For professional clients only

2018
RESPONSIBLE
INVESTMENT& STEWARDSHIPREPORT2

2018 Responsible Investment & Stewardship Report

FOREWORD
In last year’s responsible investment report we described the need to‘rethink performance’, and the challenges of moving away from the focus
on backward looking, short-term, benchmark relative returns to a more
holistic view of organisational quality which also includes forward looking,long-term, sustainability and societal outcomes.
To that end, we provided what we believed was a well-rounded view ofour organisation’s quality which included reporting on our achievementof client return objectives, active management, company engagement,
diversity, and our approach to key issues like climate change and humanrights. We used quantitative measures, described our focus areas andprovided a significant number of case studies to demonstrate our ability
to be reliable, consistent and excellent stewards of our clients’ assets both
now and into the future.
We continue with that approach this year and have made further
improvements to our online reporting and disclosures.
This year we have also changed our reporting period from calendar year
end to align with the Australian financial year end (30 June) and so thisreport covers a period of 18 months unless otherwise stated.
Our business and the landscape of our investment capabilities has also
evolved. We no longer offer Australian Equities Core, Indonesian Equities
or Global Resources as investment options and they are therefore notincluded in this year’s report.
In addition, our Emerging Market Debt and Asian Fixed Income teams
have merged and our Equity Income team (formally part of the Coreteam) are being included as standalone capabilities.

We provide detailed information on
our approach to RI on our website.

CONTENTSWELCOME1

ABOUT US2

OUR APPROACH

4

OVERVIEW

6OUR PROGRESS12BENCHMARKING26

CASE STUDIES30

POLICY36

FEATURE - STEWART INVESTORS

10FEATURE - CLIMATE CHANGE

34

FEATURE - CARBON RISK24

INDUSTRY COLLABORATION37

OUTLOOK38

12018 Responsible Investment & Stewardship Report

WELCOMETO OUR 11TH
ANNUAL RESPONSIBLE
INVESTMENT& STEWARDSHIP REPORT.
Since our last report, there has been a shift in the views of policy makers
and regulators around the world regarding the role of sustainable andresponsible investment in well-functioning capital markets. Part of thisview has included greater scrutiny of the role of asset managers in not
only delivering attractive long-term financial outcomes for their clients but
also their influence and impact on societal and environmental outcomes.
Last year’s report was built on the theme of “Rethinking Performance” andthis year’s report continues in the same vein. In it we have once again
provided an overview of how stewardship and responsible investment (RI)
is implemented across our business practices but also highlighted how weare working to understand the outcomes of our investment processes
beyond long-term risk-adjusted financial returns.
Our culture and values are important factors in delivering ourcommitment to being the best stewards of our clients’ assets that we canand ensuring that at all times we understand that we have been granted
a social licence to operate. Maintaining this licence requires that ourclients continue to have confidence in our investment capabilities andthat we always put their interests at the heart of our business. Striving forthe highest degree of transparency that we can achieve, ensures that weare held accountable and therefore operate with honesty and integrity in
our work on our client’s behalf.
Our RI & Stewardship Report provides an important point of evidence,detailing many examples of how we go about integrating environmental,social and governance (ESG) issues into our investment processes andprovides a level of transparency and disclosure which we are constantly
seeking to improve.
I believe that our approach to RI is a business strength which has helped
define our purpose. We will continue to work on improving our approach
because we believe it is in our clients’ long term interests to do so.
Evidence of this is our continued ability to deliver attractive long-term
financial outcomes for clients with 75% of the funds and 83% of theassets we manage outperforming their respective benchmarks over arolling 5 year period.
Source: Colonial First State Global Asset Management/First State Investments.

In addition, our performance against an important industry benchmark,the annual assessment by the Principles for Responsible Investment (PRI),
has been encouraging with our business now achieving the highest A+
rating in seven of the eight areas in which we are assessed, up from four
last year. This improvement was driven by a number of areas of ourpractice including: the implementation of a business-wide RI training
program, the development of a system to provide portfolio ESG quality
assessments, and, improvements on ESG integration across our fixedincome teams.
We continue however to work towards improving all areas of ourprocesses and our capability. In this year’s report we provide a range ofexamples of this including new investment strategies, thought leadershipwork and investments we are making in technology that are designed tomeet the growing expectations of our clients and wider society. We hope
this report provides meaningful insights into the way RI and Stewardshipare implemented across our global business.
Our goal is to always do the best job we can for our clients and ourcommitment to best practice in RI is very much aligned with that
objective and is, in my view, central to our purpose, which is to redefine
success for our clients, shareholders and society.
As always we welcome your feedback and comments on our work.
Email: stewardship@firststate.co.uk
Mark Lazberger CFA

2

2018 Responsible Investment & Stewardship Report

ABOUT USNew York

We are a global asset manager
with offices across Europe, the US,
and the Asia Pacific region.
We are stewards of over A$212.7 billion in assets managed on behalf ofinstitutional investors, pension funds, wholesale distributors, investment
platforms, financial advisers and their clients worldwide.
Our diverse investment teams have deep expertise across listed equities,
fixed income and unlisted infrastructure. We share a commitment toachieving the best possible outcomes over the long term for our clients.
We uphold a culture of always acting in our clients’ best interests andstructure our business to ensure our interests are aligned with our clients.
Principles of stewardship and RI are critical to maintaining and enhancing
this culture.
Total Staff

Investment Staff

UK and Continental Europe

361

56

Asia (including Japan)

154

30

Australia and New Zealand

278

85

North America

39

17

Total

832

188

Source: Colonial First State Global Asset Management/First State Investments as at
30 June 2018.

Louisville32018 Responsible Investment & Stewardship Report

Edinburgh

LondonFrankfurt

Paris

Hong Kong

Singapore

SydneyMelbourne

Tokyo

4

2018 Responsible Investment & Stewardship Report

OUR APPROACH
TO RESPONSIBLE
INVESTMENT AND
STEWARDSHIPFor five years our strategic approach
to RI has focused on enhancing thequality and relevance of ourinvestment capabilities, embedding
a culture of stewardship across theorganisation and engaging all of ouremployees in our RI work.
This approach is underpinned by astrong governance and oversightframework.
In this report we describe theprogress we have made in eachof these areas.

We employ 16 investment teams across a range of asset classes. Each are
specialists in their respective fields and set their own investment
philosophies and processes.
Our commitment to RI and stewardship is a common thread which runs
through these diverse investment capabilities.
In particular, all teams believe that ESG issues comprise sources oflong-term risk and return and can therefore impact long-term investment
value. Teams also believe that as a leading global institutional investor andstewards of our clients’ assets we can achieve better long-term
investment outcomes through active company engagement and by
exercising the equity ownership rights we hold on behalf of our clients.
Maintaining and testing those beliefs is an important part of ensuring weare effective and credible in our RI work. In 2017 we conducted a surveyof our entire organisation on RI. The survey found that over 80% of ourinvestment professionals believe that considering ESG issues leads tomore complete investment analyses and over 90% believe thatstewardship can positively influence company behaviour and returns.
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 ourcollective business as they allow us to share ideas, develop our knowledge
and learn from each other’s successes and mistakes.
The governance of RI across the business and the systems for cross-team
information sharing and collaboration are critically important and includes
a Responsible Investment Steering Group, chaired by our CEO, and an
ESG Committee made up of investment professionals from each
investment team.

More information on our governance and approachis available on our website.

52018 Responsible Investment & Stewardship Report

Our success relies on fully
integrating RI across every
aspect of our business.

Focusing on RI product/businessdevelopment opportunities/aligned with client needs

QualityStronggovernanceframework

Enhancing disclosure andthought leadership, clearer
statements of policy positions

Enhancing ESG integration
and understanding of ESG risks

High quality
investment practices
and processes

GlobalResponsible
Investment
Leadership

Continually 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 knowledge andawareness and skills acrossthe global business62018 Responsible Investment & Stewardship Report

OVERVIEWWHAT YOU CANEXPECT FROM US

While we are proud of our diverse
investment capabilities and theirasset class specific approaches to RI,
the following provides an overview
of what our clients and otherstakeholders can expect from all of
our investment teams. Individual
team profiles on our website provide
a more in-depth description of eachteam’s specific approach.

For all teams, responsibility and accountability for analysis and integrationof ESG factors, investee company engagement and proxy voting rests witheach investment professional and the head of the team. Integration andengagement are mutually reinforcing; company analysis drives
engagement and engagement outcomes influence the analysis. This is
why we have made the strategic decision not to separate proxy voting,engagement or ESG research and analysis into specialised functions.

Overview - ESG integration
ESG integration refers to the methods by which our investment teams
incorporate ESG factors into their investment analysis and decisionmaking. These factors can be relevant to both a team’s assessment ofan assets quality and its valuation.
Listed Equities - Each listed equity team has a process for identifying
and assessing the relevance and materiality of ESG issues for theirrespective asset classes. For all active equity teams, company
engagement is a key source of insights on such risks and opportunities.
These insights, coupled with the best available third party ESG research,
are assessed by the relevant company analyst and incorporated into stock
notes or reviews and influence company valuations.
Some teams assign specific ESG scores, while others incorporate theassessment into broader views of company management and businessquality. All active equity teams hold regular team meetings to discusscompany assessments, including ESG factors.
Fixed Income - Our Fixed Income teams believe that ESG issues have a
direct impact upon an issuer’s risk and therefore its probability of default.
As risks turn into liabilities, they can impact cash flow and, therefore, on
debt costs and credit ratings. ESG issues can also impact on a sovereign’s
ability to generate sustainable revenues or potentially increase its future
costs, affecting its ability to repay bond holders.

Detailed descriptions of each team’s approach to responsible investment
is available on our website in their team profiles.

2018 Responsible Investment & Stewardship Report7

For all teams, responsibility andaccountability for analysis andintegration of ESG factors, investee
company engagement andproxy voting rests with each
investment professional and thehead of the team. Integration andengagement are mutually
reinforcing; company analysis drives
engagement and engagement
outcomes influence the analysis.

82018 Responsible Investment & Stewardship Report

OVERVIEWOF OURAPPROACH
Our Fixed Income teams engage
with counterparties, corporates,
governments and supranational
issuers to raise ESG concerns. For
counterparties, they conduct aformal ESG assessment, which isprovided to the counterparties.

The teams have an assessment process for ESG issues which flows into
their view of a particular security, whether through a proprietary six-factor
model used for emerging markets debt or the ESG score and internal
credit rating used for other securities.
Unlisted Infrastructure – For our Unlisted Infrastructure team, theownership interest we currently hold in our portfolio companies ranges
from ~15% to 100%. Our investment professionals are therefore a key
part of the corporate governance structure by sitting on Boards of
Directors or Shareholder Representative Groups. Consequently a morebespoke approach to ESG integration is desirable and necessary. The teamhas developed separate and detailed RI policies and assessment
frameworks, while still adhering to the organisation-wide approach.

Overview – Stewardship
Given the varying nature of the asset classes we manage, the geographiesin which they operate and the size of our holdings, each of ourinvestment teams’ engagement approaches are tailored to individualcompanies and the specific issues in question. In all cases there is a focus
on material ESG issues that could impact on investment value over all
periods, but particularly over the long term.
Listed Equities – Engagement with company management is afundamental part of our active equity teams’ investment processes.
Through company engagement, we seek to highlight areas for potential
improvement and risk reduction, encourage improved disclosure on ESG
issues, and commend companies that are making progress in these areas.
Proxy voting rights are an important asset for listed equity investors andexercising these rights is a core part of our stewardship responsibilities.
Our policy is to vote on all resolutions at company meetings with the
exception of share blocking markets.

Our investment teams retain full control over their proxy voting decisions
informed by the guidance provided by third party governance research
providers CGI Glass Lewis and Ownership Matters. In the team profiles on our
website, we have disclosed statistics on the independence of our teams’
voting and also provide a ‘live’ voting tool which discloses all voting decisions
post meeting. This approach means that from time to time different teams
may vote differently on the same company.
Fixed Income – While different to the access and approach that is
possible for listed equity teams, our fixed income teams engage withcounterparties, corporates, governments and supranational issuers toraise ESG concerns. For counterparties, they conduct a formal ESG
assessment, which is provided to the counterparties.
We also engage with credit rating agencies and collaborate with other fixedincome investors to improve ESG integration practices across the industry.
Unlisted Infrastructure – For Unlisted Infrastructure, our seats oncompany boards allow greater direct oversight and influence.

92018 Responsible Investment & Stewardship Report

EACH INVESTMENT TEAM
HAS DEVELOPED THEIR OWNAPPROACH TO RI
SPECIALIST EQUITIESAustralian Equities, Growth
ESG risks are primarily identified by our rigorous company engagement
program. Analysts assess how companies are managing ESG issues andencourage stronger ESG performance and disclosure.

FIXED INCOME AND CREDIT
Our fixed income teams share significant aspects of their credit research
process as it relates to ESG considerations.
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 materially different than a rating agency’s
assessment of individual issuers.
Short Term Investments

Equity Income

For Short Term Investments, the ESG assessment most often comesthrough its impact on the internal credit rating (ICR) provided by theCredit Analysts via our Credit Research process.

We work in partnership with other investment teams within our firm.
As part of this approach, the team draws upon the analyst research fromvarious investment teams which includes the identification of any relevant
ESG issues.

Global Credit
In our experience, companies who manage ESG risks poorly typicallymanage other risks poorly. This has a flow on effect which filters throughto most aspects of the company.

Australian Small Companies
By favouring companies with sustainable competitive advantages, strong
financials, quality management and predictable earnings we aim to deliver
superior returns and mitigate downside risks. Sustainability is one of the six
factors that we assess when evaluating a company’s investment credentials.

Emerging Markets Debt & 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 Listed Property Securities
We have developed a tailored ESG framework that is part of our stock
review process. Despite sourcing third party research, in-house researchremains the most important source of reference when integrating ESG
considerations into the investment process.
Global Listed Infrastructure
ESG issues are fundamental to infrastructure companies, given they havesignificant service obligations and moral accountability to the communities
in which they operate. ESG criteria account for 24% of the overall quality
score we assign when considering investment.
First State Stewart Asia
We only invest where we perceive the management operates the business
effectively and in the interests of all stakeholders. Companies that do notlook after their customers, employees, suppliers and the larger community
are unlikely, in our view, to be rewarding long-term investments.
Stewart Investors
Sustainable investment has always been an integral part of Stewart Investors’
investment philosophy and stock-picking process. We believe ESG issues areinvestment issues and we identify them, and their importance, throughbottom-up company research. Our own team of investment analysts identify
and analyse companies and their behaviour towards ESG issues.
Realindex
The incorporation of ESG into the Realindex investment process remains animportant and ongoing area of research for our business, with our researchand design focusing on developing a systematic, rules-based
implementation that delivers on the value proposition for clients.

ESG assessment is also part of our Key Factor Model for emerging markets
debt. For each country that we invest in, we monitor six variables: humandevelopment, corruption, business environment, institutional strength,
government effectiveness and energy dependence.
Global 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 tosignificant financial cost, reputation and brand damage.
High Yield
Key factors such as corporate governance, business practices, industry
and contingent liabilities related to environmental issues are researchedthoroughly and heavily influence investment decisions.
REAL ASSETS
Unlisted InfrastructureWe have the distinct advantage of being able to engage directly with ourportfolio companies via board representation and/or workshops withmanagement, giving us the opportunity to help drive cultural change andset ESG KPIs.
MULTI-ASSET
Multi Asset Solutions
We work with clients to integrate ESG considerations into their portfolios asrequired to meet their investment objectives. In addition to our standard
exclusion of munitions and armaments companies, we can exclude specific‘red flag’ companies or industries, such as those involved in tobacco,gambling and alcohol. We also vote on all company resolutions where weare able to do so.

102018 Responsible Investment & Stewardship Report

FEATURESTEWART INVESTORS –BRINGING COMPANIESTOGETHER TO SOLVE THE
PLASTIC WASTE PROBLEM
Having identified plastics pollution as an engagement priority for 2018,
the Stewart Investors Sustainable Funds Group, in partnership with theInstitute for Sustainable Futures at the University of Technology Sydney,hosted an interactive forum on 25 July in Mumbai with some of thelargest local and multi-national consumer goods companies in India.

Having identified their‘preferred futures’,
participants then engaged ina structured process to
identify and prioritise
collaborative actions inaddressing the issue of plastic
pollution. A long list of ideas
was generated, thensummarised down to a shortlist that was prioritised byForum participants andgrouped under the broad
headings of:

The main objectives of the Forum was to bring business leaders together
to share knowledge about the challenges they face in relation to plastic
packaging waste and to brainstorm ideas for how they can work together
to improve the situation. The Forum was attended by 23 participants
representing 11 companies, as well as representatives from World
Resources Institute (WRI) India and XYNTEO, who were invited both asguest speakers and as participants.

1.

2.

3.

Forming a national
industry body focusedon plastics

Shared visions andtargets

Knowledge sharing andpeer learning

The proposed new national
industry body would lead projects
on behalf of members, including
working together on a national
strategy and targets, providing
a strong voice with government,
and educating consumers about
appropriate disposal and recycling.

While participants agreed thatmany of the building blocks for a
successful plastics waste
management strategy werealready in place, a national,
industry-lead strategy, withassociated targets, would help todrive change. Perhaps along thelines of the UK’s Plastic Pact, thisshared vision could be coordinated by the new peak body,
but work could start earlier.

Participants acknowledged theimportance of peer-to-peer
learning. One specific opportunity
identified for knowledge sharing
was the development of a list of
credible, responsible waste
management organisations. Manyof the companies represented at
the Forum want to ensure that
their partners have appropriate
policies and procedures in place toensure their activities are socially
responsible and environmentally
sustainable.

112018 Responsible Investment & Stewardship Report

The proposed new national industry body would leadprojects on behalf of members, including working
together on a national strategy and targets, providing
a strong voice with government, and educating
consumers about appropriate disposal and recycling.

The group acknowledged the importance and usefulness of plastic but
agreed there was a need to find better ways to manage its use anddisposal. Through various group sessions participants shared some of theirorganisational successes, challenges and priorities for plastic packaging; ona personal level what a plastic pollution free India might look like to them;and then explored the practicalities for achieving their preferred futures.

4.

5.

6.

Consumer awarenessand behaviour change

Innovation andtechnology for waste
management

Building the collection
systemThere was general agreement
amongst participants that
consumers need to be engaged toraise their awareness of recycling
and the need for responsible
disposal. Multiple participants
therefore proposed a national
communications campaign toachieve a few objectives. A
separate but related opportunity is
to run an education campaign
through schools on theimportance of recycling andproper disposal.

While many types of plastic
packaging are already recycled,
others have limited value and are
generally not collected. Several
initiatives were proposed tosupport investment in new or
improved processes to facilitate
recycling of these lower valuematerials. One was to run acompetition for innovations inplastic waste management, as thiswould help the industry tounderstand the current landscape.
Another idea was to seed an
incubation fund that would invest
in R&D for alternative materials.

One of the frustrations expressedby participants was that despite
numerous trials and pilot schemes
to improve recycling, there is no
mechanism to scale these.
Participants proposed a number of
initiatives including:Forum briefing paper and output paper–d evelop a new for-profit
company or public private
partnership (PPP) to aggregate
collected plastic packaging– c ompanies work with existing
third-party collectors andrecyclers to build scale–p rovide funds for equipmentthat would improve efficiency,
for example bottle crushers,sachet compactors andpelletisers to feed waste toenergy (WTE) markets– r ecognise and reward theinformal sector to bringinclusivity and create a ‘feel
good’ factor.

Attendees participatedenthusiastically and weregenerous in sharing theirknowledge and experience
with peers. They demonstrated
a high level of goodwill,
genuine concern for the future
and a strong desire tocollaborate to address the issue.
Participants were also veryclear in their view that industry
must take the lead on this issue
to drive change in collaboration
with governments and NGOs.
The challenge is to ensure thatthe goodwill and commitment
demonstrated at the Forum isconverted into action. Setting
up the peak industry body thatis focused purely on plastic
packaging waste is the key next
step as this body will be tasked
with exploring and progressing
the actions further. This work iscurrently in progress.

2018 Responsible Investment & Stewardship Report12

OUR
PROGRESSThe following pages detail our
progress against three strategicpillars of quality investment
processes, highly engaged employees
and a culture of stewardship.
We have been recording the progressof our RI work for 11 years and in thattime have seen significant growth inresponsible investment across theindustry globally.

While the essential work ofintegrating ESG factors into ourinvestment decision-making andstewardship practices has evolved
over time, our reporting shows thishas been gradual and deliberate
improvements over many years.
As new issues emerge and remerge,
be it modern slavery, stranded asset
risks or the sustainable development
goals, our investment teams
incorporate these considerations
into the same transparent processes
most have had for over a decade.

2018 Responsible Investment & Stewardship Report

13

ESG has always been a consideration
for the Global Listed Infrastructure
Securities team, making up over
24% of their quality score.

142018 Responsible Investment & Stewardship ReportOUR PROGRESSQUALITY
INVESTMENTPROCESSES,INFORMATION
AND TOOLS

During the period we continued to improve our management andaggregation of ESG information by integrating the ESG ratings from ourexternal ESG research providers into our data warehouse and investment
systems and to enhance our internal ESG Portfolio Monitor tool and its
associated dashboard reports.
Realindex – Governance Factor included for Australiansmaller companies
During the period our smartbeta team, Realindex, incorporated an explicit
governance factor in their Australian Smaller Companies strategy. The
team has been conducting research on ESG factors for some time and isable to offer clients both bespoke and off-the-shelf ESG solutions.
Enhanced use of ESG Data - Sustainable Infrastructure Strategy
In December 2017 our Global Listed Infrastructure Securities teamlaunched a Sustainable Listed Infrastructure Strategy. The team uses
proprietary research, detailed engagement and a rigorous investment
process to construct a high conviction portfolio of companies that makesustainability part of their corporate culture and who are led by highquality management teams that are accountable and focused ondelivering sustainable value creation over the long term.
ESG has always been a consideration for the team, making up 24% of
their quality score, because the essential service nature and large
environmental footprints of infrastructure assets make sustainability
considerations a vital part of doing business.
The new strategy has a specific sustainable development focus and alsoseeks to allocate capital to companies best placed to drive the transition
to a low carbon economy. 2°C alignment analysis shows the strategy very
closely aligned with Paris agreement objectives and carbon footprinting
analysis shows it is 38% below the benchmark’s emissions intensity.

2°C alignment analysis was provided by the Transition monitor tool createdby the 2° Investing Initiative.

Each year we also invite
expert speakers to talkto both our investment
professionals and othercolleagues on current andemerging issues.

Capacity Building – Knowledge Development
Ensuring our investment teams have access to good quality information
on current and emerging ESG issues is an important focus for us.
Information takes a number of forms including our external ESG
research providers, broker research, NGO and other research includingfrom organisations like the World Bank and the International Energy
Agency among others.
Each year we also invite expert speakers to talk to both our investment
professionals and other colleagues on current and emerging issues.
These are group sessions in addition to the various briefings, seminars
and conferences which teams undertake independently. We are very
grateful to the speakers and their organisations who present to ourteams on these important issues.
Topics covered include:
Subject

SpeakerGreen Bonds

Climate Bonds Initiative

Gas Report

Climate Council

Results of Board Confidence Index

Ownership Matters

Integrated Reporting

IIRC

Health & Safety Presentation

School of Business UNSWWorking conditions of migrant
workers in Australian supply chains

UNSW Law & Faculty of Law,
University of Technology Sydney

Modern Slavery Act

Baptist World Aid

Climate Science update

Oxford University

152018 Responsible Investment & Stewardship ReportOUR PROGRESSHIGHLYENGAGEDPEOPLEWe recognise that to achieve ourgoals, people right across ourorganisation need to be engaged andfully informed of our philosophy andapproach to responsible investment
and stewardship. This is critical to our
success as we continue to strive to bea leader in this area and in helping
deliver strong long-term investment
outcomes for our clients.

Engagement of our people todevelop an awareness andunderstanding of ourphilosophy is integral toembedding RI within ourbusiness as usual practices.

Engaging our people to develop an increasing awareness andunderstanding of our RI approach is integral to embedding RI within
our business as usual practices.
During 2017/2018 we have focused on:– Launch of an RI eLearning module to build consistent awareness andunderstanding across all of our employees. 93% of employees globally
have completed the module since launch. We also encourage morebespoke learning, including input from a range of industry expert
speakers described on page 16.
–Recruitment and onboarding – Recruitment agencies continue tobe briefed on our commitment to RI, with some agencies also being
invited to our RI events. RI continues to be embedded into our
onboarding processes for new starters.
– Feedback from surveys across the organisation have guided ourefforts on continuing to communicate our RI progress with ourpeople. In last year’s report we described our investment beliefs
survey results and continue to use those results to guide our
employee and client engagement activities.

16

2018 Responsible Investment & Stewardship ReportOUR PROGRESSHIGHLYENGAGEDPEOPLE
Women in investment management roles
%
40

30

21%

21%

22%

23%

2015

2016

2017

2018

20

10

0

As at 30/06/2018. Source: First State Investments/Colonial First State Global AssetManagement.

Diversity and Inclusion
We believe diversity of thought contributes to better decision-making in
our investing and the management of our business. We value individuals
with a diverse range of perspectives and different ways of thinking andbelieve this helps us to be a successful organisation.
Our overarching objective is to encourage and promote diversity ofthought across our business and we acknowledge that the manydifferent dimensions of diversity contribute to achieving this. We
have continued to focus our efforts on gender diversity and achieving
meaningful change through this commitment.
Our Diversity Committee has continued to support and drive ourdiversity agenda with regular meetings to review progress andour metrics.
As at the end of June 2018, women represent 23% of our investment
management roles, which continues to demonstrate gradualimprovement over the 4 years that we have disclosed this metric.

We continue to be confident that the activities we are undertaking arehaving a positive impact on the behaviours, actions and decisions of ourpeople and that we will continue to make progress.
Our focus areas include:– Ongoing disclosure of our diversity metrics, including UK Gender Pay
Gap regulatory reporting.
– Our Recruitment approach includes a female interviewer for eachrole and a request to agencies to consider the diversity of candidate
pools as we aim to maximise the potential talent pool. We have seen
positive results of this with senior female appointments toour organisation.
– As an integral part of annual remuneration review process, decisions
are made through the lens of gender equity with approvals dependant
on demonstrated equitable outcomes.
– Development of our Diversity & Inclusion Commitment whichis undergoing internal endorsement with a view to publishing it
externally on our website.
– Continuing support and engagement with external groups including:• In Australia, the 30% Club, Women In Super and YWCA NSW
twilight series.
• In the UK, the Investment 20:20 Program, York University andsponsorship of Surrey County Cricket Club’s Disability Program.
• In Asia, the Singapore Women’s Intercompany Network andmembership of the DIAN network.

172018 Responsible Investment & Stewardship ReportOUR PROGRESSHIGHLYENGAGEDPEOPLEOur workforce is relatively stable with
7.2% annual turnover, and over thelast 12 months we have seen lower
voluntary turnover for our employeeswith more than 5 years’ service.

We continue to monitor and report on our diversity scorecard (seeopposite). We are pleased with our progress on gender numbers,
particularly given we have a low voluntary annual turnover rate of 7.2%
and therefore recognising that shifting the numbers will take time.
We have seen a decline with our client-facing professionals withfemales decreasing from 51% to 43%. The composition of this grouphas changed with an overall reduction in numbers and a change in
geographic locations. Despite these changes, we recognise that this is
an area that needs ongoing focus for us as an organisation to ensure
we achieve diversity within this role/group.
One of the ways we encourage diversity of thought is by employing
people with a diverse range of ages and fostering a team made up ofpeople with varied length of service. Our workforce is relatively stablewith 7.2% annual turnover, and over the last 12 months we have seen
lower voluntary turnover for our employees with more than 5 years’service, compared with the total population. With this stability of
employees with more than 5 years’ service as well as our new hires wecontinue to bring new people with different experiences to contributeto our goal of having diversity of thought.

We employ a diverse
range of ages

Length of service
2% 1%

1% 2%
5%

6%
25%

27%

9%

15%
26%

22%
41%

20%

24 & under

55-64

0 to 1 years

10 to 15 years

25-34

65+

1 to 3 years

15 to 20 years

35-44

3 to 5 years

20 to 25 years

45-54

5 to 10 years

25+ years

As at 30/06/2018. Source: First State Investments/Colonial First State Global AssetManagement.

182018 Responsible Investment & Stewardship ReportOUR PROGRESSHIGHLYENGAGEDPEOPLE
Our diversity initiatives andactivities will continue tofocus on ensuring we remain
on track to improve the shapeand balance of our globalorganisation from a genderequality perspective.

Gender Pay Equity
From an equal pay perspective
we are confident that gender is
not a factor in determining pay.
Our process for determining pay
includes a comparison against
market data and on average, fixed
remuneration of our men andwomen in similar roles is consistent.
During the year we also published
UK gender pay analysis in linewith UK legislation. The legislation
focuses on comparing the
average pay by gender of all roles
collectively, regardless of levelor type of role. When looking
at our UK gender pay, there aredifferences in the overall average
pay as we have fewer women insenior management and seniorinvestment roles. This is consistentacross our global business and theindustry in general.
Our diversity initiatives andactivities will continue to focus on
ensuring we remain on track to
improve the shape and balanceof our global organisation from agender equality perspective.

Gender Diversity
Total Firm
57%

43%

Operating Group

77%

23%

Senior Professionals

67%

33%

Investment Management Professionals

77%

23%

Client Facing Professionals

57%

43%

New Starters to the Firm in the last 12 months

50%

50%

New starters to Investment Teams in the last 12 months

71%

29%

Pay Equity1. differential of 0% on fixed remuneration
Pay Equity refers to the gender difference for fixed remuneration relative to current market rates (using position specific compa ratios).
As at 30/06/2018. Source: First State Investments/Colonial First State Global Asset Management.
1

192018 Responsible Investment & Stewardship ReportOUR PROGRESSSTEWARDSHIP
3,900
COMPANY MEETINGS
21,622RESOLUTIONS VOTEDOur 2018 PRI transparency and assessment reports are available on our website.

Company engagement and proxyvoting is a key part of all our active
team’s stewardship activities.
Successful engagement is built on
trust and is intended to bechallenging but constructive.

Historically, we have found it challenging to report on engagement
beyond case studies partly due to engagement often being part andparcel of the long-term relationships developed with companies by ourteams, and partly due to each team operating independently andmaintaining its own meeting databases.
Individually, a number of teams have been improving how they capturecompany engagement. An example from a client report from the Global
Listed Infrastructure Securities team is provided in the breakout box.
In addition the First State Stewart Asia and Stewart Investors teams havehired dedicated engagement administrators who book meetings, capturenotes and flag follow ups for the teams to action.

Global Listed Infrastructure Securities – Engagement

Social-related discussion topics have included:

Over the 12 months to 30 June 2018, the global listed infrastructure
investment team engaged with companies on ESG-specific topics a
total of 29 times. These engagements were one-on-one meetings withcompany management, on sustainability-related issues.
The topic breakdown was as follows (some meetings addressed morethan one E / S / G topic):−− Health and safety−− Customer satisfaction and customer solutions−− Appropriate consideration of all stakeholders when determining
environmental asset siting (eg building new roads, pipelines etc)
Key issues related to Corporate Governance included:

Environmental:
14

Social:7

Governance:
13

Engagement examples by topic
Key environmental issues we have discussed with companies include:−− Meeting a 2 degree scenario−− Levelised cost of renewable technologies−− Evolution of the competitive landscape, and renewable deployment
opportunities globally−− Ways to support the further development of renewables, including
government subsidies−− Technological innovation – batteries, decentralised grids,
electric vehicles−− Management succession planning−− Board composition and experience−− Board tenure and independence−− Remuneration – targets set for both financial and non-financial KPIs−− Diversity levels−− Capital management−− Alignment of interests
We also engaged with a number of companies to encourage improved
and more consistent ESG data disclosure. We have provided several
companies with advice on how to better report on these issues, andgiven specific examples of actions that we would like to see undertaken
to improve their ESG reporting.

20

2018 Responsible Investment & Stewardship ReportOUR PROGRESSSTEWARDSHIP

Across the business, teams reported in excess of 3,900 company
meetings for the year ending 31 December 2017 with many meetings
involving discussion of ESG issues. In our annual report to the PRI two
teams reported that 50% of engagements were comprehensive (i.e.
face to face meetings and follow up), while three teams responded that
it was between 10-50% of engagements. Two teams responded that it
was less than 10% while one could not give an estimate.
Proxy Voting Record

Proxy Voting
For active listed equity teams we voted on 21,622 resolutions
at company meetings between 1 January 2017 and 30 June 2018(excluding our smart beta team Realindex and multi asset team who
generally vote in-line with our proxy voting advisor CGI Glass Lewis).

Abstain

AgainstFor

2017/18 Total

Audit/Financials

3

20

1,397

1,420

Capital Management

14

175

2,605

2,794

10

7

17

Climate Change Related
Director Election

52

374

8,298

8,724

Director Remuneration

2

14

816

832

Executive Remuneration

1

68

946

1,015

General Business

3

99

1,735

1,837

Governance Related

58

108

3,138

3,304

M&A

6

202

208

Remuneration Related

45

660

705

Shareholder Proposal

2

71

35

108

Shareholder Rights

5

173

520

698

140

1,163

20,35921,662Grand Total

Proxy voting information is as at 30/06/2018 Source: Colonial First State Global Asset Management/First State Investments/CGI Glass Lewis

Intelligent and Independent Voting
The table shows the number of times the teams have voted against
management recommendations, our proxy advisors recommendationor against both. The purpose of this table is to show the independentjudgement which is applied by the team when making voting decisions.

2017/18
Against Proxy Advisor

2,750

Against Management

1,130

Against Both

267

21

2018 Responsible Investment & Stewardship ReportOUR PROGRESSSTEWARDSHIP

During the year we voted against management recommendations on
1,130 occasions (5.12%). The main themes for these votes included:– Director elections and re-elections (408 resolutions or 36.11% of votes
against management), mostly related to director interdependence.
– Shareholder proposals regarding independent board chairs, lobbying
reports, various rights, (37 resolutions or 26.06% of votes against
management).
– Executive remuneration, compensation, bonuses and share plans (67resolutions or 5.93% of votes against management, mostly related tosetting of hurdles for short term and long term incentives).

–C apital management (189 resolutions or 16.73% of votes against
management, mostly related to discounts to issue prices, dilution andthe need for additional capital).
– S hareholder rights around authority to issue shares without pre-emptive
rights (181 resolutions or 16.02% of votes against management).
– S hareholder proposals regarding independent chairs, lobbying reports,
climate change and other issues (37 resolutions or 3.27% of votes
against management). For the most part we supported management
where the team believed they were making adequate progress related
to the issues raised.
Share blocking markets and other operational constraints prevented us
from voting on 102 (0.46%) resolutions.

Proxy Voting by Region
The chart shows the number oftimes the teams voted in eachregion and the percentage of
votes against management
recommendations, against our
proxy advisors’ recommendations,or against both. The purpose ofthis table is to show the regional
difference in voting patterns andgovernance concerns.

10,000

25%

8,000

20%

6,000

15%

4,000

10%

2,000

5%

0

AfricaAsia ex-Japan

Canada&United States

Total Votes
Percentage Against Management (RHS)

EuropeJapan

Latin America Middle East&&
Caribbean North Africa

Oceania0%

Percentage Against Proxy Advisor (RHS)
Percentage Against Both (RHS)

As at 30/06/2018. Source: CGI Glass Lewis & Colonial First State Global Asset Management/First State Investments.

Breakdowns for individual listed equity teams are available in their profile
pages on our website. A ‘live’ proxy voting history is also available in the
responsible investment section of our website.

222018 Responsible Investment & Stewardship ReportOUR PROGRESSSTEWARDSHIPClimate Change Disclosure

intensive nature of many infrastructure assets. Pleasingly for them andmost team’s with the largest carbon exposures, they are generally lower
carbon exposure and more carbon efficient than their benchmarks.

We provide a climate change statement on our website which is alignedwith the Taskforce for Climate-Related Financial Disclosures (TCFD)
recommendations. The statement describes our governance, risk
management and strategy as it relates to climate change.

As described in previous years, we believe carbon footprinting only offersa partial view of climate change related risks and opportunities. In orderto achieve a more well-rounded view, we have also begun using 2oCalignment reports from the new transition monitor tool developed by the
2 degree investing initiative and are exploring other data sets which canalso support this goal.

As described earlier, through our ESG information management plan, weare also improving our approach to metrics. This includes carbon footprint
reporting which we can now produce at the push of a button for any
listed equity portfolio manager or team.
Equity Teams Emissions Profile
We have also looked at other external ratings of our strategies, in
The metrics opposite are an example of this output, looking at GLOBAL
all our INFRA SEC
particular the Morningstar Low Carbon Designation, which was launchedlisted equity teams combined and compares the weighted average
FSS ASIA
in May 2018. Below we detail the breakdown of low carbon designation
carbon footprint of our holdings vs that of their aggregated benchmarks.
SI
strategies currently covered by Morningstar. Individual strategy ratings can
As may be expected our global listed infrastructure securities team’s
REALINDEX INV
be accessed from Morningstar’s website.
portfolios have higher weighted average emissions due to theAUcarbon
EQUITY GROWTHAU SMALL COMPANIESGLOBAL PROP SEC

Aggregated Listed Equities Emissions Profile

The table below shows key carbon metrics including the total and weighted average
for5M
the 10M
team0 (all portfolios)
vs an50.0%
aggregated0.0% 0 20 40 60
0B emissions
20B
0M
1000 -50.0%
benchmark, the intensity of emissions (emissions/$M of sales) and the exposure to fossil fuel companies
by MSCI.
Carbon footprint
reports
Carbon as classified
Intensity
Difference
Difference
Emissions(t-CO2-e/$m
for each investment team and an explanation of how each measure is calculated can be downloaded
from ourwebsite. Weighted Ave Weighted Ave Fossil Fuel
Exposure $Scope 12

rev)

Emissions (%)

Intensity (%)

967/1,015

88,314M/90,955M

3,683,789 tCO2e-48.1%

372.2 tCO2e-18.8%

3.2

Companies/Covered$/Covered

Weighted Ave Emissions(Scope 1+2)

Diff Weighted Ave Emissions
vs Benchmark (Aggregated)

Weighted Ave Intensity(Scope 1+2/$m Sales)

Diff Weighted Ave Intensity
vs Benchmark (Aggregated)

Ave Fossil Fuel Compper Portfolio

EquityteamsTeamsemissionsprofileListed Equity
Emissions
ProfileGlobal Listed InfrastructureFirst State Stewart Asia
Stewart Investors
Realindex Inv
Australian Equities (Growth)
Australian Smaller Companies
Global Property
0B

20B

Exposure AU$

0M

10M

Weighted
Average Carbon
Emissions
Scope 1&2

Carbon footprint reports for each investment team and an explanationof how each measure is calculated can be downloaded from our website.

0

1000

-50%

50%

Weighted
Difference
Average
Weighted Ave
Emissions
Emissions vsIntensity
Aggregate of all(t-CO2-e/$m rev) Benchmarks (%)

0%
Difference
Weighted Ave
Intensity vsAggregate of all
Benchmarks (%)

060

Average numberof Fossil FuelCompanies per
TeamPortfolio

Team

23

2018 Responsible Investment & Stewardship ReportOUR PROGRESSSTEWARDSHIP

We will also be releasinga series of papers on theinvestment implications ofclimate change covering fiveareas of climate risk that ourworking group identified.

The low carbon designation is provided to strategies which receive acarbon risk rating of less than 10 which also include minimal exposure tofossil fuels, this includes 10% of our strategies. Strategies with scores of 10
to 25.99 are considered to have medium risk (see box). While we would
like to see more strategies receive the designation, the average rating of
13.6 for those strategies which are covered but have not received thedesignation is still relatively low.
Understanding what various metrics do and, more importantly, don’t tell
us was a key focus of the climate change working group which
completed its work earlier this year. A summary of the group’s findings
are available on page 36 of this report. We will also be releasing a seriesof papers on the investment implications of climate change covering thefive areas of climate risk our working group identified. We hope these
papers help our clients and stakeholders better understand the multiple
dimensions of climate change risk impacting their investments.

Morningstar Low Carbon Designation
Scores range from 0 to 100, where lower is better, indicating lower carbon risk. Scores may be interpreted as follows,
both for Sustainalytics company ratings and Morningstar
portfolio scores.
Score

Carbon-risk level0

Negligible>0-9.99Low

1-25.99

Medium30-49.99

High

50+

SevereOur Strategies by Morningstar Carbon Risk Scores
120
100
80
60
40
20
0

<5

5-10

Source: Morningstar.

10-15

15-20

20-25

25-30

30-50

>50

24

2018 Responsible Investment & Stewardship Report

FEATURECARBON RISK MAY
NOT ALWAYS BE
WHAT IT SEEMS

The work we have done on climatechange is described on our website.
The issue is having real investment
implications today which we believe
will continue into the future.
However, as we have described
previously, the focus on carbon
footprinting is potentially missing
significant risks in portfolios and caneven, at times, be misleading.

In a recent white paper the portfolio manager of our Sustainable
Infrastructure strategy, Rebecca Sherlock, discussed some of these issues
when comparing pipeline companies and utilities. An extract of the paper
is below with the full account available on our website.
Most carbon footprint methodologies take a straightforward perspective.
They focus on direct emissions from owned or controlled sources (scope1), plus emissions from the generation of purchased energy (scope 2).
This approach can lead to assets appearing carbon friendly, despite aclose association with substantial emissions further along the value chain.
Our team believes it is more realistic to take a ‘lifecycle’ approach toemissions. This point can be clearly demonstrated by comparing a utility
with an oil pipeline company.
Enbridge Inc. is a North American energy infrastructure company whichowns extensive crude oil and liquids pipeline networks. Enbridge’s assets
are responsible for transporting 65% of all Canadian energy exports to
the US. 90% of Canadian oil production comes from tar sands.
NextEra Energy is a regulated utility in the US. Its assets include Florida
Power & Light Company, a regulated electric utility business, and NextEra
Energy Resources, a clean energy leader which is the largest wind
operator in the US, with a growing portfolio of solar assets.
The following chart compares the carbon intensity of the two abovementioned companies over time, taking a traditional (or ‘directemissions’) approach.

252018 Responsible Investment & Stewardship Report

Most carbon footprint
methodologies take astraightforward perspective.
They focus on direct emissions
from owned or controlled
sources, plus emissions from thegeneration of purchased energy.

Our team believes it is more
realistic to take a ‘lifecycle’approach to emissions.

On this metric, Enbridge is clearly much less carbon intensive than
NextEra. This is because the emissions associated with the fossil fuelstransported by Enbridge are allocated to the transport sector and not to
Enbridge itself. However in NextEra’s case, the emissions from power
generation are allocated to the utility.

Carbon Intensity Scope 1+2 over time (metric tons/revenue)

Using only the carbon footprint the preference would clearly be Enbridge,
but which company actually faces the greatest risks from climate change
and transition to a low carbon economy? Using carbon intensity as the
only form of analysis has the following flaws:

3,500– It ignores change. Carbon emissions for NextEra fell by 6% CAGR
(Compound Annual Growth Rate) over this period, reflecting its
investments in wind technology and improved carbon efficiency.
The corresponding change for Enbridge is zero.

1,500– An investment premised solely on the metric of carbon intensity
supports the use of oil pipelines versus other cleaner resources – thus
having no impact on climate action.
– It ignores stranded asset risk. Following progress in clean energy
generation, the disruption of the transport sector could represent thenext global wave of decarbonisation. This implies a structural decline indemand for oil, and a risk that infrastructure associated with oil storage
and transportation may no longer be able to earn an economic return.

4,500
4,000
-6% CAGR

3,000
2,500
2,000

1,000

0% CAGR

500
0

2010
ENB

2011
NEE

2012

2013
Linear (ENB)

2014

2015

2016

Linear (NEE)

As at 30/06/2018. Source: Colonial First State Global Asset Management/First State
Investments & Bloomberg.

262018 Responsible Investment & Stewardship Report

BENCHMARKINGOUR PROGRESS

Our approach to RI and stewardshiphas always been client-focused.
We benchmark our approach against
various global standards and look to
those standards to identify areas
where we can improve our practices.
These standards also provide a basis
for developing our disclosures andtherefore allow us to be moretransparent about our progress.

While we are very pleased to have improved in our PRI Assessment results in2018 (see table), and to have continued our record of steady improvement
since 2014, we recognise that this comes against a backdrop of broad
industry improvement. For example in the PRI assessment results, medianmanager ratings in our peer group continue to rise as the industry
increasingly adopts RI approaches.
The number of investors responding has also increased which makes the
improvement in the median rating more impressive as it implies thateither new signatories are starting from a higher base and/or that existing
signatories are improving rapidly.
Other sources also demonstrate this improvement with the number ofmanagers who achieved above 80% in the Responsible Investment
Association of Australasia’s benchmarking report go to 24 from 17 last year.
As long time advocates for RI we are encouraged by the generalindustry progress.

272018 Responsible Investment & Stewardship Report

Since 2014 we have been
fully compliant with the CFA
Institute’s Code of Ethics andStandards of Professional
Conduct for asset managers.

Principle for Responsible Investment - Assessment Ratings

Our 2018 PRI assessment can be found on our website.

Each year every PRI signatory reports to the PRI on their responsible
investment practices and how they apply the Principles. Our results since2014 are below. Because we have changed the reporting period we arereporting both our 2017 and 2018 results this year. In 2018 we achieved
an A+ rating in seven of eight areas, an improvement in three.

Module2014 (Pilot)

2015

2016

2017

2018

Medianmanager 2018

Strategy & Governance

A

A–

A+

A+

A+

A

Listed Equity Incorporation

A

A+

A+

A+

A+

B

Listed Equity Active Ownership

A

A–

A–

A–

A+

B

Fixed Income SSA

B

B–

A+

A+

A+

B

Fixed Income Corporate

A

A+

A+

A–

A–

B

Fixed Income Corporate Financial

N/A

N/A

A+

A–

A+

B

Fixed Income Securitised

N/A

N/A

B–

A–

A+

C

A

A–

A+

A+

A+

A

Infrastructure282018 Responsible Investment & Stewardship Report

BENCHMARKINGOUR PROGRESS

We are one of 24 managers(from 112 assessed) whoscored above 80% in the
RIAA assessment.

RIAA Benchmark Report Assessment

Independent Research in Responsible Investment Survey 2017

Each year the Responsible Investment Association of Australasia assesses
the RI practises of asset managers in its annual benchmark report. The
assessment includes the quality of a manager’s approach to RI policy, ESG
integration, active ownership, transparency and industry involvement.

We were pleased to be voted 26th globally for having made the mostpositive contribution to RI amongst asset management firms. Stewart
Investors, who offer dedicated sustainable investment strategies werevoted 14th in the category.

In 2018 we were pleased to remain one of only 24 managers (from112 assessed) who scored above 80% in the RIAA assessment. Most of
those assessed are PRI signatories and so we find the RIAA results animportant differentiator given most managers do not disclose their PRI
assessment results.

Each year SRI Connect and Extel conduct a global survey of RI
professionals asking them to vote in various categories. Recognition frompeers is particularly valued by us and we thank all those that voted for us.

Although our focus is on integration of ESG within all our investment
processes, we are one of Australia’s largest managers of ‘core’ RIstrategies as defined by RIAA*. In this category our Realindex investment
team is the fourth largest and the Stewart Investors investment team theseventh largest manager. These strategies either have an explicit
sustainable development focus (Stewart Investors and Sustainable Listed
Infrastructure) or use a combination of negative and positive screens(Realindex). Over time these strategies have grown to represent 17% of
the total listed equity assets we manage.
UK Stewardship Code – FRC Tiering

CFA Institute’s Code of Ethics and Standards of Professional
Conduct
Since 2014 we have been fully compliant with the CFA Institute’s Code of
Ethics and Standards of Professional Conduct for asset managers. In 2017
we reviewed our adherence to the code through our compliance process.
The code is available to view on the CFA Institute website.
PLSA Stewardship Disclosure Framework
We also benchmark our practices against the UK’s Pensions and Lifetime
Savings Association (PLSA) Stewardship Disclosure Framework. The
framework provides an ‘at a glance’ comparison between the approaches
of different asset managers. Our disclosure is available on the PLSA website.

In 2016, the UK regulator the Financial Reporting Council (FRC), which has
responsibility for the UK’s Stewardship Code, announced that it would beranking asset managers into three tiers depending on the quality of theirstewardship related disclosures and activities. Since that time we havemaintained the highest tiering – Tier 1 – awarded by the FRC.

RIAA’s Benchmark Report is available on RIAA’s website.
*RIAA defines Core responsible investment as approaches which apply at least one of the following primary strategies: negative, positive or norms-based screening; sustainability themed
investing; impact investing and community finance; or corporate engagement.” Source 2018 RIAA Benchmark Report292018 Responsible Investment & Stewardship Report

BENCHMARKINGSTEWARDSHIPFor the third year weunderwent an independent
assurance of our practices
against our Global Stewardship
Principles and the UK
Stewardship Code by PwC.

Almost 50% of our strategies rated by Morningstar
achieved the highest sustainability rating.
%60

In 2017, Morningstar, in partnership with Sustainalytics, launched newsustainability ratings and more recently have added a low carbon
designation. These ratings are unique as the only widely available ratings
that evaluate the ESG quality of a strategies holdings rather than asset
manager’s policy and process.
We believe ESG ratings from independent research providers offer avaluable lens for understanding the ESG performance of companies.
However we note they are predominately desktop research and so can
only offer an incomplete understanding without direct company
engagement. This is due to variability in company disclosures and biases
related to company size, industry and location.

50
40
30
20
10
0

5 Globes

4 Globes

3 Globes

2 Globes

1 Globe

Percentage of Portfolios with Morningstar Sustainability Rating

Notwithstanding their limitations, the ratings are a very welcome andimportant development as they will allow investors and their advisors to
ask questions to get a better understanding of a strategy’s approach to
ESG, and to encourage investors to improve their own disclosure of the
ESG performance of portfolios.
Research by the Chicago Booth School* showed that since their launch,
investment flows into strategies with high Morningstar sustainability
ratings have been positive while flows for lowly rated strategies have been
negative. This supports a significant and growing body of research
pointing to strong demand for sustainable investment.

Average of Portfolio Sustainability Score
Source: Morningstar.

Morningstar Sustainability Ratings
Distribution

Score

Descriptive rank

Highest 10%

5

High

Next 22.5%

4

Above average

Next 35%

3

Average

Next 22.5%

2

Below average

Lowest 10%

1

Low

Rating icon

* Hartzmark and Sussman: Do investors value sustainability? A natural experimentexamining ranking and fund flows.

Opposite we detail the breakdown of sustainability ratings for strategies
we manage which currently have Morningstar ratings. Individual strategy
ratings can be accessed from Morningstar. We are pleased to see a highproportion of our strategies well rated. We note that there is someduplication as some strategies are offered in different vehicles in multiple
markets or on different platforms.
External Assurance of our Global Stewardship Principles
For the third year we underwent an independent assurance processagainst our Global Stewardship Principles and the UK Stewardship Codeby PwC. The statement of assurance is available to clients on request.

30

2018 Responsible Investment & Stewardship Report

CASE STUDIES
View over 100 morecase studies on ourinteractive online map.

Each year we provide case studies
from each investment team as a wayof demonstrating what RI andstewardship means to each team inpractice. Over the last four years wehave been accumulating these casestudies in an interactive case study
map, where users can look at casestudies filtered by investment team,year or issue type. We believe thistool helps bring our RI work to life.
The case studies come from theapplication of transparent processes
that are described in each of
our investment team’s profiles
on our website.

firststateinvestments.com/case-studies

We believe read together, alongwith the other contextual
information we provide, our clientsand other stakeholders can form awell-rounded view of our investment
teams. We provide six case studies
here which we have selected toreflect the range of issues,countries and investment teams
represented, more than 100 more
like it can be accessed through theinteractive map.

312018 Responsible Investment & Stewardship Report

Host has achieved a 32%
reduction in greenhousegas emissions per squarefoot, a 16% reduction inenergy use per square footand a 25% reduction inwater consumption per
occupied room.

PETROLEOS MEXICANOS (PEMEX)HOST HOTELS & RESORTS, INC

Issue Type: Environmental, Social

Issue Type: Environmental

Industry: Oil & Gas

Industry: REITs

Asset Class: Asia Fixed Income and Emerging Market Debt

Asset Class: Global Listed Property Securities

Country of Domicile: Mexico

Country of Domicile: United States

As part of our ESG engagement
strategy, we engaged directly withthe former Pemex CFO, Juan Pablo
Newman Aguilar regarding safety
and environmental concerns at an
investor update in late 2017. In
doing so, we raised specificconcerns around safety accidents
involving the loss of life andencouraged Pemex to consider
re-instating its membership to theInternational Association of Oil and
Gas Producers.

Membership in this association
would necessitate Pemex tocontribute to the compilation ofsafety statistics, allowing investors
to track trends in safety
performance and to makeinformed comparisons. The
executive confirmed that ourrequest would be considered by
the company.

Host Hotels & Resort (Host) is thelargest lodging REIT in the index
and one of the largest owners ofluxury and upscale hotels globally.
We’ve held the stock since
October 2017, as the company waspoised to benefit from a bettermacro backdrop. Host iscommitted to corporate
responsibility and focuses on threethemes of RI, environmental
stewardship and corporate
citizenship. It establishes longterm investment plans for all
assets and incorporates building
systems, equipment andtechnologies to improve efficiency
and conserve natural resources.
Since 2008, Host has achieved a
32% reduction in GHG emissions
per square foot, a 16% reduction
in energy use per square foot anda 25% reduction in water
consumption per occupied room.

Over time, we have had active
dialogue with Host’s senior
management team tocomprehend the depth andbreadth of their commitment tosustainability, and have reaffirmed
our continued support in theirendeavors in further strengthening
their corporate responsibility
program. Host has walked us
through case studies to show theircommitment such as a fuel cell
power purchase agreement to
reduce utility costs at the Sheraton
San Diego Hotel & Marina, thatcuts natural gas usage by 50%. A
local example (given our presencein New York) is the on-site steam
boilers that were installed toremove its hotel from the New
York City utility steam system andreduce carbon emissions by atleast 20%. The company continues
to be a core holding in our global
portfolios.

32

2018 Responsible Investment & Stewardship Report

CASE STUDIES

Water Utilities Australia operates
Lightsview reWater, which is part ofa sustainable housing community,
where an alternative supply ofwater is available to every home.
Lightsview reWater captures,stores, treats and supplies highquality recycled water to residents.

COSTA GROUP HOLDINGS (COSTA)

WATER UTILITIES AUSTRALIA

Issue Type: Environment, governance

Issue Type: Environmental, climate change and recycled water supply

Industry: Food products

Industry: Water supply

Asset Class: Australian Equities Growth

Asset Class: Direct Infrastructure

Country of Domicile: Australia

Country of Domicile: Australia

Each year Costa uses some 4000
casual fruit pickers, often on
temporary visas and contracted
mainly through agencies.
Following issues at other listedcompanies regarding theunderpayment of wages toworkers, the Australian Equities
Growth team investigated andengaged with other potentially“at-risk” companies to ensure
correct wages were being paid.
The team raised the risks with theCEO, CFO and Chairman andreceived assurances around
Costa’s management of labour
hire arrangements including use of
only a limited number of wellscreened labour hire companies
and processes that ensure thematching of time sheets withpayment rates.

While these issues potentially posehigh ESG risks, our engagementwith the company reassured theteam that these risks were being
satisfactorily managed andthey did not change its
portfolio position.

Water Utilities Australia is assistingin ensuring a reliable water supply
for irrigators in the McLaren Vale,a wine region south of Adelaide.
Through its subsidiary the Willunga
Basin Water Company, Water
Utilities Australia sources waterfrom state government-owned SA
Water wastewater plant. It is thensupplied to hundreds of customers
under long term contracts.
The threat and impact of climatechange has motivated grape
growers to make additional efforts
to ensure sufficient soil moisture.
The Water Utilities Australia
infrastructure ensures securityof supply, and provides it at a
rate materially cheaper than
potable water.

In another part of the business,
Water Utilities Australia operates
Lightsview reWater, which is partof a sustainable housing
community, where an alternative
supply of water is available toevery home. Lightsview reWater
captures, stores, treats andsupplies high-quality recycledwater to residents. The recycledwater is applied to uses such as
watering lawns and gardens,
flushing toilets and washing cars.
The recycled water supply is also
used for watering community
green space.
Investments such as those by theWillunga Basin Water Company
and Lightsview reWater deliver
sustainable water solutions fortheir communities and also help
displace the need for additional
state-sponsored investments in the
potable water supply network.

33

2018 Responsible Investment & Stewardship Report

We have raised our concerns
relating to production oversight withmanagement and have discussed
ways in which governance issues
could be addressed. Pleasingly, thesenior management team appeared
to take our feedback on board andwe look forward to receiving a formal
response on outstanding queries.

PEPSICO INC (PEP)NISSAN MOTOR COMPANY

Issue Type: Social

Issue Type: GovernanceIndustry: Packaged foods and meats

Industry: Autos

Asset Class: Global Fixed Income

Asset Class: Global Credit

Country of Domicile: USA

Country of Domicile: Japan

PEP’s ESG risk assessment ofModerate highlights the relevant
issues primarily reflecting dynamics
of the packaged food andbeverage industry, with growing
risks related to the expensive andkey public health issue of obesity.
These risks pose long-term
challenges from a regulatory andconsumption perspective of softdrinks and fatty, salty snacks. The
risks inherent in the ESG-focusedareas are not unique to Pepsi, but
a large majority of food/beverage
producers via the vast array ofsourcing and manufacturing
requirements essential inoperating globally.

Pepsi has come under specificcriticism for its lack of asatisfactory response to JV partner
Indofood’s handling of palm
oil-related deforestation. PEP is also
exposed to nutrition-related issues
regarding its snack-foods (high salt,high sugar, etc.) as well as its softdrink products which are
increasingly targeted by antiobesity groups in the states (aswell as anti high-fructose cornsyrup headlines). Carbonated softdrink consumption in the U.S.
continues to be on a long-term
gradual decline, at least in partdue to public health concerns.

As vehicle demand firmed in 2017,
so too did Nissan’s balance sheet.
Our view of the credit is, however,tempered by:–Q uality control during the
production process.
–A complex shareholder
structure, which contributes togovernance risk.
– T he high carbon footprint ofcars, along with Nissan’s
relatively slow development ofelectric vehicles.

We have raised our concerns
relating to production oversightwith management and havediscussed ways in whichgovernance issues could be
addressed. Pleasingly, the senior
management team appeared totake our feedback on board
and we look forward to receiving
a formal response on
outstanding queries.
Our internal credit rating on Nissan
is currently two notches belowthat of external rating agencies, inrecognition of the elevated ESG
risks we have identified forthe issuer.

342018 Responsible Investment & Stewardship Report

FEATURE

CLIMATE CHANGE

An important part of our approach has
been the efforts of our climate change
working group which concluded its
research earlier this year.
Over the coming weeks we will be presenting more detail on thisresearch, implications for investors, and provide guidance on how
investors can incorporate these issues into their risk management andinvestment decision-making processes. An outline of the key areas wehave focused on is provided below:
Climate change is one of the greatest challenges of our time, with the UN
Intergovernmental Panel on Climate Change (IPCC) concluding that rising
global temperatures, increasing extreme weather events, rising sea levels
and diminishing ice caps are being largely driven by human activities suchas the burning of fossil fuels (e.g. coal, oil or gas) and the reduction offorest cover.
Climate change and global warming pose systemic risks to society and theglobal economy, with major impacts on the availability of resources, theprice and structure of the energy market, the vulnerability of
infrastructure and the valuation of companies. The World Economic
Forum has rated climate change as one of the most significant global risks
in terms of both likelihood and impact since 2011, with the 2018 reportfinding that the top two risks in terms of likelihood and four of the top
five in terms of being climate change related.

In 2015, building on agreements stretching back to 1994, the Paris
Agreement was made at the 21st Conference of the Parties of the United
Nations Framework Convention on Climate Change. The agreement sets
an ambitious goal to hold “the increase in the global average temperature
to well below 2°C above pre-industrial levels and to pursue efforts to limit
the temperature increase to 1.5°C”.
In December 2015, Mark Carney, the Governor of the Bank of England andchair of the Financial Stability Board (FSB) stated that “the challenges
currently posed by climate change pale in significance compared withwhat might come. The far-sighted amongst you are anticipating broader
global impacts on property, migration and political stability, as well as
food and water security”. Subsequently the FSB launched the Taskforce on
Climate-Related Financial Disclosure (TCFD) which found that the natureof climate change risks were such that all companies should disclose theirassessment and response to the risks in their financial fillings.
For investors climate change poses a complex problem which has already,and will continue to, impact on different investments in a number ofways. In 2013 we convened a group of our investment professionals in a
Stranded Assets Working Group to better understand the implications of atransition to a low carbon economy on fossil fuel related industries. The
group developed, and in 2015 published, its findings and a ‘Stranded
Assets Toolkit’ to aid investors assessing the issue.

Climate-Related Financial Disclosures (TCFD)35

2018 Responsible Investment & Stewardship Report

In 2016, we established a climate change working group to take a broader
view of the issue and its investment implications. From this work we haveidentified five key categories of climate change risk facing investors today
and into the future.
1. Physical Risks Of Climate Change
It is clear that changes in climate and corresponding weather patterns are
already having costly impacts on physical assets, business continuity,
supply chain resilience and agricultural production. We expect thesechanges to continue and impacts to worsen as temperatures and sea
levels rise. There is also the risk of irreversible discontinuous changes tothe climate system if ‘tipping points’ are breached.

Increase in Mean Temperature and Variance
Probability of Occurance

Much More
Hot Weather

3. Business Transition And Stranded Asset Risk
As the economy shifts to low carbon, companies will face headwinds or
tailwinds depending on the sectors in which they operate and theopportunities available to them. For some businesses this will be direct with the risk of assets being written-down or ‘stranded’ while for otherbusinesses the need to retool and realign their business models to utilise
low carbon technologies will offer both risks and opportunities.

Power Generation Mix
%
100
90
80
70
60
50
40
30
20
10
0

1970

Less Change
for Cold Weather

Cold

Average

Old Climate

New Climate

Hot

Historical world
power generation mix

NEO2018
power generation mix

48%
solar & wind64%
renewables

29%
fossil fuelsby 2050

1980

1990

2000

2010

2020

2030

Solar

Oil

Nuclear

Wind

Gas

Other

Hydro

Coal

2040

2050

Source: International Energy Agency & Bloomberg New Energy Finance.
Source: Adapted from IPCC (2001) http://www.c2es.org/publications/extreme-weatherand-climate-change.

4. Director Duties And Legal Risk

2. Regulatory Intervention On Emissions

An increasing body of legal opinion and regulatory guidance across theglobe has found that companies and investors who cannot demonstratethat they have considered the implications of climate change arepotentially in breach of their director duty of care and/or trustee
fiduciary duties.

National and state level commitments to reduce greenhouse gas
emissions are resulting in a variety of policy frameworks being deployed.
Other regulatory concerns on air pollution are also impacting carbon
intensive companies.

Total Climate Change Laws And Policies
1,400

5. Reputational Risk And Potential Challenges To A Firm’s ‘Social
License To Operate’
The increased sophistication of environmental NGOs, public concern andthe reach of social media has resulted in companies who do not act on
climate change being increasingly targeted. A good example of thesuccess of these campaigns is the recent lobbying against further bankfinancing of coal mines and fossil fuel based energy generation.

1,200
1,000
800

Each of these areas of risk also feature corresponding
opportunities for our clients, from our stewardship, engagement
and investment activities on their behalf. We look forward to
sharing deeper insights on them in the coming weeks.

600
400
200
0

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
and before
Total legislative

Total executive

Source: Climate Change Laws of the World, Grantham Research Institute.

362018 Responsible Investment & Stewardship Report

POLICY

AND WIDER INDUSTRYENGAGEMENT
During the period we participated in a number ofconsultations and initiatives which we believe support
a more sustainable financial system, these included:

EuroSIF played a critical role in
the European Commission’sHigh Level Expert Group (HLEG)
on a Sustainable Financial
System. Our Global Head of
Responsible Investment is the
President of EuroSIF and strong
advocate for HLEG’s work.

Through the Financial Services
Council (FSC) we responded toa consultation on the revised
Australian Securities Exchange
Corporate GovernancePrinciples. In line with our views,
the FSC supported proposedchanges to the principles which
would focus directors on
maintaining a company’s social
license to operate among otherpositive changes.

We responded to MSCI’s
consultation on the designof ESG indices including ourconcerns around a proposal
to remove tobacco andother exclusions from some
MSCI indices.

Our Chief Investment Officer,
Equities led the developmentof the Financial Services
Council’s new standard on
Internal Governance andStewardship which is now
compulsory for FSC members.

We are leading a working
group on behalf of the UK
Investment Association on
developing standards andclarifying definitions ofsustainable investment.

Our Head of Responsible
Investment Asia Pacific chairs
the Investor Group on Climate
Change’s Investor Disclosure
Working group whichdeveloped a Master Class withleading ESG research provider
Regnan on preparing TCFD
aligned climate change
disclosure for investors.

Stewart Investors held a plastics
round table in India following
research they sponsored by the
University of Technology
Sydney. The round tablebrought together some ofIndia’s leading consumer
companies (some for the firsttime) to collaborate on solutions
to the plastic pollution crisis.

We hosted and led thediscussion for a Debt
Roundtable conducted by the
Prince of Wales’ Accounting for
Sustainability (A4S) initiative
which sought to explore
barriers and solutions forunlocking sustainable debt
financing from Australian banks
and corporates.

37

2018 Responsible Investment & Stewardship Report

INDUSTRYCOLLABORATION
We support a number of industry
and trade groups who are focusedon developing and improving RI.
While these groups do not
represent our views unless we
specifically sign up to a particularstatement, we do support and arealigned with their broader mission.

GLOBAL INITIATIVESASIA PACIFIC

Cambridge University
Investment Leaders Group

Financial Services Council

Each year we review the various
initiatives that we have been
involved with to ensure their
purpose aligns with our clients’interests and that wehave the capacity to make ameaningful contribution.

– Business Reporting Leaders
Forum (Australia)

The initiatives that we remain
actively supportive of andengaged with are listed below:– Founder member– Working Group Chair
Integrated Reporting

EMEA

–M
 ember of the Investment
Committee–M ember of the ESG
Working Group
Responsible Investment
Association Australasia– Chair96
AWARDS
While our focus is always ondelivering for our clients rather
than winning awards, weappreciate the recognition we
receive when we deliver for ourclients. During the reporting
period we received 96 awards in
Asia and Europe including from;

Investment Association–M ember of GovernanceCommittee– Member of Sustainable &Responsible Investment
Committee–M ember of Human Rights
Working Group– T hompson Reuters Lipper,

Investor Group on Climate
Change– B enchmark Fund of the Year–M ember of the Committeeof Management–A J Bell Awards–C hair Investor Disclosure
Working Group–V WD Cash Awards– Chair of Standards & Definitions
Working GroupUK Sustainable Investment
Forum– Member
EUROSIF– Chair

Asian Corporate Governance
Association

ICAEW– Member– Member – Corporate
Governance Committee– Member - Sustainability
Committee
Prince’s
Acounting4Sustainability (A4S)– Expert Panel Member

firststateinvestments.com/stewardship-report– Citywire,– F und Selector Asia
–A
 sian Private Bank; andIn terms of RI we received theAsia Asset Management Best of
the Best Awards 2018 – Best
Application of ESG and theBenchmark Fund of the YearAwards 2017 – Grand Awards– Best Sustainable Investment
Award (Overall Leader).

382018 Responsible Investment & Stewardship Report

OUTLOOK
We recognise that adoption of RIpractices across the industry has
accelerated and standards are
evolving rapidly. Two key areas for
us in this regard are the increasing
focus on measuring the impact of
our investments on society and theenvironment, and considering how
these measures can help us better
contribute to and support the UN
Sustainable Development Goals (SDGs).

Our colleagues at Cambridge University’s Investment Leaders Group are
working with us using their academic excellence and resources tonavigate the key challenges in measuring SDG impact at a whole ofportfolio level.
We have seen attempts at SDG mapping by investors and have become
increasingly concerned that the focus on what a company does was being
counted regardless of how it does it. For example, it is clear that not all
health care companies contribute positively to the SDG’s third goal of‘good health and wellbeing’, however several of the mapping exercises wehave seen ignore this.
As we look at the SDGs further we will be very mindful of these
considerations so as not to misrepresent the contribution ourinvestments make.
We will continue to review and seek to enhance our own practices andprocesses and increase the level of knowledge of RI across ourorganisation. We have long believed that in order to be a credible industry
leading responsible investor we must act as and, at all times, be a
responsible business.
Other key milestones for 2018/2019 include:– Refreshing our ESG tools for investment analysts with new data including
MSCI Carbon and Reprisk ratings which are currently being integrated
into Bloomberg.
– R oll out of new ESG Portfolio Monitor reports, including interactive
carbon footprint reports on our website.
– S coping data requirements for portfolio impact measurement andSDG assessment.
– E xploring other opportunities for the development of new more explicit
sustainable investment strategies.
We look forward to continuing our journey and sharing thechallenges and progress ahead.

Appendix – Policy Exclusions
We exclude cluster munition and land mine manufacturers. The criteria were established under our cluster munitions policy which was approved by the Responsible
Investment Steering Group.
Sanctioned and High Risk Countries
We also exclude sanctioned and very high risk countries, companies domiciled in those countries and individuals. The process includes a two-tier system whereby somecountries are completely blocked (such as Iran, North Korea and Syria) and others are heavily restricted.
The companies captured by the policy are reviewed annually with any
changes reported on our website.

AucklandFirst State Investments
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Telephone: +64 9 448 8424
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Colonial First State Global AssetManagement
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intended to provide a summary of the subject matter covered. It does not purport tobe comprehensive or to give advice. The views expressed are the views of the writer at
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