on
valuation. In addition, through the past year adeteriorating view relating to the ESG factors
has been one of, but not the only, consideration
causing us to sell from a material overweight
to a material underweight position.
Finally, although we do not believe theQueensland operations will be affected, we
have factored a combination of possible delays
and materially higher costs into our thinking
related to the New South Wales assets as we
form our views about the value of theentire entity.
We have an active and ongoing program ofengagement with company management
including the Chairman, Chief Executive
Officer, Chief Financial Officer, operational
management, and ESG specialists. We makeour active commitment to ESG issues acornerstone of those conversations and feed
any learning back into our investment process.
An extended version of this case study isavailable on our website.

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Appendix 1 –RI and Stewardship Measures

Limitations and qualifications
Some of the additional information has only
been provided for listed equity teams (egturnover), as it is more relevant to them. As
we further develop these enhanced reporting
measures (in consultation with our clients andtheir consultants), we will progressively include
more extensive information for our fixedincome and unlisted infrastructure capabilities.
For the information to be relevant, it isimportant to note the context and limitationsof the information, which are discussed in thefollowing section.
Team level reporting
Our RI report is at the team level and therefore
will not fully reflect the experience of clientsat the portfolio level. This is because teamlevel reporting includes a number of different
strategies run by each team.
We believe that team level reporting isappropriate because the purpose of this reportis to highlight the culture and approach ofeach team, which we believe will translate into
portfolio outcomes over time. Measures likefive-year average turnover at the team level
therefore are intended to highlight the general
attitude to trading, not to provide portfoliospecific outcomes.
The other reason we use team level reportingis that we manage hundreds of funds and so
we are conscious not to overwhelm readers of
the report with information that lacks insightor descriptive power. Over time we believethat we can achieve the benefits of both
strategy level and team level reporting
through use of interactivity on our website.
We hope that clients who are familiar with
their own funds will find this approach usefulfor seeing their fund in context and how they
are influenced by the relevant team’s
approach to RI and stewardship.
New measures
We are including a number of new measures
which we believe help show the influenceof each team’s RI and stewardship practices
on the long-term performance of the team.
As far as we are aware, these measures havenot been used before at a team level.
We hope that publishing them sets new
standards within the industry on how we canprovide better quality and more insightful
reporting. If this occurs, it may turn out that
we find better measures which we can adopt
in future. To aid in this conversation, we havemade the measures simple and are disclosing
the methodology for each in this appendix.

38

Below is a list of indicators used in the team profiles, what they mean, why we believe they areimportant and any specific limitations.
Indicator

Why it is important

Average turnover(five years annualised)

Shows team culture towards trading (and associated cost generation)over extended periods of time.
Should be used in conjunction with name retention for fuller view.

Stock retention(five years)

Shows importance of an investment-led mindset as long-term holdersof companies and the potential benefits of engagement.
Should be used in conjunction with turnover for fuller view.

Team profileShows the number and experienceof people managing client funds.
Shows the highest conviction investments.

Top five holdings
Top five active holdings
Portfolios outperforming
benchmarks

Shows proportion of funds under stewardship which have exceededbenchmarks and so added value.
RI and stewardship practices are one aspect of our team’s investment
processes which contribute to this performance.

Weighted averageoutperformance

Shows weighted average value added by a team over the five year period
to 31 December 2014 against benchmark.
RI and stewardship practices are one aspect of our team’s investment
processes which contribute to this performance.
Shows absolute return achieved annually by theteam on its flagship fund over the last five years(to 31 December 2014).
These returns are quoted pre-fees and tax and in $A terms, with the following
exceptions:–– Wholesale Global Listed Infrastructure and Wholesale Global Property
Securities Fund, where returns are quoted in $A hedged terms–– First State IndoEquity Sectoral Fund, where returns are post-fees and in IDR;–– First State Emerging Markets Bond Fund (VCC) where returns are in USD.
Absolute returns represent actual outcomes for clients as opposed torelative performance, which may be positive despite clients losing money indown markets.
The team that manages the First State Emerging Markets Bond Fund has only
been in place since September 2011; therefore
the return only reflects this period.
For Global Property Securities, the investment team Head and most of theteam changed in November 2012, so performance represents management
under both regimes.
Government bonds includes supra and semi-government debt.
The inclusion of the industry split charts is relevant because the industry (andcountry) a company operates in carry inherent ESG risks and opportunities.
We have provided an industry breakdown for the team’s holdings to give asense of these risks. Additional industry and country information is available
on our website.

Absolute return

Other things to noteDefinition and methodology

Limitations

Simple measure, does not account for different market conditions
Due to differing standards in global regions, turnover has been calculateddifferently for some teams. The teams below have been calculated using the in different countries / sectors.
SEC methodology which is: Total purchase OR total sales (whichever is less)
Does not account for inflow/outflows from funds which force trading.
for the fund over the period / total net asset value.
–– First State Stewart–– Indonesian Equities
The following teams have funds available in both the UK and Australia:–– Global Resources–– Global Listed Infrastructure
The funds offered from the UK have turnover measured using the SEC
method quoted above, whilst the Australian-based funds have turnovermeasured as per the standard methodology quoted below.
All other teams have been calculated using the standard methodology usedin Australia which is: (purchases + sales – absolute return (contributions –withdrawals))*0.5)/ average fund market value.
In future years we will calculate turnover in a consistent manner for all teams.
Compares the portfolio at two different points in time (from December
Does not cover instances where a company is owned, completely divested and2009 to December 2014). For example, if there are 50 stocks in the portfolio then re-bought. However, the importance of stewardship in an investment-led
at point one and 40 of named stocks are still the same at point two you get a long-term mindset remains, as engagement can occur throughout.
retention ratio of 80%.
––
Five highest overweight securities in flagship fund or the five largest
holdings across the team.
% of funds ahead of benchmark weighted by funds under stewardship.
Returns calculated using the global investment performancestandards (GIPS).

Weighted average of total excess performance vs benchmark, annualised.
Returns calculated using GIPS.

Some teams have an absolute return mindset, and so the over/underweightvs benchmark may not be the best indicator for conviction for these teams
we have provided the top five holdings.
Different asset classes and sectors will perform differently at different times.
Quantitative easing and loose monetary policy has resulted in asset priceinflation in a number of markets which may not be reflective ofunderlying value.
Benchmarks are inherently blunt and not always reflective of the style orobjectives investors are trying to achieve. Therefore they should not belooked at in isolation.
Past performance is not indicative of future performance.
As above.

Returns calculated using GIPS.

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Appendix 2 –Industry Collaboration

During 2014, we reviewed the range ofindustry initiatives that we were involved with.
The purpose of this review was to ensure that
any initiatives we committed to supporting
met a number of criteria. These criteria are
based upon the interests of and long-termvalue to our clients and our ability to provide
sufficient resources to effectively support
such initiatives. The initiatives that we remain
supportive of and engaged with are listed below.

Industry body memberships/
Supported initiatives
Global initiatives
Principles of responsible investing (PRI)–– PRI Country Network Steering Committee(Australia)

Asia PacificFinancial Services Council–– Member of the Investment Committee–– Member of the ESG Working Group
Responsible Investment Association
Australasia–– Chair–– Member of Governance Committee
Infrastructure Sustainability Councilof Australia–– First Deputy Chair and Director
ESG Research Australia–– Management Committee member–– Reporting Framework Advisory Group

Investor Group on Climate Change–– Member of the Committee of Management

Cambridge Investment Leaders Programme–– Founder member–– Chair of the Research Working Group––Chair of the Long-Term Mandates
working group
Integrated Reporting–– Business Reporting Leaders Forum (Aust)
Towers Watson – Thinking Ahead Institute–– Founder member

40–– Member of the Water Working Group

Europe/Middle East/America
Institutional Investor Group on Climate
Change–– Member
UK Sustainable Investment Forum–– Board member
EUROSIF–– Board member

Appendix 3 – Progress Against
Goals Reported in the 2014 RI Report

Goal as disclosed in the 2014 RI ReportComplete an RI policy review and update
Incorporate RI principles into the new productdevelopment process

Finalise HR and Culture plan and implement
plan to agree and set short-term targets

Progress in 2014
See page 6
Early stages of scoping

Next steps
See page 6
During the course of 2014, reporting lineschanged for both the Product and the
Responsible Investment teams, whereby both
now report to the Head of Global Investment
Solutions. Subsequent to which, the strategy
has been refined, with a much greater focus oncollaboration between Product, RI, ProductSpecialists and Investment Assurance.
These changes have focused all areas of the
Global Investment Solutions Group on thequality and relevance of our product offerings,
and we expect to see formal integration of RI
principles into the Product Development andInvestment Assurance functions during 2015.
Through the strategic review process, theSignificant progress:–– RI Report and Stewardship Principles provided GRIC has prioritised a number of HR and
Culture elements of the RI strategy, including
to all new hires;
integrating stewardship principles into all–– RI and Stewardship Principles highlighted
employee behaviour assessments.
with all job advertisements;–– Detailed planning for the integration of RI
and stewardship into onboarding processes,
training programs and behaviour assessments
for implementation in 2015.
The next phase of the information
Significant progress
Finalise and implement ESG information
management project is to:
management plan which will include:–– Sustainalytics and GMI data integrated with–– Integrate Sustainalytics and GMI ratings with
Bloomberg and available to all Bloomberg–– Integration of ESG research services with
Factset and developed dashboard templates
users;
Bloomberg, Capital IQ and proprietary
similar to what has been developed forresearch systems;–– Bloomberg ESG ‘Launchpad’ developed,
Bloomberg users;–– Enhancement of intranet site to become an ESG which combines data from Sustainalytics,–– Incorporate Sustainalytics and GMI ratings
GMI and Bloomberg;
information hub for investment professionals;
with our data warehouse;–– Enhancement systems and processes to better –– Excel-based ESG dashboard developed whichdraws on Sustainalytics, GMI and Bloomberg; –– Develop portfolio, team and firm level
capture company engagements from acrossreporting from our data warehouse for
equity teams in a consistent and reliable format.
–– Sustainalytics and GMI data integrated
internal reporting purposes; andwith the Australian Equities, Growth team’s–– Develop reporting for the investment
proprietary database;assurance functions.
–– GMI data available through Factset.
Negotiations underway to integrate
Sustainalytics data;

Continue our involvement and support of theCambridge Investment Leaders Programme.
Lead workstream on investment timeframes
and long-term mandates.
Complete a strategic review of current
collaborative initiatives.

–– Planning underway for the inclusionof Sustainalytics and GMI data with ourdata warehouse, which will allow for moresophisticated portfolio level reporting.
Ongoing
Will Oulton, our Global Head of RI, is chairing
the Long-Term Mandates Working Group.
Complete–– We have withdrawn from selected initiatives
and joined the Towers Watson Thinking
Ahead Institute.

None

None

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Appendix 4 – Companies Subject
to the Cluster Munitions Policy

Cluster Munitions and Anti-Personnel
Mines Policy
During 2013, we launched our policy oncluster munitions and anti-personnel mines.
This policy states that we will not invest ourclients’ money in securities, whether equity
or debt, issued by companies that are involvedin the manufacture of cluster munitions oranti-personnel mines.
This policy is applied globally across all ourasset classes, including index strategies.
The list of companies, as published by
Eumedion, and endorsed by the Dutch
Authority for Financial Markets, has been
adopted as our starting point for the purposesof the exclusion policy. Changes in thecompanies on the exclusion list between
December 2013 and December 2014 aredescribed below.
The following companies have been removed
from the list and will be available forinvestment:–– Aryt Industries;–– Ashot Ashkelon;–– Kaman Corp;–– Lockheed Martin;–– Norinco;–– Splav State Research.
The following companies remain involved inthese activities and will continue to be subject
to investment restriction:–– Aeroteh SA;–– Alliant Techsystems;–– Hanwha Corporation;–– Poongsan Corporation;–– Singapore Technologies;–– Textron;–– Motovilikha Plants JSC.

42

Appendix 5 –GRIC and ESG Committees

Global Responsible Investment Committee
Mark Lazberger

Committee Chairman and Chief Executive Officer

Alexis Ng

Managing Director, South East Asia and Head of Distribution, Asia

Chris Turpin

Managing Director, EMEADavid Dixon

Chief Investment Officer, Equities

David GaitFirst State Stewart

Hario Soeprobo

President Director, Indonesia

Harry Moore

Head of Sales, Australia and New ZealandJoe Fernandes

Head of Global Investment Solutions Group

Kanesh Lakhani

Head of Global Consultant Relationships and Head of Distribution, EMEAMark Rogers

Director, Unlisted Infrastructure Investments

Martin Lau

First State Stewart

Niall Mills

Partner, Unlisted Infrastructure Investments

Pablo Berrutti

Head of Responsible Investment, Asia PacificPaul Griffiths

Chief Investment Officer, Fixed Income and Multi-Asset Solutions

Stephen Deane

First State Stewart

Toni Spencer

Head of Credit ResearchWill Oulton

Global Head, Responsible Investment

ESG Committee
Name

Title

Location

Robin Balcomb

Portfolio Manager, Structured Equities, Australian Equities, Core

SydneyPablo Berrutti

Head of Responsible Investment, Asia PacificSydneyGokce Bulut

First State Stewart

Edinburgh

Manuel Cañas

Senior Portfolio Manager, Emerging Market Debt

LondonJoseph Daguio

Investment Analyst, Global Property Securities

SydneyHazrina Dewi

Head of Indonesian Equities

JakartaAlex Gallard

Senior Investment Analyst, Australian Equities, Growth

SydneyTal Lomnitzer

Portfolio Manager, Global Resources

LondonWill Oulton

Global Head, Responsible Investment

LondonMark Rogers (Chairman)

Director, Unlisted Infrastructure Investments

SydneyRebecca Sherlock

Senior Investment Analyst, Global Listed Infrastructure

SydneyYen Wong

Manager, Fixed Income and Credit

SydneyResponsible Investment Team Contacts
Will Oulton
Global Head, Responsible Investment
will.oulton@firststate.co.uk+44 (0) 20 7332 6529

Pablo Berrutti
Head of Responsible Investment, Asia Pacificpablo.berrutti@colonialfirststate.com.au+61(0) 2 9303 0433

Elizabeth Dourof
Team Assistant, Responsible Investment
elizabeth.dourof@firststate.co.uk+44 (0) 20 7332 6801

We welcome your comments and feedback. Please email stewardship@firststate.co.uk

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44

AucklandFirst State Investments
ASB North Wharf
12 Jellicoe Street
Auckland Central,
New Zealand
PO Box 35
Auckland
New Zealand
Telephone: +64 9 448 4922
Dubai
First State Investments
The Gate Building
Dubai International Financial Centre
PO Box 121208
Dubai
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Telephone: +971 4 401 9340
Edinburgh
First State Investments
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Edinburgh EH2 1BB
United Kingdom
Telephone: +44 (0) 131 473 2200
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Westhafen Tower
Westhafenplatz 1 60327
Frankfurt a.M.
Germany
Telephone: +49 (0) 69 710456 – 302

www.firststateinvestments.com
www.cfsgam.com

FP856_0314

Hong KongFirst State Investments
Level 6 Three Exchange Square
8 Connaught PlaceCentral Hong Kong
Telephone: +852 2846 7566
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29th Floor Gedung Artha Graha
SudirmanCentral Business District
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Jakarta 12190
Indonesia
Telephone: +62 21 2935 3300
LondonFirst State Investments
Finsbury Circus House
15 Finsbury Circus
London EC2M 7EB
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Telephone: +44 (0) 20 7332 6500
LouisvilleFirst State Investments
400 West Market Street Suite 2110
Louisville, Kentucky 40202
United States of America
Telephone: +1 502 912 5506

Melbourne
Colonial First State Global AssetManagement
Level 10, 357 Collins Street
Melbourne VIC 3000
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Telephone: +61 3 8628 5600
New York
First State Investments
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New York, New York 10022
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Telephone: +1 212 848 9293
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SydneyColonial First State Global AssetManagement
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Telephone: +81 3 5402 4831