2017 Responsible Investment and Stewardship ReportRESPONSIBLE
INVESTMENTRETHINKINGPERFORMANCE2017 Responsible Investment and Stewardship Report75%

of funds
outperformed theirbenchmark over
five years*

US$159 billion
Funds Under
Stewardship* Gross of fees as at 30 April 2017.

1

2017 Responsible Investment and Stewardship Report

Welcome to the First State Investments 2017
Responsible Investment (RI) and Stewardship Report

This year’s report marks a major milestone for our business.
10 years ago, First State Investments, known as Colonial First State
Global Asset Management in Australia, became a signatory to the
UN Principles for Responsible Investment (PRI) and produced our
first RI Report.
As our business has evolved over the past decade, so too has
our approach to RI. I am particularly pleased that a clear setof stewardship principles and a thorough RI governancemodel have been developed and are embedded across ourbusiness globally.
Leading ESG research providers have been appointed and we havedeveloped a number of tools to support our investment teams,
enabling them to analyse the potential financial impact of
ESG-related issues to a much greater degree than waspreviously possible.
I firmly believe that this company-wide commitment to RI andstewardship has had a positive influence on our investment
performance. Across all asset classes globally, 75% of our funds
have outperformed their respective benchmarks (86% on anasset-weighted basis) over the five years as at 30 April 2017,
gross of fees.
I am confident that our investment professionals’ increasing
understanding of how ESG issues comprise sources of risk andreturn has been a factor in delivering such outcomes for ourclients. While this progress is encouraging it must be seen incontext; the latest Edelman trust survey shows that trust in
business, governments and the media is at record lows. These
broader trends are reflected in the World Economic Forum’s global
risk report, which continues to focus on significant environmental
and social risks. So in spite of the progress we have seen, there is
no room for complacency with many areas of further research,understanding and engagement to be undertaken.
It is for this reason that as our reporting has evolved over time,
we have increasingly sought to rethink and for ourselves redefine
investment performance from the narrow backward-looking
performance numbers that we most commonly see, to a more
holistic and forward looking view of our firm’s quality.

This summary report covers a number of these areas, however
I encourage you to visit our online report, which provides a higher
degree of interactivity and depth. In addition to deeper coverageof the issues in this summary report, the online report includes
profiles of each of our investment teams, information on our
approach to human rights and climate change, an interactive casestudy map and ‘live’ proxy voting disclosure, as well as detail on
how our approach to responsible investing has developed overthe last 10 years.
I hope that you will enjoy reading the report and that it provides
a useful insight into the progress we have made towards meeting
our long-term goals. Please contact us if you require additional
information about our approach to stewardship as well as ourphilosophy and strategy more broadly. We are always delighted
to hear from you.
Thank you for your ongoing support.
Mark Lazberger
Chief Executive Officer
First State Investments

2017 Responsible Investment and Stewardship ReportRESPONSIBLE
INVESTMENTRETHINKINGPERFORMANCE
How we view investment
performance must change.
Our focus has been to broaden
the discussion of performanceso that it becomes long-term,socially connected, active andsustainable.

2

32017 Responsible Investment and Stewardship Report

Measuring investment performance has long been dominated by
one number – percentage returns, mostly versus a benchmark.
Within this implied zero-sum game, investors can only control
what share of the pie they received, not its size or the broader
economic, environmental and social outcomes achieved.
The way investment performance is measured needs to evolve
if it is to reflect the fact that the allocation of capital and useof ownership rights have both real world and real
investment impacts.
For long-term investors, understanding how effectively capital isbeing deployed for productive and sustainable purposes, and theability to influence better outcomes through engagement andadvocacy are critical for achieving a holistic view of investment
performance.
Stewardship and RI have become the key terms used to describe
this shift in thinking, however they have not yet entered theinvestment performance discussion beyond whether their impact
on returns can be discretely measured. That debate assumes that
all of the benefits of these approaches can fit within the existingnorms and frameworks for performance measurement.

Rethinking performance:
Our listed infrastructure, property andresources teams invest in companies
that are 27%, 47% and 70%
respectively more carbon efficient than
the average company in those sectors.

To address this, new forward and outward looking measures areneeded as indicators of the quality of investment practices, part ofwhich will be determined by their alignment with broader societal
objectives and environmental sustainability.
Over the last 10 years we have recognised the challenges ofrethinking performance measurement and have been evolving ourreporting accordingly. In addition to long-term returns, we reporton long–term holding retention, turnover, proxy voting, inherent
levels of ESG risks and the processes underlying the way they
are managed.
Our integrated approach to reporting uses quantitative measures,
narrative and case studies to provide a more complete picture of
our investment beliefs, approach, process and performance. While
we still have much we can improve on, our focus has been to
broaden the discussion of performance so that it becomes
long-term, socially connected, active and sustainable.
If institutional investors are to accept and be recognised forplaying their role in society and for allocating capital in the way
beneficiaries expect, such multidimensional ways of assessing
performance will emerge and become more widespread.
Achieving this goal will help underpin long-term returns for boththe investors and society through an increasing focus on delivering
a fairer and more sustainable economy.

Rethinking performance:
In 2016 our active equity teams
voted against both our proxyadvisors and company management
recommendations 96 times.

42017 Responsible Investment and Stewardship ReportRESPONSIBLE
INVESTMENTSTRATEGICAPPROACH
Our success relies on fully
integrating RI across every
aspect of our business.

WANT MORE information on each investment
team’s approach to RI? Find out how we invest at:
ri.firststateinvestments.com/2017/teamprofiles

first state RI5

2017 Responsible Investment and Stewardship Report

We have been rated by the UK’s
Financial Reporting Council
as being in the top tier of asset
managers for the quality of ourstewardship disclosures.
We are a global asset management business offering a broad
range of investment strategies. We employ 17 investment teams
that are specialists in their respective fields and who set their own
investment philosophies and processes. Our commitment to RI
and stewardship is a common thread which runs through thesediverse investment teams, guides the broader management of ourbusiness and is integral to our culture.

Each of our investment teams has a lead RI representative who
coordinates information flows across and within their respective
teams. The RI representatives also sit on the Environmental, Social
and Corporate Governance (ESG) Committee, which reports onteam progress, contributes to thought leadership and assesses
new approaches for addressing current and emerging ESG-relatedrisks and opportunities.

Our approach to RI is based upon three strategic pillars;
Investment Quality, Stewardship and Employee Engagement.
The strategy is underpinned by a strong governance frameworkand is supported by our specialist RI team.

Functional working groups have been formed from across thebusiness to support the strategy including our Human Resources
and Employee Engagement Group, Business and Client Support
Group and the Marketing and Communications Group.

The RI team engages with the entire business to deliver the
strategy, which is overseen by the Responsible Investment SteeringGroup. The steering group is chaired by the CEO and is comprisedof executive committee members whose role is to monitor, direct
and champion RI and stewardship practices across theorganisation.

In addition to dedicated forums, RI principles have also been
integrated with other business governance functions including:
ESG reporting to the Global Investment Committee, inclusion in
Risk Management profiles and assurance through our internal
audit function.

Quality

Focusing on RI product/businessdevelopment opportunities

Stronggovernanceframework

Enhancing disclosure andthought leadership, stronger
statements of policy positions

Enhancing ESG integration
and understanding of ESG risks

High quality
investment practices
and processes

GlobalResponsible
Investment
Leadership

Strengthening our
RI governance modelEngagement

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

Stronggovernanceframework

Stronggovernanceframework

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

Increasing RI engagementin the wider business62017 Responsible Investment and Stewardship ReportRESPONSIBLE
INVESTMENTSTEWARDSHIPWe recognise our significant
responsibilities as stewardsof our clients’ assets. These include
our role in maintaining the integrityand quality of the markets in which
we operate, the allocation of
investment capital to productive
purposes, and the use of soundjudgement and detailed analysis tomake investment decisions which
protect and enhance our clients’capital over the long-term.

INTERESTED IN case studies, company
engagement and proxy voting
information?
Each of our investment teams cover theirstewardship approach and activities at:
ri.firststateinvestments.com/2017/teamprofiles

first state RI

7

2017 Responsible Investment and Stewardship Report

Rethinking performance:
Our active equity teams voted on 8,621
resolutions at company meetings in 2016 – tohelp view these our online report now provides‘live’ and searchable disclosure of proxy votes.
Principles of stewardship are the foundation of our investment
business. In 2013, we launched our global stewardship principles,
which comply with all current stewardship codes globally.
Our approach to RI and stewardship has always been clientfocused and investment-led. We also benchmark our progressagainst various global standards and look to those standards toidentify areas where we can improve our practices.
These standards also provide a basis for developing our disclosuresand therefore allow us to be more transparent about our progress.
In 2016, PwC conducted an assurance review of our Principles andprovided an opinion that we are meeting the statements that wehave publicly made.
UK Stewardship CodeThe Financial Reporting Council (FRC), which is the UK regulator
with responsibility for the UK’s Stewardship Code, announced in2016 that it would rank asset managers on the quality of theirdisclosures and activities. We achieved the highest tiering – Tier 1– awarded by the FRC.

In addition we asked PwC to assess our stewardship practices
against our own Global Stewardship Principles and the UK Code.
Following this evaluation, PwC provided an assurance statementthat we were in full compliance with both the UK Code and ourown Principles. The assurance statement is available to clientson request.
Investor Group on Climate Change (IGCC)– Disclosure Working Group
Last year we reported on our involvement with the Investor Groupon Climate Changes (IGCC’s) Disclosure Working Group. Throughthe IGCC we established and chaired the group following concerns
we had about the direction of climate change disclosure by
investors, and in particular the dominance of carbon foot printing
as the primary form of disclosure.
Following a period of consultation the guidance that the groupdeveloped was launched on 12 April, 2017. The guide supports the
Michael Bloomberg led Task Force for Climate-Related Financial
Disclosures (TCFD) recommendations by providing practical
approaches for implementing the principles.
This year we have sought to align the disclosure in our online
report with the IGCC guidance and TCFD recommendations.

Principle for RI – assessment and ratings
Each year, every PRI signatory reports to the PRI on theirapplication of the Principles. We strive to achieve industry bestpractice and are therefore encouraged that our results havesteadily improved from the pilot year. We use this benchmarking
process to identify areas for improvement.

View our full assessment report at
ri.firststateinvestments.com/2017/pri-assessment

Module2014 (Pilot)
2015
2016
				
				

Medianmanager
2016

Overarching Approach
Listed Equity Incorporation
Listed Equity Active Ownership
Fixed Income SSA
Fixed Income Corporate
Fixed Income Corporate Financial
Fixed Income Securitised
Infrastructure

B
A
B
C
C
C
E
B

Source: PRI as at July 2016.

A
A
A
B
A
N/A
N/A
A

A
A+
A
B
A+
N/A
N/A
A

A+
A+
A
A+
A+
A+
B
A+

2017 Responsible Investment and Stewardship ReportRESPONSIBLE
INVESTMENTINVESTMENTQUALITY
We believe that embedding
environmental, social andcorporate governance factors
into our investment processes
enhances their quality
and will deliver long-term
benefits to our clients.

892017 Responsible Investment and Stewardship Report

Rethinking performance:
Over 70 case studies are available
in the interactive case study
map in our online report.

60% emissions reduction from ourUnlisted Infrastructure team convertingtwo HH Ferries to 100% battery power.

Our diverse investment capabilities

Improving the quality of our investment processes

Across our diverse investment teams we share a belief that ESG
issues impact investment value and that as a leading global
institutional investor we can achieve better long-term investment
outcomes through active engagement and by exercising theequity ownership rights we hold on behalf of our clients.

During 2016 and in early 2017 we sought to support
our investment teams’ processes in three areas:

Each investment team’s approach to incorporating these factors
into their investment process has evolved over time. We believe
the diverse approaches of our individual investment teams are a
key strength of our collective business as they allow us to shareideas, develop our knowledge and learn from each other’s
successes and mistakes. The governance of RI and the systems forcross-team information sharing and collaboration are critical and asignificant strength in this regard.

How do our investment teams
add value for clients?
Access the team profiles online
ri.firststateinvestments.com/2017/teamprofiles– Investment philosophy–People profile–Approach to RI and climate risk
–Historical and forward-looking indicatorsof long-term performance−−Improving access to data and reporting on company ESG
performance;−−Improving, understanding and developing guidance on complex
ESG issues; and−−Supporting new and existing investment teams
as they developed their approach to RI.
Access to data and reporting on company
ESG performance
In early 2017 we began the rollout of our ESG Portfolio Monitor
tool. The culmination of two years of work, the platform is aninteractive reporting tool that allows people from across theorganisation to better understand the environmental, socialand corporate governance profiles of our listed equity
investments.
The tool has initially been used to support the reporting
requirements of our Global Investment Committee which began
receiving ESG reports on each of the listed equity teams during
2016. The reports highlight where company ratings have changed,
the reason for any low or falling company ratings and controversies
associated with companies invested in. The tool is currently beingrolled out to investment teams and eventually will be used tosupport client reporting.
During 2016 we also appointed MSCI to provide us with climatechange related data including carbon emissions and fossil fuelexposures. This data has enhanced our disclosure in the online
version of this report and supports team specific statements on
their management of climate change risks and opportunities.

To find out more go tori.firststateinvestments.com/2017/our-progress-outlook

102017 Responsible Investment and Stewardship ReportRESPONSIBLE
INVESTMENTINVESTMENTQUALITY
Improving understanding and developing guidance oncomplex ESG issues
In late 2015 as part of a broader governance change, weestablished three issue-specific working groups under the ESG
Committee. This followed the success of our stranded assets
working group, the results of which we reported on in our2015 RI Report.
The three working groups are focused on climate change, humanrights and executive remuneration. The groups are comprised ofinvestment professionals from the ESG Committee and aresupported by the RI team. The purpose of the groups is to develop
guidance for our investment professionals across the organisation
regarding topical and complex issues. The results of the humanrights group’s work are summarised on page 20 of this report,
and is discussed in detail in the online version of this report.
The climate change and executive remuneration groups are
expected to finish their work in the second half of 2017.

Visit our website for an in-depth update on the progressof our working groups
ri.firststateinvestments.com/2017/our-progress-outlook

Rethinking performance:
Our Fixed Income team has shown thelink between internal ESG ratings, internal
credit ratings and default experience.

ri.firststateinvestments.com/2017/fixed-income-overview

VISIT OUR WEBSITE for investment team Q&A
and information on our new frameworks:
ri.firststateinvestments.com/2017/our-progress-outlook

first state RI

Supporting new and existing investment teams
During 2016 we welcomed our new High Yield Fixed Income team
based in New York. The team joined as part of a strategic
broadening of our fixed income capability over the last few years.
This work has seen RI and stewardship practices extended to these
new teams and integrated into the shared Investment Opinions
Network (ION), a global platform for sharing investment insights.
In addition the credit analyst team implemented a stranded assets
framework, following the completion of our stranded assets
working group’s guidance in 2015. The Fixed Income Credit
Research team adapted this work when considering stranded asset
risks for fixed income.

A Q&A with the head of the high yield team Matt Philori.firststateinvestments.com/2017/high-yield-qa

112017 Responsible Investment and Stewardship Report

Each investment team has developed theirown approach to RI
SPECIALIST EQUITIESAustralian Equities, Core
We believe there is a correlation between companies
with good governance practices and strong, sustainable shareholder
returns. Consequently, we seek to positively inﬂuence companies
towards ESG best practice for the ultimate beneﬁt of our investors.
Australian Equities, Growth
ESG risks are primarily identified by our rigorous company
engagement program. Analysts assess how companies aremanaging ESG issues and encourage stronger ESG performanceand disclosure.
Australian Small Companies
By favouring companies with sustainable competitive advantages,
strong financials, quality management and predictable earnings we
can deliver superior returns and protect from downside risks.
Sustainability is one of the six factors that we assess when evaluating
a company’s investment credentials.
Global Resources
ESG has been a core part of our investment philosophy and process
for 20 years. Our extensive research, first-hand site visits and stock
reviews – supplemented by third party ESG providers – are critical toassessing stock-specific ESG risks.
Indonesian Equities
We use ESG analysis to determine whether a stock valuation should
be discounted as a result of a higher risk. It is our responsibility tomake sure that companies we invest in understand what they cancontribute to slow down global warming.
Global Listed Property Securities
We have developed a tailored ESG framework that is partof our stock review process. Despite sourcing third party research,in-house research remains the most important source of reference
when integrating ESG considerations into the investment process.
First State Stewart Asia
We only invest where we perceive the management operates thebusiness effectively and in the interests of all stakeholders.
Companies that do not look after their customers, employees,
suppliers and the larger community are unlikely, in our view,
to be rewarding long-term investments.
Realindex
The incorporation of ESG into the Realindex investment process
remains an important and ongoing area of research for our business,with our research and design focusing on developing a systematic,
rules-based implementation that delivers on the value proposition
for clients.

Global Listed InfrastructureE SG issues are fundamental to infrastructure companies,
given they have significant service obligations and moral
accountability to the communities in which they operate.
ESG criteria account for 20% of the overall quality score
we assign when considering investment.
FIXED INCOME AND CREDIT
Australian Fixed IncomeWe assign a proprietary internal credit rating to every bond
we review. The rating is a forward looking measure of default
risk, including ESG risk. Our internal rating is often materiallydifferent than a rating agency’s assessment of individual issuers.
Short Term Investments & Global CreditIn our experience, companies who manage ESG risks poorly typicallymanage other risks poorly. This has a flow on effect which filters
through to most aspects of the company.
Asian Fixed Income
Analysts identify ESG risks during their bottom-up credit research.
We analyse ESG risks through our own risk framework, which
also takes into account stranding risk, arriving at a customised
ESG ranking.
Global Unconstrained & US Fixed Income
ESG issues can have a significant bearing on risk. Poor corporate andregulatory governance are recognised contributors in most
corporate failures. Dangerous environmental and social practices
can lead to significant financial cost, reputation and brand damage.
Emerging Market Debt
ESG assessment is part of our Key Factor Model. For each country
that we invest in, we monitor six variables: human development,
corruption, business environment, institutional strength,
government effectiveness and energy dependence.
High Yield
Key factors such as corporate governance, business practices,
industry and contingent liabilities related to environmental issues areresearched thoroughly and heavily influence investment decisions.
REAL ASSETS
Unlisted InfrastructureWe have the distinct advantage of being able to engage directlywith our portfolio companies via board representation and/or
workshops with management, giving us the opportunity to help
drive cultural change and set ESG KPIs.
MULTI-ASSET
Multi Asset Solutions
We work with clients to integrate ESG considerations into theirportfolios as required to meet their investment objectives.
In addition to our standard exclusion of munitions and armaments
companies, we can exclude specific ‘red flag’ companies orindustries, such as those involved in tobacco, gambling and alcohol.
We also vote on all company resolutions where we are able to do so.

2017 Responsible Investment and Stewardship ReportRESPONSIBLE
INVESTMENTENGAGEDPEOPLEThe engagement andknowledge of our people
is vital to achieving our vision of
being a world class global asset
manager that delivers superior
investment performance, acts
at all times in our clients’ bestinterests and is a global leader
in RI and stewardship.

12

13

2017 Responsible Investment and Stewardship Report

Rethinking performance:
Our voluntary turnover rate is 6.4%.

In 2016 a working group focused on RI and Employee
Engagement was formalised. This group focuses
on further integrating RI into the employee
lifecycle to engage a wider spectrum of colleagues
in our RI philosophy.
The working group has been involved in the development ofparticular activities, which link to the broader business strategy:

Rethinking performance:
Women represent 22%of our investment management
roles with key client facing
professionals being 51% women.
The First Foundation
Since 2012, our charitable foundation, The First Foundation has
encouraged our people to give back to their local communities bypromoting charitable time and giving in the areas of education,
environment and social welfare. In 2016 we donated AUD500,000
to different charities in locations where we operate. This involved
grants to support local charities where our staff are actively
involved in volunteer positions as well as matching their financial
contributions.
By being employee led, the First Foundation not only helps goodcauses but does so in a way that seeks to engage our people.

Our recruitment practices have been refreshed
These practices include updated guidelines for recruiting
managers and interviewers which embed RI into our recruitment
process including consistent references to RI in our
advertisements, briefing packs to external recruitment agencies,
and interview question templates.

 ll staff will complete a new RI eLearning module
A
The module will be rolled out to all employees and new starters tocreate a consistent base level understanding of RI.

Staff were surveyed about their investment beliefs
In addition to our annual People & Culture Survey, which now
includes RI specific questions, all employees were invited tocomplete a survey to better understand their investment beliefs
and convictions in relation to the value of integrating ESG andsustainability in our investment processes and activities. We will
use the results to enhance RI education in our business. The
results of the survey are discussed on page 16.

Case Study:
Dandelion Support Network
Dandelion is a charity run by volunteers who accept, sort andsafety check nursery items, clothes, toys and linen for babies andkids. The donations are then passed on to families in needthrough referrals from social workers. Leanne Sayers from ourSydney office has been an advocate for Dandelion and has driven
a number of fundraising initiatives including: volunteering days;
Christmas Campaigns; Funding for the purchase of approximately
60 cots; and three years of fixed funding from First Foundation.

142017 Responsible Investment and Stewardship ReportRESPONSIBLE
INVESTMENTENGAGEDPEOPLE
Diversity
Our diversity strategy is aimed at the continued development of
the firm as a well-rounded, high quality investment business.
We value individuals with a diverse range of perspectives andbelieve that having an inclusive environment helps us to be a
successful firm.

We employ a diverse range of ages
1% 3%
5%
26%

24%

In 2016 we established our Diversity Committee, which comprises
all members of the Operating Group, to review our progressagainst key diversity metrics and monitor our diversity-focused
activities to ensure they are having the desired impact.
41%

As part of this ongoing strategy, we are committed to thefollowing activities:−−Improved disclosure of diversity metrics.
−−Recruitment approach to maximise the potential talent pool.
−−Influencing industry change and using our influence as investors,
for example through our membership of the 30% Club Australia.
−−Annual Pay Equity Analysis.

24 and under 3%
25 - 34 years 26%
35 - 44 years 41%
45 - 54 years 24%
55 - 64 years 5%
65 and over 1%−−Global Parental Leave Policy.
−−Continuing partnerships including the investment 20:20
Program in the UK and sponsorship of Surrey County Cricket
Club’s Disability program.

We are confident that our diversity strategy is focusing on theloy a diverse range of ages
right activities and starting the conversations that will lead togender balance, and improved thought diversity;
1%greater3%
therefore contributing to a well-rounded, high quality investment
5%organisation.
We invest
in companies with greater diversity to reap the benefits
26%
of better corporate decision making. In our own firm women
represent 22% of investment management roles and 51% of our
key client facing professionals.

Length of service
2%1%
5%

15%

10%

24%
30%

41%

under 3%
years 26%
years 41%years 24%years 5%over 1%

13%

Less than 1 year 15%
1 to 3 years 24%
3 to 5 years 13%
5 to 10 years 30%
10 to 15 years 10%
15 to 20 years 5%
20 to 25 years 2%
Over 25 years 1%

152017 Responsible Investment and Stewardship Report

Gender Diversity
Total Firm

58%
42%

Gender Diversity

Operating Group

80%

20%

Senior Professionals

69%

31%

Investment Management Professionals

78%

22%

Client Facing Professionals

49%

51%

New Starters to the Firmin the last 12 months

50%

50%

New starters to Investment Teamsin the last 12 months

70%

30%

Gender Pay Equity differential of 3% on fixed remuneration
Source: FSI data as at 31 December 2016.

Get the full results of our investment beliefs survey
ri.firststateinvestments.com/2017

162017 Responsible Investment and Stewardship ReportRESPONSIBLE
INVESTMENTOUR
BELIEFS
The adoption of RI practices has
been a decade-long journey forour business. Our focus extends
beyond processes and policies
to culture and shared beliefs.
Progress can only be achieved
through a willingness to ask
difficult questions of our people
and, most importantly, to act
on what they tell us.

17 specialist investment teams,
over 200 investment professionals,
in 8 locations – belief in RI is thecommon thread which ties
them together.
ri.firststateinvestments.com/2017/teamprofiles

172017 Responsible Investment and Stewardship Report

Some early raw output from this research
includes data that indicates that 80% believe
considering ESG issues leads to more
complete analyses and better-informed
investment decisions.

Mapping our conviction

Investment beliefs survey

The analysis also reveals how beliefs vary among different groups
within the business; from the leadership team to individual
investment and operational teams, as well as across our different
regions. This rich source of information has provided the basis tobuild a draft set of investment beliefs for the business. This will
require internal consultations and workshops to establish and thendefine an agreed set of statements which will integrate and alignwith our corporate culture. The research will also allow us toascertain if there are any regional biases across the organisationby, for example, comparing views of our colleagues in Europe orAsia with those of our Australian and US-based staff.

A decade of experience in responsible investment has taught usthat individuals and the wider industry’s views on sustainability/ESG
are constantly evolving. In response to this challenge, in April andMay 2017, we commenced a project with the support of Willis
Towers Watson’s Thinking Ahead Institute to establish theinvestment beliefs across our entire business relating to ESG
integration, climate change and sustainability. Unprecedented
among global asset managers, this project in its first phase
involved a business wide exercise testing the extent of individuals
beliefs on issues such as the materiality of ESG factors, the extent
to which they are mispriced and can therefore contribute tolong-term investment performance and the wider social purposeof sustainability, ESG and stewardship in investment management.
Helpfully, we are able to assess and benchmark our own beliefs
against a peer group of managers and asset owners within
the Willis Towers Watson client base who have completed asimilar exercise.

When this process is complete, it will enable us to review andenhance our investment Principles and Policies and to assess how
our current range of investment portfolios’ comply.
Some early raw output from this research includes data thatindicates that:– 80% believed that considering ESG issues leads to more Investment Tea(equity ownersh
complete analyses and better-informed investment decisions.
can positively in

The survey has established where employees have the strongest(and least) conviction on a range of potential beliefs statements.
We have also evaluated the coherence of beliefs in terms of thedegree of consistency and uniformity i.e. the extent to which
individuals in a group share beliefs.

– An overwhelming 9 out of 10 employees believed that
effective stewardship can positively influence company
behaviour and returns.

and lower the r– 7 in 10 believed climate change will have a material impact
on society.

38.06%

58%
90

50%

52%

80

5.16%
2.58%

70
60

52%

50

38%

22%

31%

27%

40
30

10% 11%206%
1%3% 3% 4%

5%

10

7%

3% 2%

7%
3%

3%

2%

0

I believe that companies cangain significant competitive
advantage through theirstrategic response to climatechange and/or natural
resource scarcity/
environmental degradation.

n Strongly agreen Agree

I believe that the execution of
stewardship (equity
ownership rights including
voting and engagement) can
positively influence company
behaviour and performanceand lower the risk ofinvestments over time.

n Don’t know n Neutral n Disagree

2.58%

I believe that sustainability
in investing is broader thanconsidering ESG factors andincludes the sustainability ofthe economic and financial
system as well as integrating
ESG considerations into
investment analysis.

n Strongly disagree

I believe that asset owners aspart of their overall duties
and responsibilities should
consider direct and indirect
negative impacts withrespect to the ESG footprint/
impact of their investments.

Agree 51.61%
Disagree 2.58%
Don’t know 2.58%
Neutral 5.16%
Strongly agree 38.0

182017 Responsible Investment and Stewardship ReportRESPONSIBLE
INVESTMENTOUR
BELIEFS… There is a broadand strong belief
in the value of
responsible
investment andstewardship …

80% of our investment professionals believe that considering
ESG issues leads to more complete analyses and over 90%
believe that stewardship can positively influence company
behaviour and returns.
Our senior executive committee, known as the OperatingGroup, showed even stronger support with over 90% support
for these statements. No one in the Operating Group disagreed
with the statements while there was less than 5% disagreement
among investment professionals.

Research shows that beliefs develop fromfirstly framing issues (competitive positioning,fiduciary obligations, time horizons andanalytical insights), secondly providing evidence,measurement and reporting and finallysocialising and settlement.

… This value is notefficiently priced bymarkets due in part toshort-termism and otherbarriers to responsible
investment …

Most investment professionals believe that neither ESG norlong-term factors are efficiently priced by markets. Around 75%
believe that investors are over sensitive to short-term factors.
A similar number believe that risks and opportunities associatedwith ESG externalities are not being captured in market values.

The belief statements most highly rated byour leadership teams included; execution ofownership rights can increase performanceand reduce risk; considering ESG issues leads tobetter analysis and decisions; sustainability ininvesting is broader than simply ESG integration.

192017 Responsible Investment and Stewardship Report

Mapping our conviction… Over 70% believe
climate change will
have a material
impact on society andthere was majority
belief that climatechange will have amaterial impact now
or within the next
10 years …

There was majority belief that climate change will have amaterial impact now or within the next 10 years. However,beliefs on the extent of the financial impact were mixed withalmost 45% believing the impacts would be moderate or
negligible over the next 20 years. At the same time 40%
believed that the impact would be either substantial or extreme
over that period. This reflects the challenge of attempting tovalue the impact of as yet unknown and unpredictableclimate volatility.
Notwithstanding these results, more than 70% of ourinvestment professionals believe that companies will gain
competitive advantages from a strategic response to theseissues. A more difficult question, however, related to fossil fuels,with 28% believing technological advances would overcome
the risk of these resources becoming stranded, while 35% held
the opposing view.

… There is significant
support for investors
playing a role in mitigatingsome of these risks …

The link between broader societal and environmental
sustainability to stewardship and RI in this regard was also clear.
With strong support for ‘sustainable investment’ to be broader
than ESG and also include the sustainability of the economic
and financial systems, and for asset owners to take a more
assertive role in this regard.
85% support the view that asset owners should, as a part oftheir duties, consider both the direct and indirect ESG impactsof their investments. Our investment professionals also believethat asset owners should incorporate these factors into
investment mandates and monitor investment managers
accordingly.

Get the full results of our investment
beliefs survey
ri.firststateinvestments.com/2017

20

2017 Responsible Investment and Stewardship Report

Visit our website for more information
on human rights
ri.firststateinvestments.com/2017

HUMAN
RIGHTS ORHUMANWRONGS
A guidance note for investment professionals
As stewards of our clients’ assets, we have a duty to manage awide range of risks on their behalf. In December 2015, a working
group was established to research and develop human rights
guidelines for investors in our business. Corporations have legal,
moral and commercial responsibilities to respect human rights andmanage the human rights impacts of their operations. As aninvestor in these businesses on behalf of our clients, it is imperativethat we fully understand and mitigate these risks.
Why are human rights relevant for companies andinvestors?
As investment managers, we face two main types of risk fromhuman rights infringements. First, earnings and valuations could
be impacted by a company’s poor performance in managing
human rights issues. This represents a clear and significant risk to
the performance of our portfolios.
Second, when investing in a company, we can become exposed tothe same human rights concerns that the investee business faces.
This could result in reputational damage to individual investment
teams, our business and jeopardise long-term relationships withour clients.

Identifying
companies
with humanrights risks

Responding
following ahuman rights
incident/
allegation

Internal
governance andreportingAssessingcompanies’
approach andcurrent issues

Engaging withcompanies

In addition to the risks to our clients’ investments, the tragic
human costs are of great concern. While generating sustainable
investment returns, we recognise the opportunity to contributeto improvements in human rights outcomes to the benefit ofmillions of people.
Improving the quality of our investment processes
In 2016, our working group developed a Human Rights Toolkit tohelp identify and manage human rights risks in our portfolios. We
engaged external specialists and an international human rights
lawyer to clarify best practice on how companies should manage
human rights-related incidents and allegations.
More broadly, we hope to be able to make a genuine difference tovulnerable groups of individuals by influencing corporate
behaviour. This can be via direct engagement with company
directors and management, collaborative engagement with otherinvestors on human rights issues, and proxy voting on resolutions
relating to human rights. Our toolkit incorporates a five-stage
process designed to help minimise human rights risks in our
portfolios represented by the image above and described in detailon our online report.

AucklandFirst State Investments
ASB North Wharf
12 Jellicoe Street
Auckland Central,
New Zealand
PO Box 35
Auckland
New Zealand
Telephone: +64 9 448 8424
Dubai
First State Investments
The Gate Building
Dubai International Financial Centre
PO Box 121208
Dubai
United Arab Emirates
Telephone: +971 4 401 9340
Edinburgh
First State Investments
23 St Andrew Square
Edinburgh EH2 1BB
United Kingdom
Telephone: +44 (0) 131 473 2200
FrankfurtFirst State Investments
Westhafen Tower
Westhafenplatz 1 60327
Frankfurt a.M.
Germany
Telephone: +49 (0) 69 710456 – 302

Hong KongFirst State Investments (Hong Kong)
LimitedLevel 25, One Exchange Square
CentralHong Kong
Telephone: +852 2846 7566

Melbourne
Colonial First State Global AssetManagement
Level 10, 357 Collins Street
Melbourne VIC 3000
Australia
Telephone: +61 3 8628 5600

SingaporeFirst State Investments
38 Beach Road
#06-11 South Beach Tower
Singapore 189767
Singapore
Telephone: +65 6538 0008

JakartaFirst State Investments
29th Floor Gedung Artha Graha
SudirmanCentral Business District
Jl. Jend. Sudirman Kav. 52–53
Jakarta 12190
Indonesia
Telephone: +62 21 2935 3300

New York
First State Investments
10 East 53rd Street, Floor 21
New York 10022
United States of America
Telephone: +1 212 848 9293

SydneyColonial First State Global AssetManagement
Ground Floor Tower 1 Darling Park
201 Sussex Street
Sydney NSW 2000
Australia
Telephone: +61 2 9303 3000

LondonFirst State Investments
Finsbury Circus House
15 Finsbury Circus
London EC2M 7EB
United Kingdom
Telephone: +44 (0) 20 7332 6500

Paris
First State Investments
14, Avenue d’Eylau
75016 Paris
FranceTelephone: +33 1 73 02 46 74

Tokyo
First State Investments
8th Floor, Toranomon Waiko Building
12–1, Toranomon 5-chome
Minato-ku
Tokyo 105-0001
Japan
Telephone: +81 3 5402 4831

LouisvilleFirst State Investments
400 West Market Street Suite 2110
Louisville, Kentucky 40202
United States of America
Telephone: +1 502 912 5506

Disclaimer

Australia

This document is directed at persons of a professional, sophisticated, institutional or wholesale
nature and not the retail market.

In Australia, this document is issued by Colonial First State Asset Management (Australia) Limited
AFSL 289017 ABN 89 114 194311.

This document has been prepared for general information purposes only and is intended toprovide a summary of the subject matter covered. It does not purport to be comprehensive or togive advice. The views expressed are the views of the writer at the time of issue and may changeover time. This is not an offer document, and does not constitute an offer, invitation, investment
recommendation or inducement to distribute or purchase securities, shares, units or otherinterests or to enter into an investment agreement. No person should rely on the content and/or
act on the basis of any matter contained in this document.

United Kingdom and European Economic Area (“EEA”)

This document is confidential and must not be copied, reproduced, circulated or transmitted,
in whole or in part, and in any form or by any means without our prior written consent. The
information contained within this document has been obtained from sources that we believe
to be reliable and accurate at the time of issue but no representation or warranty, express
or implied, is made as to the fairness, accuracy or completeness of the information. We do
not accept any liability for any loss arising whether directly or indirectly from any use of thisdocument.
References to “we” or “us” are references to Colonial First State Global Asset Management(CFSGAM) which is the consolidated asset management division of the Commonwealth Bank ofAustralia ABN 48 123 123 124. CFSGAM includes a number of entities in different jurisdictions,operating in Australia as CFSGAM and as First State Investments (FSI) elsewhere.
Past performance is not a reliable indicator of future performance.
Reference to specific securities (if any) is included for the purpose of illustration only and should
not be construed as a recommendation to buy or sell. Reference to the names of any company
is merely to explain the investment strategy and should not be construed as investment advice
or a recommendation to invest in any of those companies. Commonwealth Bank of Australia(the “Bank”) and its subsidiaries are not responsible for any statement or information containedin this document. Neither the Bank nor any of its subsidiaries guarantee the performance of
the Company or the repayment of capital by the Company. Investments in the Company are
not deposits or other liabilities of the Bank or its subsidiaries, and the Company is subject toinvestment risk, including loss of income and capital invested.

In the United Kingdom, this document is issued by First State Investments (UK) Limited which
is authorised and regulated in the UK by the Financial Conduct Authority (registration number
143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number
2294743.
Outside the UK within the EEA, this document is issued by First State Investments International
Limited which is authorised and regulated in the UK by the Financial Conduct Authority(registration number 122512). Registered office 23 St. Andrew Square, Edinburgh, Midlothian EH2
1BB number SC079063.
Middle East
In certain jurisdictions the distribution of this material may be restricted. The recipient is required
to inform themselves about any such restrictions and observe them. By having requested thisdocument and by not deleting this email and attachment, you warrant and represent that you
qualify under any applicable financial promotion rules that may be applicable to you to receiveand consider this document, failing which you should return and delete this e-mail and all
attachments pertaining thereto.
In the Middle East, this material is communicated by First State Investments International Limited
which is regulated in Dubai by the DFSA as a Representative Office.
KuwaitIf in doubt, you are recommended to consult a party licensed by the Capital Markets Authority(“CMA”) pursuant to Law No. 7/2010 and the Executive Regulations to give you the appropriate
advice. Neither this document nor any of the information contained herein is intended to andshall not lead to the conclusion of any contract whatsoever within Kuwait.
UAE – Dubai International Financial Centre (DIFC)
Within the DIFC this material is directed solely at Professional Clients as defined by the DFSA’s
COB Rulebook.

Hong Kong and Singapore

UAE (ex-DIFC)

In Hong Kong, this document is issued by First State Investments (Hong Kong) Limited and has
not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, thisdocument is issued by First State Investments (Singapore) whose company registration number
is 196900420D. First State Investments and First State Stewart Asia are business names of First
State Investments (Hong Kong) Limited. First State Investments (registration number 53236800B)
and First State Stewart Asia (registration number 53314080C) are business divisions of First State
Investments (Singapore).

Copyright © (2017) Colonial First State Group Limited

By having requested this document and / or by not deleting this email and attachment, youwarrant and represent that you qualify under the exemptions contained in Article 2 of the
Emirates Securities and Commodities Authority Board Resolution No 37 of 2012, as amended
by decision No 13 of 2012 (the “Mutual Fund Regulations”). By receiving this material you
acknowledge and confirm that you fall within one or more of the exemptions contained in Article
2 of the Mutual Fund Regulations.
All rights reserved.

EX3185

CONTACT US:
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
Please email stewardship@firststate.co.uk

VISIT US AT:
ri.firststateinvestments.com/2017

first state RI