Responsible investment report
For the period 01 January – 31 December 2010

Contents
About Colonial First State Global Asset Management
and First State Investments

Principle 1

10

1

Principle 2

23

Foreword from the Chief Executive Officer

2

Principle 3

30

CFSGAM’s approach to responsible investment

4

Principle 4

35

Governance, policy and strategy

5

Principle 5

40

The six Principles for Responsible Investment

6

Principle 6

43Work towards global best practice7

Appendix A

46

The scope of ESG considerations

9

Appendix B

47

Scale of operations
1	Colonial First State Global Asset Management
is the largest Australian-domiciled
investment manager
4	Years CFSGAM has been a signatory to the
UN Principles of Responsible Investment
5	Investment specialists in the Responsible
Investment team64	Pooled funds that integrate environmental,social and governance (ESG) considerations
into the investment process
230

Specialist investment professionals

1,500+

Company meetings voted on during 2010

3,000+

Years of combined investment experience

8,000+

Retail clients globally

17,000+Resolutions voted on during 2010

155,400,000,000 Funds under management (US$)
Colonial First State Global Asset Management
Product Disclosure Statements (PDS) and Information
Memoranda (IM) for the funds issued by Colonial First State
Investments Limited ABN 98 002 348 352, CommonwealthManaged Investments Limited ABN 33 084 098 180, and CFSManaged Property Limited ABN 13 006 464 428 (collectively
CFS) are available from Colonial First State Global AssetManagement. Investors should consider the relevant PDS or
IM before making an investment decision. Past performance
should not be taken as an indication of future performance.
No part of this material may be reproduced or transmitted inany form or by any means without the prior written consent
of Colonial First State Asset Management (Australia) Limited
ABN 89 114 194 311 (CFSAMAL). This material contains or
is based upon information that we believe to be accurate
and reliable. While every effort has been made to ensure its
accuracy, none of CFS or CFSAMAL offers any warranty thatit contains no factual errors. We would like to be told of any
such errors in order to correct them.

This material has been prepared for the general informationof clients and professional associates of CFS and CFSAMAL.
You should not rely on the contents. To the fullest extent
allowed by law, CFS and CFSAMAL exclude all liability(whether arising in contract, from negligence or otherwise)in respect of all and each part of the material, including
without limitation, any errors or omissions.
This material is intended only to provide a summary of
the subject matter covered. It does not purport to becomprehensive or to render specific advice. It is not an offer
document, and does not constitute a recommendationof any securities offered by any of CFS or CFSAMAL. No
person should act on the basis of any matter containedin this material without obtaining specific professional
advice. Colonial First State Global Asset Management
is the consolidated asset management division of theCommonwealth Bank of Australia ABN 48 123 123 124.
Copyright © Colonial First State Group Limited 2010.
All rights reserved.

About Colonial First State Global Asset Management
and First State Investments

In Australia and New Zealand, the company operates under thename of Colonial First State Global Asset Management (CFSGAM).
Outside of Australia and New Zealand, the company is known asFirst State Investments (FSI). The entire company is collectively
referred to as CFSGAM in this report.
CFSGAM is a global asset management business withexperience across a wide range of asset classes andspecialist industry sectors.
CFSGAM manages assets across a diverse range of global
asset classes, including equities, cash, fixed interest andcredit, property securities, listed infrastructure, listed andunlisted direct property, and direct infrastructure.
Being a global asset management business allows
CFSGAM to focus on its key strengths in investing,while developing a performance culture to attract
and retain talented personnel to underpin theperformance of our clients’ investments.

Aspirations–– To be a world-class global asset manager deliveringsuperior investment performance to clients aroundthe world–– Outperforming benchmarks and exceeding clients’investment objectives–– Upholding a culture that serves our clients’best interests

Key features–– More than US$155 billion in funds under management–– Guided by the expertise of 230 investment
professionals globally–– CFSGAM’s interests aligned with clients–– Strong risk management and compliance framework–– Signatory to the UN Principles for Responsible
Investment (PRI) since March 2007–– A dedicated Responsible Investment team.

Ownership structure
Commonwealth Bank of Australia
Market cap US$74.3 billion*

Business andPrivate Banking

CommInsure

Institutional Banking
and Markets

Premium
Banking
WealthServicesManagement

International
Financial Services

Colonial First State Global Asset Management
FUM US$155.4 billion
Australia and New ZealandColonial First State
Global Asset Management
FUM US$100.8 billion

RetailBanking Services

Colonial First State

Ex Australia and New ZealandFirst State Investments
FUM US$54.6 billion

Source: Colonial First State Global Asset Management as at 31 December 2010.
* As at 31 December 2010.

1

Foreword from the Chief Executive Officer

Welcome to CFSGAM’s responsible investment report for the 2010 calendar year. This is our fourth report on our
progress towards implementing the Principles for Responsible Investment (PRI) and I welcome the opportunity toshare with you some of the successes and challenges we experienced during the year. I trust this report provides
a useful insight into our approach to responsible investment and the work we are undertaking to implement the
PRI. Collaboration is a key component behind the success of the PRI for our business and the wider industry, andI welcome interest from our clients in the work we are doing in this area.
The PRI has steadily been gaining traction in the investment community over a number of years and 2010 was no
exception. This was evidenced by a marked increase in the number of ESG-related questionnaires and information
requests we received from our clients, especially Australian superannuation funds. There was genuine interest fromclients on our implementation of the PRI and how we are effectively implementing ESG considerations into ourinvestment processes. I believe a best practice approach to responsible investment will become an increasingly
important factor driving the allocation of capital from investors.
Successful implementation of the PRI means incorporating the six Principles into all areas of our business. As amulti-asset, global investment manager, successfully integrating ESG considerations into investment processes
is more challenging in some areas than others. A focus for our business this year has been implementing ameaningful consideration of ESG issues into our credit and fixed interest products. These are among themost challenging investments in which to meaningfully integrate ESG factors, as they are exposed toduration and credit risk, as opposed to valuation risk.
Further, credit and fixed interest investors have traditionally had little traction in engaging issuers on
ESG concerns due to the contractual nature of the relationship. Consequently, the ability to engage inmeaningful discussions with issuers on ESG issues in the past has proved challenging. However, during
2010 our Global Fixed Interest and Credit team initiated discussions with a number of corporate andsupranational issuers on ESG issues. These discussions helped to enhance the team’s understanding of
the risks involved with each issuer.
A challenge for our business since signing the PRI is that collaborative engagement between ourinvestment teams has often been difficult, due in part to the autonomous approach of our investment
teams and the scale of our global operations. Further, in some respects our investment teams actuallycompete with each other in the marketplace. During 2010, CFSGAM held an investment offsite in Hong
Kong, where investment teams came together to discuss how we can improve our investment processes
for the ultimate benefit of our investors.
High on the agenda was improving collaboration and knowledge sharing between our investment
teams. Our company engagements, which number many thousands per year, have traditionallytaken place at a team level and the outcomes of these engagements have been difficult to capture
or leverage from in a meaningful way. Consequently, we have implemented a more centralised,
coordinated approach to engagement which enables all investment teams to monitor what issues andwhich companies each team is engaging with. This is an important development as it allows for greatercollaboration across teams and asset classes, enhanced thought leadership and effective active ownership.
Climate change continues to be among the most pertinent of environmental issues and remains a longterm focus for our business. I was pleased to contribute to the discussion on the effect of climate change forthe investment management industry through my participation on the CEO Panel on Climate Change. Thispanel, which is comprised of nine CEOs from Australia’s leading superannuation funds and fund managers,
was established to encourage clarity and certainty on climate change policy. The panel engages with politicalparties on Australia’s carbon pricing framework and inputs into the Federal Government’s Business Roundtableon Climate Change.
Policy frameworks need to be transparent, long-term and credible to support private low-carbon investment.
The current uncertainty surrounding carbon pricing hinders investment decision-making across both emissionsintensive and low-emissions assets.
The framework for pricing emissions must be resolved to allow for informed, long-term investment
decisions. As outlined in our statements on climate policy, we are supportive of a market mechanismthat sets a price for carbon to stimulate the move to a low carbon economy. I look forward tocontributing to the future activities of the panel, which will involve meeting with political leaders2

Responsible investment report 2010and leading company CEOs to contribute to the debate
on carbon price design.
CFSGAM takes its success in implementing the PRI
seriously, and our effectiveness in doing so is built into
CFSGAM’s strategic planning process. Our rankings in theannual PRI survey form part of our business’s balanced
scorecard, which means key performance indicators
are set across the business towards achieving this goal.
Our balanced scorecard target is to be ranked in the
top quartile in five out of the six Principles for the 2011
reporting year. It is pleasing that since signing the PRI
in early 2007, we have made significant steps towards
achieving this target and now sit in the top quartile infour of the six Principles. We will be paying particularfocus to Principle 2 and Principle 3 during 2011 to
improve our relative scores in these areas.
A key driver behind our success in implementing the PRI
is our dedicated Responsible Investment team. CFSGAM
remains one of the few investment managers to have a
dedicated, specialised team that works across all asset
classes globally. The Responsible Investment team works
closely with investment analysts, research analysts
and portfolio managers to seamlessly integrate ESG
considerations into all of CFSGAM’s investment processes.
The team also encourages the progress of responsible
investment in the wider industry through education,
collaboration and thought leadership. During the year,
Nicholas Edgerton joined the team, which bolsters
the team to five responsible investment specialists, up
from just one member in early 2007. The growth of
this team is a reflection of the increasing emphasis thatour business, and our clients, are placing on the PRI andresponsible investment.
In addition to the support provided by the Responsible
Investment team, each investment team has a
responsible investment champion who focuses
on responsible investment-related activities forapproximately half a day per week. The responsible
investment champions from each team meet monthly
to discuss the approach they are taking to learn fromeach other and ensure continuous improvement.
As our investment teams deepen their approach
towards responsible investment, we are finding thatmany team members are spending more and moretime on ESG‑related matters.
The education of our investment professionals inmatters relating to responsible investment remains apriority for our business. We need our staff to become
responsible investment specialists if they are going tosuccessfully and effectively integrate ESG considerations
into their investment processes. CFSGAM made asignificant investment in training staff during 2010

and of particular note was a globally-recognised training
program for the direct infrastructure team. Given thelong-term nature of direct infrastructure investing, it’s
critical that CFSGAM understands and manages ESG
issues to both maximise value for our investors andto reduce investment risk.
All Australian-based analysts were also trained in the useof ESG research tool ASSET4, which was rolled out acrossthe organisation with the support of the Responsible
Investment team. The use of ASSET4 and RepRisk
continues to supplement the information gathered
through company engagement. The effective use ofthird party ESG research tools, combined with directcompany engagement, is expected to significantly
enhance the effectiveness of ESG integration for all
our investment teams.
To successfully implement ESG considerations into allof our investment processes we need high quality ESG
research which is on par with more traditional financial
research. To encourage sell side brokers to provide this,our collaboration with ESG Research Australia continued
in 2010. The second year of ESG Research Australia saw
a substantial improvement in the quality and quantity of
ESG research produced by the sell side for the Australianmarket. In 2010, CFSGAM was pleased to chair the ESG
Research Australia Awards judging panel and host theawards event. These awards were created to encourage
brokers to provide quality ESG research and recognise
excellence in this area.
It is pleasing to witness responsible investment,
supported by the framework of the PRI, gain real tractionin the investment management industry. CFSGAM has
been committed to responsible investment for a numberof years now, which puts us in a strong position to
respond to the future needs of our clients and industry.
Increasingly, clients are demanding that ESG issues areintegrated into investment processes, as it becomes
clear that a proper consideration of ESG issues in theinvestment process can help investment managers makethe best possible investment decisions. It is our role as afiduciary to make the best possible investment decisions
on behalf of our clients, and this is what drives ourapproach to responsible investment and the PRI.

Mark Lazberger
Chief Executive Officer

3

CFSGAM’s approach to responsible investment

CFSGAM’s approach to responsible investment is to integrate aconsideration of ESG issues into every investment process acrossthe organisation. This is driven by a belief that ESG issues arematerial investment issues that have the potential to impact
long‑term investment performance.
As a fiduciary, CFSGAM has regard to the long-term
interests of its clients. This drives the long-term focus
on responsible investment, with ESG considerations an
integral part of the investment process employed by
all asset class teams.
CFSGAM’s approach to responsible investment does notlook to build socially responsible or ethical strategies thatscreen out particular companies or sectors. Rather, ESG
issues are considered in the same manner as traditional
financial issues in terms of their capacity to affect long‑term
investment performance. This is highlighted because
there is still some misunderstanding across the investment
industry around the definitions of mainstreaming ESG versus
socially responsible or ethical investing.

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

4

Responsible investment report 2010

CFSGAM’s leadership team is passionate about delivering
global best practice in the whole-of-business approachto implementing the PRI. To achieve this goal, PRI
performance is embedded into CFSGAM’s balanced
scorecard. This means that the PRI are an importantpart of the business strategy and are used to set key
performance indicators throughout the business.
CFSGAM’s balanced scorecard target is to achieve top
quartile ranking across five of the six Principles by the2011 reporting year.

Investment policies, reports and statements
There are a number of entities within CFSGAM and these
may have their own responsible investment policies,
reports and statements. These documents are publicly
available on CFSGAM’s website and are listed in Appendix A.

Governance, policy and strategy

The global responsible investment policy and strategy is set by the PRISteering Committee, which is comprised of 17 senior representatives
from across the business and chaired by the Chief Executive Officer.
Reporting to the PRI Steering Committee are sub-committees and working groups that deal with asset class-specific
ESG issues. These sub-committees ensure that ESG considerations are integrated into the investment strategies acrossthe organisation. There are also asset class-specific policies which are reported against. This structure is illustrated in
the diagram below.

Governance structure
CFS GAM Executive Committee

PRI Steering Committee

Climate Change Position Statement

Responsible Investment Policy

Annual Responsible Investment Report

Listed equities and credit and fixed interest
implementation committee

Property working groups

Infrastructure working groups

Voting and engagement policy

Direct property sustainability policy

Infrastructure ESG policy

Corporate governance andengagement report

Direct property
responsible investment report

Client reporting

Listed funds reportingKey

Committee nnPolicyReporting n

1. Investment policies, reports and statements
There are a number of entities within CFSGAM and these may have their own responsible investment policies, reports
and statements. These documents are publicly available on CFSGAM’s website, www.cfsgam.com.au, and are listed inAppendix A.

5The six Principles for Responsible Investment

Principle 1
We will incorporate ESG issues into investment analysis
and decision-making processes.

Principle 2
We will be active owners and incorporate ESG issues into
our ownership policies and practices.

Principle 3
We will seek appropriate disclosure on ESG issues by theentities in which we invest.

Principle 4
We will promote acceptance and implementation of the
Principles within the investment industry.

Principle 5
We will work together to enhance our effectivenessin implementing the Principles.

Principle 6
We will each report on our activities and progress towards
implementing the Principles.
Possible actions that can be undertaken to help signatories fulfil their fiduciary obligations under the PRI are provided
by the PRI organisation. Where these suggested actions have been addressed by CFSGAM, they are referenced by the
sub-section heading number. Refer to Appendix B for a list of references.

6

Responsible investment report 2010

Work towards global best practice

CFSGAM is proud of its track record in the consideration of ESG issues
and was one of the first global investment managers to become asignatory to the PRI in early 2007. CFSGAM was the first Australiandomiciled investment manager to release a detailed annual reporton its progress of PRI implementation, now in its fourth year.
CFSGAM’s continued work towards global best practice in
its approach to sustainability and responsible investment
was recognised in the 2009–10 PRI survey results.
CFSGAM maintained top quartile ranking for Principles
4, 5 and 6, second quartile ranking for Principles 3 and4, and improved its ranking for Principle 1 from second
to first quartile. The integration of ESG research supplied
by ASSET4 and RepRisk, combined with the continued
activities of all investment teams, contributed to theimproved relative performance under Principle 1.
CFSGAM now sits in the top quartile in four of the six
Principles relative to global investment managers.

The leadership team is passionate about delivering
global best practice in a whole-of-business approach toresponsible investment. Performance under the PRI is
now embedded into the business’s balanced scorecard,
which means it is now part of the business strategy
and is used to measure company performance and set
key performance indicators throughout the business.
The balanced scorecard target is to achieve top quartile
ranking across five of the six Principles by the 2011
reporting year.
Full consideration and integration of ESG issues in theinvestment process remains a long-term focus for
CFSGAM and we are committed to demonstrating
leadership in this area.

7

Work towards global best practicecontinued

CFSGAM quartile summary against all investment managers
2008

2009

2010

Principle 1

Quartile 2

Quartile 2

Quartile 1

Principle 2

Quartile 4

Quartile 2

Quartile 2

Principle 3

Quartile 3

Quartile 2

Quartile 2

Principle 4

Quartile 2

Quartile 1

Quartile 1

Principle 5

Quartile 3

Quartile 1

Quartile 1

Principle 6

Quartile 3

Quartile 1

Quartile 1

Source: PRI.

2010 PRI scores against all investment managers globally
Principle 1
100%
80%
60%
Principle 6

Principle 2
40%
20%
0%

Principle 5

Principle 3

Key■ CFSGAM’s score ■ IM’s median score
Principle 4

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

8

Responsible investment report 2010

The scope of ESG considerations

CFSGAM broadly takes the following approach to ESG considerations,although there is no exhaustive list as ESG issues are continually
evolving and changing.
Environmental issues
CFSGAM takes a broad consideration of environmental
issues, such as considering the track record of how
companies have dealt with past environmental issues,
how companies have acted in environmentally-sensitive
areas and sound public leadership on environmental
issues. ‘Environmentally friendly’ companies are notpreferred, rather evidence is sought that companies
have effective management, processes and behavioursin place to mitigate any environmental impacts.
Where CFSGAM has the ability to influence outcomesin its unlisted property and infrastructure businesses,
environmental impacts are minimised through resource
efficiency and recovery.
Examples of specific environmental issues include:–– physical impacts of climate change and related
regulatory risks–– environmental pollution and waste–– ongoing supply of natural resources–– new regulation expanding the boundaries ofenvironmental liability with regard to products
and services–– increasing pressure by civil society to improve
performance, transparency and accountability,
leading to reputational risks if not managed properly–– emerging markets for environmental services andenvironment-friendly products, and–– the impact of carbon pricing on future
investment returns.

Social issues
It is important that companies are supported by thepeople they affect, in order to be able to operate
without undue interference or hindrance. This concept
is referred to as a ‘social licence to operate’ and is
especially important in large organisations, direct
property and infrastructure operations.

Good corporate citizenship, strong community relations,
good employee safety records, sensitivity aroundvulnerable communities and public leadership onsocial issues are considered.
Examples of social issues include:–– human capital and associated metrics such as staff
turnover, engagement, and absenteeism–– customer and consumer relationships–– workplace health and safety–– community relations–– human rights issues at the company and supply
chain level–– government and community relations in the context
of operations in developing countries, and–– society increasing pressure to improve performance,transparency and accountability, leading to
reputational risks if improperly managed.

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

As a shareholder in many large organisations, and directowners of large property and infrastructure assets,
a social licence to operate is an important part of
CFSGAM’s operations.

9Principle 1

10

Responsible investment report 2010

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

Principle 1 is key for CFSGAM as it is the Principle which has themost potential to impact investment returns. Principle 1 underpins
CFSGAM’s goal of achieving responsible investment best practicethrough the successful integration of ESG considerations into every
asset class and investment product globally.
A number of resources are made available to support
the investment teams implement Principle 1, including
education sessions, dedicated internal resources,
governance policies and external ESG research providers.
Governance processes are in place to help ensure
continuous improvements in activities relating to
Principle 1.
Each investment team completes a quarterly surveyof responsible investment activities as they relate to
the investment process, and details the engagement
undertaken with companies. The sharing of informationin this manner allows investment teams to effectively
collaborate on engagement across asset classes andgeographies. This survey also ensures CFSGAM is pushingdown the supply chain to encourage ESG research to be
produced by sell side brokers.
By successfully implementing Principle 1 throughout
the business, CFSGAM will ultimately realise the fullinvestment proposition of responsible investment, whichis to make the best possible investment decisions onbehalf of investors.

2. Integrating ESG: equity investment approach
Each equity investment team takes an autonomous
approach to integrating ESG considerations into theinvestment process, and so the approach to integration
varies from team to team. This autonomous approachempowers each investment team with responsibility for
integrating ESG into its own investment process. ESG
research tools, including ASSET4, RepRisk and specific sellside research, are used by all equity investment teams
to support their research process.
The approach that each equity investment team takes tointegrate ESG considerations into its investment process
is outlined below.

Australian equities, coreFunds under management:
Inception date:
Team size:
Location:

US$9.7 billion
199318
SydneySustainability and governance are an explicit part of thestock research process for the Australian Equities, Core
team. This stock research feeds into the team’s overall
view of the company in a similar way to traditional
financial analysis.
The team considers ESG issues as the ‘sixth factor’ in its
research process because it helps it make more informed
investment decisions.
The Australian Equities, Core team has always considered
ESG when researching companies, because the teambelieves that the approach a company takes to ESG
issues provides an insight into the quality of thecompany’s management. Making ESG considerations an
explicit factor in the research process, as part of the PRI
integration process, has enabled the team to formalise
this approach.
The team’s primary source of ESG information iscompany engagement. The team will generally meetwith the managers of companies in which it invests
at least twice per year, along with site visits andcollaboration with other industry participants. The teamwill typically engage with companies on sustainability
concerns and encourage companies to improve their
management of potential risks. The team will alsoenquire about the approach that company management
is taking to address relevant ESG issues, and it will lookfor evidence of this in company reporting.

11

Principle 1
continued

Australian equities, growth
Funds under management:
Inception date:
Team size:
Location:

Global equities
US$14.5 billion
1989
18
SydneyThe Australian Equities, Growth team analyses ESG issues
at both the industry and stock level under two discrete
sections: board governance, and environmental andsocial issues.
The team uses Porter-style1 analysis to focus on areas ofcompetitive advantage and areas of potential threats.
ESG analysis is used to provide insights into the qualityof company management, which then feeds in to thebroader view of company management. The team also
commissions bespoke ESG analysis from sell side brokers
to support its research and company engagement.
ESG considerations are key to the team’s ownership
practices. Through engagement and proxy voting theteam sends an important message to companies thatthey must take ESG issues seriously.
To embed ESG consideration across the team, it forms
part of analysts’ key performance indicators to ask aquestion related to ESG at every company meeting,identify a material issue and engage with the company
to encourage change.
The team also proactively encourages brokers to increase
the quality and coverage of ESG issues. This is achieved
through feedback that the team gives its brokers, broker
ESG research awards and proprietary work, such as
looking at the performance of directors on boards.

Note:

1. Porter’s Five Forces analysis
is a framework for industry
analysis and business strategy
development formed byMichael E. Porter of Harvard
Business School, 1979.

12

Responsible investment report 2010

Funds under management:
US$3.1 billion
Inception date:
1997
Team size:
9
Location:	London
ESG analysis is a fundamental part of the Global Equities
team’s stock research process. The team has a particularfocus on the ESG issues that may be a catalyst forshare price movements, or which provide insight into
the quality of company management. The adoptionof RepRisk has proved particularly useful for supplying
this information.
Each sector specialist in the team includes ESG
considerations in their evaluation of investment risk.
Where a company is weak on ESG issues, the sector
analyst will increase the company’s risk rating which,in turn, will scale down the company’s weighting in
the portfolio.
The team monitors on a monthly basis the ESG ratingon all stocks which are either in the portfolio or thatare potential investments. The team looks to engage
with the management of any poorly-rated companies
to encourage them to address and improve on their
ESG performance.

Listed property securities
Funds under management:
Inception date:
Team size:
Location:

Global resources
US$4.1 billion
19979
Sydney, London,
Hong Kong, New YorkA key part of the Listed Property Securities team’s
process is the assessment of ESG issues of companies.
The team believes that companies with stronger ESG
ratings are better placed to achieve strong long-term
returns for shareholders.
An in-depth understanding of a company, the industry
in which it operates and the company’s position withinthat industry is gained through fundamental research.
The team analyses a company’s management, asset
quality, financial position, strategic direction, regulatoryenvironment and overall competitive landscape.
This includes a consideration of ESG issues for the firm.
Typically this involves information gathering from company
management and asset visits, Colliers research, broker
research and discussions with local sources or competitors.
The qualitative weighting factors in the team’s process
are based on a set of three major qualitative criteriathat influence performance. These include ‘capitalmanagement’, ‘strategic direction’, and ‘managementand ESG factors’. Each of these three qualitative factors
receives a score out of a potential of five, to create
a potential total of 15.

Funds under management:
Inception date:
Team size:
Location:

US$5.6 billion
19979
Sydney, London

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

Management and ESG factors scoring is based on
environmental policies, social policies, board quality
and composition, alignment of interest with shareholders
and remuneration factors. This element uses pure ESG
analysis and other qualitative factors.

13

Principle 1
continued

Asia Pacific and global emerging markets

Global listed infrastructure

Funds under management:
Inception date:
Team size:
Location:Funds under management:
Inception date:
Team size:
Location:

US$44.5 billion
1988
26
Edinburgh, Singapore,
Hong Kong

ESG analysis is a fundamental part of the research andportfolio construction process for the Asia Pacific and Global
Emerging Markets team. The team has a strong convictionthat the sustainable positioning of companies plays animportant role in determining long-term shareholder
returns for all companies in emerging economies.
The macroeconomic and political backdrop is often
challenging, and the ESG risks are high in developing
markets. The team believes that by understanding
how companies in emerging markets are managing
ESG risks, it can make superior investment decisions.
The team believes that governance in particular isa vital consideration when investing in emerging
markets companies.
The team is very active in engaging with companies
and will regularly raise ESG concerns with company
management. This positive engagement on ESG issues
is a powerful tool to drive shareholder value and protect
and enhance the value of the team’s portfolios.
The team also actively participates in broader discussion
and thought leadership around responsible investment inemerging markets. An example of this, written by Analyst
Sashipal Reddy, is at the end of this section.

14

Responsible investment report 2010

US$0.5 billion
2007
5
Sydney, Hong Kong

ESG risks and opportunities are fully integrated into the
Global Listed Infrastructure team’s security selection
and portfolio construction through the team’s ‘quality
rating’ process. The quality rating of a company consistsof six categories: infrastructure, management, finance,
regulation, sustainability, and equity flows. ESG issues
are captured in the ‘sustainability’ and ‘management’categories and account for 20% of a company’s quality
rating. The quality rating is combined with value ranking
which gives an overall score for the company. Consistency
by region and sector ensures scores are comparable.
To ensure robustness and consistency when integrating
ESG considerations into the investment process, theteam subscribes to a number of third party ESG research
providers to cross-check and validate its own analysis.

3. Integrating ESG: credit and fixedinterest approach
Credit and fixed interest
Funds under management:
Inception date:
Team size:
Location:

US$23.6 billion
198629
Sydney, Hong Kong

The credit and fixed interest asset class faces someunique challenges when it comes to successfully
integrating ESG factors into the investment process.
Unlike equity investments, where a view can be formed
whether an ESG risk is factored in to the share price, thisis not the case with credit and fixed interest investments,
especially corporate credit and structured transactions.
This is partly because of the fact that credit and fixedinterest investments mature. Keeping in mind that
equities are perpetual securities, the maturity dates for
credit and fixed interest securities are quite short, andthe average corporate or government bond matures
within 5 – 7 years of the purchase date. Some ESG risks,
though present, may not be significant for the pricingof securities that mature over such a comparatively
short timeframe. Further, whereas a company only has
one share price, it may have many bonds on issue ofdifferent maturity dates and which therefore trade atdifferent prices. In other words, credit and fixed interest
investments are exposed to duration and credit risk as
opposed to valuation risk.
Fixed interest and credit investors are often notprovided with the same level of access to information
flows or company management that an equity investor
would typically have. Corporate governance is themost important ESG issue for fixed interest investors.
Corporate collapses can seriously impact a fixed interest
portfolio’s performance and corporate collapses usuallyoccur as a direct result of poor corporate governance.
High profile company collapses, such as Enron andParmalat, are evidence of this.
The Global Credit and Fixed Interest team have vigilantly
incorporated corporate governance risks within theirdisciplined investment process, as poor governancepractices can elevate default risks for the team’s
suite of portfolios. This is taken into account within
the credit risk rating assigned to each issuer, where
quality of management and the business plan is afactor. It is also quantified through Information Quality
Scores (IQS) which measure the potential for ‘credit
surprises’. Assessments are conducted on the quality
and transparency of the information provided as wellas the overall standard of governance. The focus of theteam has also broadened to include the assessmentof environmental and social risks following CFSGAM
becoming a PRI signatory in 2007.

The team’s credit analysts also assess ESG risk as partof the overall investment process, accessing ESG
research through providers such as ASSET4, RepRisk
and Responsible Research, in addition to the support
provided by CFSGAM’s Responsible Investment team.
Environmental and social risks can also point toweaknesses in standards of governance and highlight
any potential issues with risk management.
The Responsible Investment team continue to engage
the credit analysts in ongoing training, contributing toincreased ESG research output and coverage (particularlyof Asian issuers), as well as expanded sovereign,supranational private loans coverage. Moreover, theteam continue to focus on downside risks and materiality
to credit securities. ESG risk assessments and rankings
have also been integrated into the team’s proprietary
research analytics web tool, CRED.net.
As part of the transition from the previous service
providers to ASSET4, the team cross-referenced andtested scores from the two existing service providers for
specific credit issuers to ensure the continuity in data
integrity. The team also collaborated with ASSET4 to
apply more relevant ESG indicators to supranational andsovereign issuers. The team concluded that companybased criteria in ASSET4 did not always reflect the real
ESG risks for these issuers, which can more closely reflect
a sovereign issuer and their inherent risks. This also
includes new data points which examine the social andsustainability purposes of an issuer’s core business, suchas funding mass transit networks in the EU. This provides
the team with a sense of the risk associated with theactivities of the credit issuer.
Recently, the team has enhanced its ESG assessmentof counterparty risk. Counterparties are now assessedon a weighted range of indicators under ESG andcontroversies using data from ASSET4. Results will
be provided to the counterparties during the review
process and will include some examples of where they
can improve based on the analysis. The team plans to
implement this during the first quarter of 2011.
Fixed interest investors have historically had little traction
in engaging issuers on ESG concerns due primarily to thecontractual nature of the relationship. Consequently, theability to engage in meaningful discussions on specificissues – which the issuer believes has little relevanceto the relationship – has been difficult. During the past
twelve months, the team’s credit analysts, with thesupport of members of the Responsible Investment
team, have conducted numerous meetings with both
corporate and supranational issuers on ESG issues
pertinent to our overall investment process.

15

Principle 1
continued

This engagement has greatly assisted the credit analysts
with their review of individual companies, enablingthem to make better informed decisions in supportof our portfolio risk management. The team is also
involved in ongoing discussions with the Australia’s four
major banks, which are among the largest issuers in theAustralian credit and bond markets. These discussions
are focused largely on the materiality of ESG businessrisks, such as lending practices and financing risks aswell as reputational risks for the banks, rather than theirdirect environmental and social policies. The focus
remains on each bank’s over arching ESG policies so that
ESG risks can be identified, measured and reviewed whenassessing the bank’s lending and business practices.
The impact of this decision making infrastructure isused to enhance the team’s internal credit assessment.

4. Integrating ESG: direct property andinfrastructure approach
Direct property
Funds under management:
Inception date:
Team size:
Location:

US$35 billion
1984
727
Australia, New Zealand

The Direct Property team is focused on theimplementation of ESG principles into the day-to-day
operational management of the properties, particularly
as they relate to risk mitigation and value creation.
The ability to improve the environmental performanceof properties through operational efficiencies has led to
the reduction of operating costs and so the increase invalue of the properties generally. A case study of Direct
Property’s approach to integrating ESG can be foundlater in this chapter.

Direct infrastructure
Funds under management:
Inception date:
Team size:
Location:

US$2.5 billion
1984
23
Sydney, Melbourne,
LondonAs one of Australia’s first direct infrastructure investment
managers, CFSGAM has long been a driving force in
implementing ESG matters into investment strategies,
particularly as they relate to risk mitigation andvalue creation.
With a long track record, the process of dealing with
ESG issues has been in itself an evolutionary process.
Infrastructure was a relatively new investment class,presenting its own unique set of challenges, when
CFSGAM first became involved in this asset class.

16

Responsible investment report 2010

The team has consistently developed and refined its
commitment to ESG and today recognises it as beinga fundamental part of its investment process. The
team has a rigorous and detailed policy that outlines
its global commitments and has trained the team toensure ongoing improvement. A case study of Direct
Infrastructure’s approach to integrating ESG can befound later in this chapter.

5. ESG research and the investment process
One of the challenges when integrating ESG
considerations into the investment process lies inputting an accurate dollar figure on ESG risks. To be able
to do this, investors need reliable data and research.
The breadth of ESG considerations and theirmeasurability makes pricing ESG risks complicated. For
example, what is the dollar value of a social licence tooperate? ESG research needs to address the vagaries
of different investment processes, asset classes andgeographies. It needs to balance short-term risk withlong-term outcomes and normalise inconsistentreporting by companies.
A number of specialised research providers and mainstream
investment research providers are now responding to thedemand from investment managers to produce researchthat addresses these needs. As previously reported, in2009 CFSGAM undertook a global review of ESG research
providers to ensure its investment professionals wereable to access the most relevant information for thevarious investment processes. A new suite of ESG research
providers was appointed in early 2010.
CFSGAM has ESG research needs across the business.
For example, research is needed for the listed equity
teams across global markets for stock level research,while the credit and fixed interest teams need research
related to default and duration risk.
No single ESG research provider is able to meet all theneeds of a large, diversified investment manager suchas CFSGAM. Also, the best insights are the ones thatanalysts get from actually visiting companies and seeing
how businesses operate first hand.
CFSGAM has taken the approach of sourcing a diverse
range of ESG information that is then used by teams to
supplement the information they get from their own ESG
research. External ESG research needs are divided into
four categories: ESG data, ESG news, stock-specific andthematic ESG research, and proxy voting research. Thisadditional research helps investment managers more
systematically incorporate a consideration of ESG issues
into their investment processes and practices.

6. ESG news and data

8. Proxy voting research

Many companies only report their ESG performance
annually, and the companies themselves are notalways the most reliable source of ESG information;
the number of smiling children in sustainability reports
often correlates with the number of problems lurking
beneath. Rather than waiting on information fromcompanies themselves on ESG developments, Zurichbased RepRisk provides investors with a real-time ESG
news service. It is useful for CFSGAM’s analysts to receive
the most up-to-date information as they monitor
company developments daily. It also allows potential
ESG risks to be highlighted swiftly and enables company
engagement to cover the most pertinent issues.

Voting on shareholder resolutions is an important partof an active shareholder’s responsibility and one thatCFSGAM takes seriously. CFSGAM voted on more than
17,000 resolutions in 2010. To satisfy responsibilities
as a shareholder, CFSGAM subscribes to the servicesof Risk Metrics and Glass Lewis. These companies
gather company and resolution information and provide
voting recommendations. Each investment team thenconsiders these recommendations before making theirown voting decision.

Gathering information and data from company reportingand various websites is time consuming, so CFSGAM
subscribes to the services of ASSET4, which provides ESG
data that is used when making investment decisions. Thisdata includes information on ESG performance, such as
greenhouse emissions, workplace injury statistics, thenumber of independent directors, and industrial disputes.
This data is used by each of CFSGAM’s investment teamsin the consideration of a company’s management of
ESG issues. Each investment team has a slightly different
investment process, so the raw data can be individually
utilised. ASSET4 collects up to 600 data points on almost
3,000 companies across 178 key performance indicators.
ASSET4 also collects a considerable amount of data onsovereign entities that can be used by CFSGAM’s Fixed
Interest and Credit team. Not all data points are relevant
for all companies, but they provide analysts with anumber of useful ESG factors to consider.

7. Stock-specific and thematic ESG researchIn-depth, stock-specific and thematic ESG research
and analysis play an important role when integrating
ESG considerations into the investment process.
Goldman Sachs JBWere and Citi were the pioneers of
ESG research in Australia and have since been joinedby many major sell side brokers, such as RBS, Deutsche
Bank and Macquarie. The quality and quantity of thisresearch has improved dramatically in recent years as
ESG considerations become increasingly mainstream.
CFSGAM’s investment teams can use high quality
research to broaden their knowledge on companies andbetter understand the potential materiality of ESG issues.

9. Mainstreaming ESG research
There is a need to send a clear signal to the researchcommunity regarding the lack of quality ESG researchand CFSGAM has been an active participant in thediscussions leading to the formation of the ESG Research
Australia Initiative.
CFSGAM seeks to incentivise sell side brokers to produce
ESG research which supplements the traditional financial
research they provide. CFSGAM has a particular focus on
Australian-based ESG research, given CFSGAM’s positionin the market as one of Australia’s largest investors.
In 2010, CFSGAM hosted the inaugural ESG Research
Australia Awards. These awards were created toencourage brokers to provide quality ESG researchand recognise excellence in this area.
All ESG Research Australia members were invited tosubmit ESG research produced by brokers in 2010that they believed added value to their investment
processes. A judging panel, chaired by CFSGAM’s
Head of Responsible Investment, was formed from a
sub-group of ESG Research Australia signatories fromthe superannuation and funds management industry.
This judging panel then assessed the research against
a set of predetermined criteria.
ESG Research Australia members also voted on anaward for the best broker service. This was voted on by
investment managers and superannuation funds that
directly manage Australian equities investments.
Together, the awards are designed to recognise andpromote the important role that brokers can play inidentifying and assessing the impact of ESG matterson investments and investment returns.

CFSGAM also purchases specific ESG analysis fordifferent investment markets. For example, CFSGAM
has considerable exposure to emerging markets, and so
Singapore-based Responsible Research provides detailed
thematic ESG research on Asian companies.

17

Principle 1
continued

10. Internal research and education
Despite sourcing third party research, in-house researchremains the most important source of reference when
integrating ESG considerations into the investment process.
Responsible investment sessions are held as part of aninternal education and awareness-raising program whichhelps to provide CFSGAM’s investment professionals

Paul Curnow

Partner

Baker and
McKenzie

Josh Dowse

Principal

Dowse CSP

Lucy Carmody

Executive
Director

Responsible
Research

Julie Hudson

Head of SRI &Sustainability

Richard Fuller

Investments
Analyst (PRI)
Head ofGovernanceandSustainable
Investment

UBS
Investment
Bank, Equity
Research
HESTA

Talieh Bentley

18

Responsible investment report 2010

UniSuperwith a better understanding of the opportunities andchallenges presented by responsible investment.
These education sessions equip staff with the knowledge
to engage on ESG issues with clients and the wider funds
management industry. The following table summarises
some of the guest speakers who were invited to present
at the investment sessions during 2010 and the topics
they covered.

The end of 2009 saw numerous headlines on the Copenhagenclimate negotiations and the politics of climate change here inAustralia. With a fresh perspective for 2010, Paul Curnow from
Baker and McKenzie presented on what it means for investors.
Josh Dowse, the principal of Dowse CSP, spoke on the ESG due
diligence process, assessing the relevance of ESG issues and linking
ESG opportunities to the investment’s operational strategies.
Lucy Carmody from Responsible Research summarised key findings
from recent work on Water in China, Green Buildings in Asia,
Pharma, Healthcare and the Brewery sectors. The presentation
also included the current findings from a study of the Top 100
companies within the Asian Sustainability Rating and from RepRisk.
Julie Hudson, Head of SRI & Sustainability at UBS, presented via
video conference to our Sydney, London and Edinburgh offices
and summarised key findings surrounding ESG Integration and,specifically, the framework UBS applied in its ESG Analyser.
Richard Fuller from HESTA and Talieh Bentley from UniSuper
outlined how their respective funds are approaching the integrationof ESG to their investment practices and the broader United
Nations Principles for Responsible Investment. They also made someobservations on what they expect of their fund managers and what
they think ‘best practice ESG integration’ looks like.

11. Case study: The Global Resources team’stransition to ASSET4
During 2010, CFSGAM’s Global Resources teamtransitioned to ASSET4 as its key provider of ESG data.
In undertaking this process, the Global Resources team
implemented two key reforms to its investment process.
The first change was the establishment of a new,company-specific ESG scorecard. This scorecard displays
key operating metrics for a particular company and its
rank within the Materials and Energy sectors. This is thenused in the team’s regular stock review process andinvestment committee meetings at which investment
decisions are made. The team is also working towards
increasing the number of stocks that have ESG reviews
included in the stock guideline review.
The second development was a sector-specificcomparisons table. This table allows the Global Resources
team to compare company performance by sector, suchas gold companies, steel companies and explorationcompanies. One of the challenges of implementing ASSET4
data into the investment process has been that many data
points provide an ‘N/A’ response due to lack of disclosure
by the companies and limits in ASSET4’s research universe.
The Global Resources team also established RepRisk
watch lists for its funds and maintained the team’s trackrecord of assessing ESG impacts on all of the stocks
invested in the Global Resources long only portfolios.

12. Case study: Direct property –incorporating ESG
During the management and ownership process of
CFSGAM’s direct property portfolio, ESG considerations
are incorporated into every aspect of managing thebuildings in accordance with the Responsible Property
Investment Strategy and Sustainability Policy.
The investment process for buildings can be explained
through the following three broad steps as it relates to
responsible investment and ESG:
1) Acquisition: Responsible investment and ESG isincorporated in the due diligence process when the teamlooks at acquiring new buildings through a standard
checklist and sign-off process. This process investigates
the environmental and physical aspects relating to
the property, with regard to both its construction andongoing operation. The social aspects are investigatedwith regard to the community and society in the vicinity
and how the building interacts with them. Regarding
governance, the asset is reviewed for compliance withregulatory controls and its economic performance. These
aspects form a part of the entire due diligence process.
This is not a screening process, but one of risk mitigationand investigation which is taken into account in pricing.

2) Performance: The day-to-day management ofbuildings is closely guided by the Responsible Investment
Principles and Operational Performance Strategy.
This strategy is focused on setting and achieving
performance targets for the operation of buildings
based on an appropriate benchmark for the classand use of the building. The benchmark used is the
NABERS Performance Tool, which is a performancebased rating system for existing buildings. CFSGAM
monitors, manages, analyses and reports on the actual
achievement of these targets.
The occupant use of buildings plays an integral part ofachievement of the targets. This interaction is managed
through a detailed Tenant Engagement Strategy, which
includes a Green Lease strategy and a Green Lease
schedule. The Green Lease strategy also focuses on
the tenant fit-out guide and house rules, governing theoperation of the asset.
3) Valuation: The valuation of buildings takes into
account both the income from the occupants and thecosts in running and maintaining the building. ESG
factors are integral to both these aspects. With regard
to income, Green Lease clauses are in place for certain
buildings and are being further developed to assist
with managing the occupant use of the building. With
regard to maintenance and management of plant andequipment, lifecycle costing is used taking into accountESG factors. The softer side of valuation is reflective of the
facilities and attractiveness of the building to attract andretain tenants and therefore secure an income stream.
All of CFSGAM’s building assets are covered by the
Responsible Property Investment Strategy and ESG
processes. All buildings are physically managed by
the CFSGAM business, and all retail (shopping centre)
properties are completely internally managed from theasset through to property and facility management. The
office and industrial class properties are internally asset
managed, with the property and facility management
operations outsourced to third party managers who
manage according to CFSGAM’s operational policies,
and therefore implement CFSGAM’s ESG standard policies
and principles.
The hotel properties are asset managed by CFSGAM, andthe day-to-day operations of the hotel are outsourced toa hotel operator. In this asset class, both the ESG policies
of CFSGAM, and those of the hotel operator, The MarriottGroup, are implemented in the buildings.

19

Principle 1
continued

Direct property lifecycle analysis
The Lifecycle Analysis model was borne from the needto find drivers for sustainability across shopping centre
assets. Unlike office assets, where there are drivers in
the forms of legislation and tenant requirements, retailproperty doesn’t have these drivers. The Lifecycle
Analysis model assesses whether the owners will realisea return if additional capital is spent currently, to save on
operating costs in the future. This analysis allows for theselection of more efficient items of plant and equipment
which otherwise may not have been selected due tocapital costs being too high.

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

13. Case study: Direct infrastructure –incorporating ESG
A consideration of sustainability issues is embedded into
the lifecycle of the direct infrastructure investment process.
ESG issues are considered at the following four steps.

Step 1
During initial due diligence, prior to an investment being made in an asset, reference on the key issues for thedifferent infrastructure sectors will be made to:–– existing legislation–– the IFC Performance Standards and the Equator Principles, and–– applicable industry-specific environmental, health and safety guidelines.

Step 2
Ongoing active asset management post-acquisition is undertaken as part of a continuous improvement
process to value-add to asset performance and effectively manage risk. This is done through an active asset
management strategy.

Step 3
Appropriate management of ESG considerations is undertaken as part of the ongoing valuations of assets
and is a consideration in decisions whether to divest an investment.

Step 4
Thematic ESG issues are considered as part of our overall investment strategy. Through participation inindustry dialogue, CFSGAM ensures it is across emerging sustainability issues for different infrastructure
asset classes.

20

Responsible investment report 2010

Direct infrastructure corporate
engagement guidelines
CFSGAM’s guidelines for corporate engagement ensurethat an adequate management framework is in placethat identifies ESG issues within each asset undermanagement. The guidelines identify potential andexisting risks for infrastructure assets and set benchmark
performance objectives that focus on key principles
associated with ESG issues.
The corporate engagement guidelines help ensure thatthe long-term value of CFSGAM’s infrastructure assets isenhanced and the reputation of its clients is protected.

14. Direct infrastructure ESG education
CFSGAM made a significant investment in its implementationof the PRI during 2010 by undertaking a tailored training
program for the direct infrastructure team.
CFSGAM’s asset managers sit on the boards of theinfrastructure businesses that CFSGAM invests in. It is vitalthat the asset managers are well equipped and up-to-dateon the most current environmental and social challenges
in order to protect and enhance asset performance.
To facilitate this, CFSGAM appointed Environmental
Resources Management (ERM) to specifically develop
a unique course for the direct infrastructure team on
the environmental and social issues currently facing theinfrastructure sector.

Challenges to implementation
The challenges for Principle 1 continue to be the lack ofcomparable ESG reporting by companies and the realitythat traditional training for financial analysts does notinclude ESG.
CFSGAM is encouraged that the global discussions
on integrated reporting will result in a trend towards
reporting that integrates a discussion on how ESG issues
drive company value. CFSGAM also hopes to see moreconsistent and comparable data provided by companies.
The development of the Responsible Investment Academy
is also valuable for the investment community. CFSGAM
has enrolled 40 executives from across the business tocomplete the Certificate for Responsible Investment.
There has been a tangible increase in the numberof questions and surveys from clients and otherstakeholders on CFSGAM’s approach to ESG. While theinterest is welcomed, the information gathered isn’t
necessarily being incorporated meaningfully into theallocation of capital. Only rarely are further questions
asked on the information provided in these surveys.

CFSGAM decided the International Finance Corporations(IFC) Environment, Health and Safety Guidelines provided
the most structured framework for the direct infrastructure
team to refer to in their consideration of environmental
and social issues in the investment process.
Undertaking this training demonstrates CFSGAM iscommitted in its approach to understanding andmanaging environmental and social investment issues.

21Principle 1
continued

Viewpoint
Sashipal Reddy, Analyst.
“What have I done? If this is a victory, what’s adefeat then?”
Nearly 2,200 years ago, King Ashoka, the Emperor
from the Maurya Dynasty, asked this after waging
one of the bloodiest battles in Indian history; theconquest of Kalinga, or the state of Orissa as it is
known today. The war claimed 100,000 lives. Ashoka
was so devastated at the carnage that he took to
Buddhism, preached Ahimsa (non-violence) andauthored one of the first writings on administrationand good governance. A couple of millennia later,a similar war is being waged, across several statesin India. Corporate India has become increasingly
entangled, sometimes as victim, sometimes asperpetrator. The state of Orissa is home to someof India’s largest deposits of coal, iron ore andbauxite, while sheltering some of the country’s
most disadvantaged communities.
A town called Kalinga Nagar is facing the brunt of
this ‘war for resources’ as a reputable Indian groupplans to set up steel plants in this area. Kalinga Nagar
is a small town in the Jajpur district of the state ofOrissa. It is rich in iron ore and the state government
plans to make it the biggest steel hub in the world.
While the company’s record of managing community
issues has been one of the best in India, even it isstruggling to get the project off the ground due toland acquisition issues. Not too far away, one of theworld’s largest steel makers has failed to start India’s
biggest foreign direct investment project for the last
five years for similar reasons. While development isnecessary, the current approach fails to gain the trustof local communities. There is enough evidence tosuggest even fair compensation is not awarded as
the state and corrupt politicians have made windfall
gains by acting as intermediaries in land deals. Local
communities here are adivasis (tribals) with little or noskills required for industrial labour and so losing theirland is losing their livelihood.

22

Responsible investment report 2010

Though the trumpet blowers talk about
uninterrupted 8-10% growth of the economy,
we believe this growth will incrementally get moredifficult unless the country finds a way to take allcommunities along with it. Fortunately, there aresigns of improvement. The Environment Ministry
has woken up from its previous slumber following
a change in its leadership. It is playing a very activerole in trying to ensure there are no short cuts forcorporates when it comes to developing valuable
resources. One can point to lots of instances ofcompanies running head on into the Ministry
and failing to make too much progress beyond that.
Take for example the Lavassa project, India’s largest
hill township built on 25,000 acres. We believe thisproject should have raised a lot of questions ranging
from land acquisition, ownership, and source of funds
to environmental impacts. Interestingly, the project
was engineered in such a way that it does not fall into
the ambit of the Environment Ministry but it has now
forced its way in and has put the project on hold.
While some commentators argue that the Ministry isusing the environment as a political tool, we believe
it has at least done a very good job in creatingawareness on such issues.
Following in the Ministry’s footsteps, markets havebegun to recognise the importance of ESG risks
to investments. Companies that commanded a
premium back in 2007 for being able to ‘manage thesystem’ are unable to ‘manage their discounts’ now.
Like India’s new generation of taxi drivers, most Indiancompanies are looking at short cuts to success. Sucha strategy usually comes fraught with risks, dead-ends
and accidents. Unlike Ashoka, India cannot afford towage a war before learning its lessons; it needs tomake that leap to good governance straight away.
We are looking to invest in companies who focus
on what can go wrong and take a more risk aware
approach. We believe such companies, possibly at
the cost of short-term profits, will deliver value toinvestors over the medium to long term.
Sashipal is an Investment Analyst in First State Investments’Global Emerging Markets/Asia Pacific (ex-Japan) team. Sashipal is
responsible for providing research support to portfolio managers
and focuses on Indian equities. This article was first published in
January 2011.

Principle 2

23

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

CFSGAM is an active shareholder through proxy voting and direct
discussions with company management and directors. CFSGAM’slarge scale and reputation in the investment management industry
provides its investment managers with the opportunity to engage
in dialogue with individual companies on ESG issues.
Through company engagement, CFSGAM seeks tohighlight areas for potential improvement, encourage
disclosure on ESG issues and commend companies thatare making progress in addressing ESG considerations.
CFSGAM also seeks to positively influence companies
towards ESG best practice for the ultimate benefit of
its investors. CFSGAM has guidelines and principles forcorporate engagement which are publicly available on
the company website.

Management performance

Active ownership and engagement are among
CFSGAM’s top priorities as a fiduciary, because of thebelief that there is a correlation between companies
with good governance practices and strong, sustainable
shareholder returns. For example, the Global Listed
Infrastructure team’s top-rated ESG stocks outperformed
the bottom-rated stocks by more than 20% over three
years to May 2010. Consequently, CFSGAM seeks topositively influence companies towards ESG best practice
to ultimately benefit investors.

CFSGAM takes its ownership and engagement
responsibilities seriously and will only engage companies
on material issues. CFSGAM engages companies toachieve specific outcomes, namely to ensure good
ESG practices and thereby protect investor interests.
In instances where management does not respondadequately to CFSGAM’s engagement, this may impact
negatively on its valuation assessment and/or could
result in CFSGAM divesting its ownership.

Given the varying nature of the asset classes CFSGAM
manages, the engagement approach is adjusted
according to the asset class and the level of influence.
Further, due to the autonomy of funds, one investment
team may have ESG concerns about a particular stockthat is a major stock holding in a different fund.

As engagement is an integral part of ownership, company
engagement is best carried out by the responsible
portfolio managers and their investment teams.

CFSGAM believes that engagement with companies
is key to achieving ESG improvements. Collaborative
initiatives with third party engagement providers exist togather necessary information to help obtain maximum
value from engagement. A focus for 2010 was toimprove collaboration between investment teams on
engagement on controversial issues.
As an owner of company shares, CFSGAM will engage
companies on ESG issues in the following circumstances:

Risk
Where CFSGAM’s assessment shows that certain ESG
factors have a material impact on company earnings
or value or have the potential to do so.

24

Responsible investment report 2010

Where, in CFSGAM’s assessment, management is notadequately addressing ESG issues that could have amaterial impact on earnings and/or value.
In keeping with CFSGAM’s approach, company
engagement on ESG issues, when necessary, will be
primarily carried out on a direct basis and indirectly
via its proxy voting process.

Accountability

ThemesCFSGAM recognises that ESG covers a wide range ofissues and therefore it will concentrate its efforts on
those material ESG issues in which it has a significant
understanding and where it can exert influence towards
achieving a specific outcome.

Collaboration
CFSGAM recognises the benefits of collaborative
engagement and therefore may collaborate in industry
initiatives and forums where appropriate.

Form
CFSGAM’s approach to engagement varies on acase-by-case basis. Engagement may take the form of:–– ESG issues being raised in a face-to-face company
meeting with management or on a company site visit–– a telephone conversation

–– a formal letter or email raising an ESG issue either forconsideration or requesting formal action, or–– a joint letter with other investors through acollaborative initiative.

15. Internal collaboration
CFSGAM held an offsite in Hong Kong for global
investment teams which was mostly based around theteams outlining what differentiates their investment
process. The Responsible Investment team ran asession on engagement and the potential for greatercollaboration across the teams.
During the discussion there was broad agreement thatengagement was valuable for investment teams and forclients by providing a better view on risk management
and management quality. The opportunity for improved
collaboration between investment teams was discussed
in order to better leverage the large scale of CFSGAM
when engaging companies in order to provide greater
influence. It is acknowledged, however, that in many
instances collaborative engagement is not an option due
to sensitivity around investment decisions.
CFSGAM’s investment teams have agreed to collaborate
more on ESG engagement. A list of companies that are
being engaged across the business is now shared across allof the investment teams globally and there are discussions
on where the teams may be able to collaborate. Eachteam also now completes a quarterly survey on theengagement they have had with companies. This allows
investment teams from across various asset classes andgeographies to collaborate and benefit from engagementthat takes place across the group.
This internal collaboration is coordinated by the
Responsible Investment team. This development issignificant, given many teams have different investment
strategies and in some ways actually compete with eachother. However, there is benefit in using our significant
global investment weight strategically, and there isrecognition that all teams will benefit if companies better
manage ESG issues.

16. Examples of engagement
Engagement is an important part of the investment
practices of all of CFSGAM’s investment teams. Reportingon voting and engagement activities is undertaken
twice yearly. These reports can be found on the
CFSGAM website.

Australian-listed major corporate
The Australian Equities, Core team engaged with the
Chairman of a major corporate during the period
regarding adjustments in the company’s governanceand sustainability process. The team noted thatthe corporation has a focus on improving customer
satisfaction and has improved structures within theorganisation to improve the focus on governance andenvironmental and social stakeholders. This positively
impacted the team’s view on management, given
the changes in the executive team and improving
relationships with the Government and community.
The team is concerned, however, that transparency
around remuneration and KPIs could be improved. Thisis the subject of ongoing discussions between CFSGAM
and the Chairman and other board members. The teamalso provided feedback on the company’s sustainability
report, suggesting there was potential to improve thecontent in order for the document to be a more usefulreflection of how management was incorporating ESG
practices across the organisation.

Major retailer
CFSGAM looks to encourage companies to achieve
industry best practice in their approach to energy andwater use. There was concern that some companies in
the retail sector were lagging behind, so CFSGAM looked
to engage with companies on these issues on site visits.
A site visit with the CEO of a major supermarket chain
gave the Australian Equities, Growth team confidence
that energy usage was a priority for the company andthat innovative ideas were being implemented to savecosts. For example, power-down automatically took
place at the time of store closing, blinds are pulled downover open chiller displays, heat from the refrigeration andair conditioning is redeployed to other areas of the store.

Airport operator
The Global Listed Infrastructure team met with a power
and infrastructure company who own the concession
to a major Indian airport. Part of the land within theconcession area currently contains slums where a large
number of people live. As the airport continues toexpand, residents of the slum will have to leave theirhomes and be relocated. The Global Listed Infrastructure
team encouraged the company to consider its longterm social licence to operate in the way it pursues its
development plans. The team continues to monitor thesituation with the company as it sees this as a potentiallysignificant social issue.

Agriculture company
An Asian agricultural company announced a discounted
placement to a select group of new shareholders. The
Global Resources team wrote to the company expressing
its disappointment at the company’s decision to
selectively place shares with investors that were not on
the register. The team received an immediate response
from the company, which gave it some comfort.
Following significant shareholder feedback, the company

25

Principle 2
continued

has stated that it will make all future capital raisingsavailable to all shareholders. Despite this, the teamremains cautious on the company as this has impacted
the company’s reputation.

Mining company
The Indonesian Equities team invested in a large mining
contracting company. Around mid-year it received news
that the company planned on acquiring a coal company
related to a business group with a reputation for poor

governance. After researching and finding out that thelisted company is related to the business group, the team
decided to sell its holdings. The Indonesian Equities teambelieves that the company is going to have unnecessary
price volatility because of its association with thebusiness group and its reputation for poor governance.
The below table provides an example of the types of
topics we engage with companies on. These examples
are a small selection taken from the fourth quarter, 2010.

SectorCountry

Engagement issue

Complete/ongoing

Behavioural change/
research process*Soft commodity
RetailHong Kong
Australia

Complete
Complete

Behavioural change
Research process

RetailAustralia

Ongoing

Research process

Insurance

Australia

Ongoing

Research process

Energy company

US/Australian region

Complete

Research process

Uranium exploration
Banking

Australia
Australia

Complete
Complete

Behavioural change
Research process

Manufacturing

Australia

Ongoing

Behavioural change

Food and beverage

Australia

Complete

Research process

Uranium exploration
Telecommunications

Australia
Australia

Ongoing
Complete

Behavioural change
Research process

Rail

Australia

Complete

Research process

Banking
Soft commodity

Australia
US

Complete
Ongoing

Research process
Research process

Engineering

Australia

Corporate governanceCommunity programs –store visit
Supply chain
management
Remuneration and KPI/
management indicatorsand risk management
Environmental andlandowner issues
Corporate governanceStaff satisfaction
and investment,
remuneration
LTI and bonus/
management KPI
structures plus reportingon sustainability
Remuneration andincentives
Corporate governance
Remuneration and board
structure
Safety records andmanagement
Board and management
Environmental,
corporate governance
Governance andmanagement

Complete

Research process* Behavioural change/research process denotes whether the engagement is attempting to achieve a change in management/
company actions or whether it is part of informing the research and investment process only.

26

Responsible investment report 201017. External collaboration
CFSGAM recognises the benefit of collaborating withother investors on engagement. In 2010, CFSGAM
participated in collaborative engagement on the Forest
Footprint Disclosure Initiative and encouraged otherinvestors to participate. CFSGAM also collaborated
through the PRI on a Carbon Disclosure Project
engagement program. Further detail on collaborative
engagement initiatives is covered under Principle 4
and Principle 5.

18. Engagement through voting
With more than US$155 billion invested in Australian andglobal equities, CFSGAM is a significant shareholder onbehalf of investors in many listed companies around theworld. Voting on company resolutions is an importantcomponent of shareholder responsibility, and CFSGAM
votes on all possible resolutions at company meetings.
CFSGAM is restricted from voting for the approval ofshare issues where it has participated in the placement.

Prior to voting, the relevant investment manager
and company equity analyst carefully consider eachresolution, with guidance provided by internal policy
and recommendations from a selection of independent
corporate governance research houses.
Shareholder resolutions voted on during 2010–– 1,541 company meetings–– 17,091 resolutions voted on
Resolutions supported 71.1%
Resolutions against 10.5%
Resolutions abstained 0.4%
Resolutions non-voting 18.0%

27

Principle 2
continued

Types of issues voted on: All votes

Non-voting
Director election
Executive remuneration
Non-executive remuneration
Issue of new shares
Remuneration report
Financial scheme/reconstruction of capital
Constitution/articles of association change
Appoint/reappoint auditor
Takeover or merger acquisition
Shareholder proposal
Shareholder proposal – environment
Shareholder proposal – social
All other proposals
Total
Types of issues voted on: Against votes only

Non-voting
Director election
Executive remuneration
Non-executive remuneration
Issue of new shares
Remuneration report
Financial scheme/reconstruction of capital
Constitution/articles of association change
Appoint/reappoint auditor
Takeover or merger acquisition
Shareholder proposal
Shareholder proposal – environment
Shareholder proposal – social
All other proposals
Total

28

Responsible investment report 2010

Number of votes

Per cent of total votes

2,920
5,807
602
475
385
643
70
669
822
134
187
35
52
4,290
17,091

17.1
34.0
3.5
2.8
2.3
3.8
0.4
3.9
4.8
0.8
1.1
0.2
0.3
25.1
100

Number of votes

Per cent of total votes

0
597
147
24
47
138
3
98
56
25
71
13
9
558
1,786

0.0
3.5
0.9
0.1
0.3
0.8
0.0
0.6
0.3
0.1
0.4
0.1
0.1
3.3
10.5

Direct investments

Engagement with co-investors

Principle 2 is also relevant to unlisted asset classes such as
property and infrastructure, where CFSGAM has a direct
investment in the asset. However, the implementationof this Principle is somewhat different from listed
investments, given the different nature of the ownership.

ESG issues are discussed both during the initial due
diligence acquisition phase and throughout the
management of the operation of the asset.

The relative lack of liquidity in unlisted investments
makes ESG issues potentially more material if not
managed proactively. As investors in unlisted assets,
CFSGAM typically takes a longer-term view than may be
the case with publicly traded equities.
The investment process for unlisted investments seeks to:–– price ESG risk as part of the consideration during theinitial transaction process–– incorporate ESG considerations into the due
diligence process–– incorporate ESG management through the governanceprocess, primarily through board representation, and–– continually monitor all aspects of the investments,
including consideration of ESG risks.

19. Direct infrastructure
As one of Australia’s first unlisted infrastructure investment
managers, CFSGAM has a long history of implementing
ESG issues into investment strategies, particularly as they
relate to risk mitigation and value creation.
For unlisted infrastructure investments, CFSGAM
generally seeks representation at the board level or
equivalent. CFSGAM is active on ESG issues through thisrepresentation or company engagement. CFSGAM seeks
to ensure that there are adequate sustainability policies inplace and that reporting against these policies takes place.
CFSGAM has developed a detailed ESG policy for its direct
infrastructure investments which outlines how assets
are engaged with, and how those assets should engage
relevant stakeholders. This policy will allow for greateralignment with clients’ long-term investment interests.
The CFSGAM Infrastructure investment strategy is
to typically manage a large enough interest in eachindividual business to enable CFSGAM Infrastructure
to add value through board and board committee
representation. If CFSGAM does not have a board seat,
it will seek to add value and influence management
decisions by actively exercising shareholder rights.
ESG issues are managed through the following activities:

Engagement with management
Regular discussions and site visits focus on business risks
and opportunities.

Engagement with clients
ESG opportunities and exposures are addressed at both
CFSGAM and client portfolio levels. All material ESG issues
are reported as part of mainstream client reporting in linewith the existing fund and mandate reporting processes.

Engagement with other stakeholders
CFSGAM encourages management within theinfrastructure businesses to engage relevant
stakeholders to understand any concerns they may
have. Key stakeholders generally include regulators,
local communities, unions, customers, government,
shareholders and suppliers.

20. Direct property
CFSGAM is an active owner in incorporating ESG into
ownership policies and practices in the managementof its direct property business and the Responsible
Property Investment strategy is endorsed by the board.
To support the implementation of this strategy, a
Direct Property Sustainability Policy and an Operational
Performance Strategy are in place. The Direct Property
business also has an Environment Policy, Risk Policy andResource Recovery Policy. A Green Lease strategy guides
the business in tenant engagement, and is instrumental
in assisting to manage tenant expectations, tenant
practices in occupation of our buildings, and building
tenant goodwill.

Challenges to implementation
The large scale and complex structure of our businessprovides challenges when capturing the success orotherwise of engagement activities. Given the autonomyof the investment teams in the business and thedifferent investment styles, it is very difficult to capture
the engagement that occurs in an efficient manner.
As a result, tracking our success is challenging.
This, combined with the fact that the actual outcomesof engagement are difficult to measure, means wecannot accurately monitor outcomes of engagement.
During 2010, we looked to improve collaboration
between our investment teams to better leverage off
the outcome of each team’s engagement. Following
an investment team offsite, it was agreed that, on
a quarterly basis, the Responsible Investment teamwill circulate a list of issues currently being engaged
on to ensure broader understanding of targetedissues and provide the opportunity to collaborate
where desired. We also expect this will give us better
reporting capability in 2011.

29

Principle 330

Responsible investment report 2010

We will seek appropriate disclosure on ESG issues
by the entities in which we invest

The most important activity undertaken for Principle 3 is direct
engagement with companies when providing feedback on their
existing reporting, or encouraging them to begin reporting.
CFSGAM welcomes these discussions and understands thechallenges that companies face in trying to meet all the various
stakeholders’ demands. There was a large increase in this typeof engagement by CFSGAM’s investment teams globally in 2010.
21. Company reporting
To ensure CFSGAM has adequate information to assess
the value at stake (risks and opportunities), CFSGAM
encourages companies to disclose their material ESG
risks and performance in keeping with emerging global
standards. More specifically, companies are encouraged
to provide the following information to investors:–– An articulation of the business strategy and the key
strategic drivers, and how ESG issues could impact thecompany’s ability to deliver on its strategy.
–– A description of the most relevant ESG issues for thecompany and the timeframe of any potential impact.
–– The governance process in place for managing ESG
issues (eg which ESG issues are managed by risk,
strategy, the board or operational management).
–– Information on whether and how externalities are
identified, measured and potential liabilities estimated(in the event that regulation were to internalise thatcost in future).
–– Relevant performance data to demonstrate theprogress and success (or otherwise) of the approach.
This should include the data points that are themost meaningful for the company and ideally would
be reported consistently year on year and acrosscompanies in the same sector to enable crosscompany comparisons. ESG performance data should
ideally be verified and related back to strategic drivers
and key risks and opportunities. Reference should bemade to the best practice reporting standard; forexample, the Global Reporting Initiative.
–– A discussion around materiality and how ESG issues
are being managed.
–– Quantification where possible of the relevant ESG
metrics and potential financial impacts.

–– Forward looking discussion on how ESG issues aregoing to be managed and how these issues may
impact the forward looking financial statementsof the company.
–– Identification of future ESG regulatory risks which
could impact the balance sheet; for example, throughasset impairment.
–– A simple concise summary of the key ESG issues
without marketing gloss.
CFSGAM consistently gets feedback from companies thatvery few investors ask for ESG information, particularlyin emerging markets. This may be partly because
companies often classify ESG issues as only environment
issues. Many engagements cover human capital issues;
however, companies often view this as a ‘normal
business’ discussion, rather than an ‘ESG’ discussion.
Questions that companies received through collaborative
initiatives or engagement are also often not seen as
investor driven.
A number of initiatives were undertaken during theyear to encourage transparency and disclosure on ESG
issues from companies. CFSGAM sees significant benefit
in collaborating with other investors and stakeholders
on matters of disclosure, as everyone benefits fromincreased transparency on ESG issues.
Value is added as an investment manager by analysing
ESG information; a competitive advantage cannot
be gained from the information itself. As a result, we
focus many of our efforts under Principle 3 throughcollaboration. Examples of some of the initiatives thatCFSGAM has undertaken are outlined below.

31Principle 3
continued

22. Engagement with the Hong Kong
Exchange and Clearing
We were invited to provide investor feedback to theHong Kong Exchange and Clearing (HKEx) as part of its
stakeholder consultation on ESG reporting guidelines
for companies listed in Hong Kong. In a meeting withrepresentatives from HKEx we provided an investor
perspective on a range of proposed indicators andlanguage of the guide. This is a new approach for the
Hong Kong market and provided the opportunity to leadother exchanges in guidance and requirements fromcompanies. We encouraged them to promote company
transparency on all material ESG issues, using a culturally
appropriate approach to the guideline language. We
believe stock exchanges have an influential role to playin encouraging better disclosure on ESG issues fromlisted companies, and maintaining rigorous best practicecorporate governance standards while executing
exchange and clearing services.

23. Asian Corporate Governance Association
CFSGAM continued its membership of the Asian Corporate
Governance Association (ACGA) in 2010. The ACGA is
an independent, non-profit membership organisation
dedicated to working with investors, companies andregulators in the implementation of effective corporate
governance practices throughout Asia.

24. Carbon Disclosure Project
CFSGAM is a signatory to the Carbon Disclosure Project(CDP) and a lead participant in the Australian Working
Group for the CDP through the Investor Group on
Climate Change. CFSGAM continues to participate in
the CDP as it harnesses the collective power of investors
globally to encourage better disclosure by companies.
More than 2,500 organisations in 60 countries now
measure and disclose their greenhouse gas emissions
and climate change strategies through CDP, so thatthey can set reduction targets and make performance
improvements. CFS Retail Property Trust, Kiwi Income
Property Trust, and the Commonwealth Property Office
Fund all disclose to the CDP.
Through the PRI, we are participants in the CDPEngagement Steering Committee. This steeringcommittee aims to encourage improved disclosure
through the CDP, thereby improving the quality andquantity of information available to investors.
The focus of engagement is to encourage companies
that operate in energy-intensive sectors to take action on
climate change and report this through CDP. Specifically,
it requests that companies:–– disclose a greenhouse gas emissions inventory withscope 1 and 2 emissions, and32

Responsible investment report 2010–– establish and disclose emissions reductions targets
and activities.
These actions can be considered key indicators of companies’
preparedness for climate change and potential regulatorychanges in the future. The steering committee aims to
support the CDP by encouraging dialogue with companies in
the months prior to the annual CDP questionnaire. Following
the CDP deadline, responses are reviewed to gauge
improvement and the impact of the engagement. In 2010,
the group engagement included about 90 companies incollaboration with about 35 investors.

25. CDP Water Disclosure ProjectIn 2011, the CDP Water Disclosure Project will be
requesting information on the risks and opportunities
companies face in relation to water on behalf of 354
investors with assets of US$43 trillion. This includes water
usage and exposure to water stress in companies’ own
operations and in their supply chains and on companies’
water management plans and governance. CFSGAM has
agreed to participate in this project.

26. Extractive Industries Transparency Initiative
The Extractive Industries Transparency Initiative (EITI) wasestablished in 2003 to support improved governancein resource-rich countries through the full publicationand verification of company payments and government
revenues from oil, gas, and mining. The EITI arose following
public concerns about how much companies are paying,
and what countries are doing with the funds. About 30
countries are currently participating to help protect theirsocial licence to operate, including Yemen, Peru, Albania
and Nigeria. The EITI helps companies improve stakeholder
and community relations, mitigates reputation risk andhelps provide transparency to investors.
CFSGAM is a signatory to the EITI because it contributes
towards improvements in governance and transparency
in emerging markets in which we invest. Country
reporting is expected to provide a better understandingof sovereign and political risk which may be particularly
useful for our Credit and Fixed Interest investment teams.
In late 2010, we wrote to 35 of the largest Australian
resources companies that operate in EITI countries orcountries listed by Transparency International as having
a perception of corruption, and encouraged them toreport to the EITI framework. This engagement willcontinue in 2011.

27. Financial Services Council ESG
Working Group
During 2010, CFSGAM participated in the Financial
Services Council (FSC) ESG Working Group. This working
group was established to help drive existing FSC workon appropriate investee company disclosure related

to ESG issue exposure and management. One of thestrategic priorities in the group’s first year is to release
an ESG reporting template. This template aims to provide
guidance to ASX 200 listed companies on the minimum
level of reporting expected of all companies, regardlessof size or sector.
It is still a challenge that most investment managers
are not asking for the necessary ESG information.
There needs to be a critical mass of investors to drive
companies to produce the information needed. It isenvisaged that this reporting template will assist withsimplification of reporting, thus allowing for moremeaningful analysis of issues and a better understandingof the business impacts of ESG factors. The target
audience is for those companies not currently reporting
ESG issues or those with minimal reporting.

28. Forest Footprint Disclosure Project
The Forest Footprint Disclosure Project (FFDP) is a
UK Government-supported initiative, created to help
investors such as CFSGAM identify how an organisation’s
activities and supply chains contribute to deforestation,and link this forest footprint to the company’s value.
Modelled on the Carbon Disclosure Project, the FFDP
aims to create transparency and shed light on a key
challenge within investor portfolios, where currently
there is little quality information. CFSGAM became asignatory to the FFDP in early 2009.

29. PRI Cluster Munitions GroupCFSGAM has participated in the PRI Cluster Munitions
Group. This Group is made up of nine institutional
investors with approximately US$3.8 trillion total assets
under management and who are all signatories to the PRI.
These signatories recognise that their international
investment universe may include companies thathave involvement in the manufacture of weapons
or component parts that contravene the Convention
on Cluster Munitions 2008 or the Ottawa Treaty.
The Convention on Cluster Munitions and the Ottawa
Treaty prohibit the use, production, stockpile andtransfer of cluster munitions and anti-personnel mines.
The ultimate aim of the PRI Cluster Munitions Group is
to establish a definitive list of such companies in orderto produce a factual and widely-accepted list for use
amongst the investment community.
As a part of this process, the investor group is
actively collaborating through research and company
engagement to gain greater clarity on company
exposure to cluster munitions or anti-personnel mines,
to better inform their investment decisions and also
to ensure compliance with legislation prohibiting
investment in such companies where applicable.

30. Enhancing business reporting; Business
Reporting Leaders Forum
In 2010, CFSGAM participated in the Australian Business
Reporting Leaders Forum (BRLF). The BRLF is a multistakeholder group, established by the Society forKnowledge Economics, to explore the interest of concerned
stakeholders in establishing a network to advance Australia’s
business reporting practices and processes. CFSGAM was
one of the investor participants in this roundtable.
Attendees included Chief Financial Officers fromsome of the 100 largest Australian companies, public
sector policy leaders, standard setters, academics andrepresentatives from CFSGAM.
The aim was to confirm the practical problems thatreporting entities experience with the volume, timing
and relevance of the information they are required toprepare for stakeholders, and then discuss potential
solutions to reduce cost and improve timeliness andrelevance of reporting.
There was also discussion on the benefits of establishing
the BRLF in Australia to engage in this global process
and progress the agenda. CFSGAM supported thedevelopment of this forum primarily because of
the involvement of the CFO community, who havetraditionally been a largely silent group in the discussions
around sustainability reporting. With the involvementof CFOs, there should be a high level of integration ofsustainability discussion into company strategy.
The BRLF will seek to collaborate with Australian
stakeholders to promote and drive the development
and implementation of an integrated business reporting
framework. The purpose of the BRLF is to collaborate
with Australian stakeholders to promote and drive thedevelopment and implementation of an integrated
business reporting framework, to reduce complexityand enable efficient allocation of capital.

31. Direct infrastructure ESG reporting
CFSGAM’s active investment management typicallyinvolves taking a seat on the board of directors of thecompany, participating in the planning and budgeting
process, selecting management and maintaining ESG andreporting standards. By taking active roles on the boardsof our invested companies, CFSGAM is fully informed of
the current asset condition and applicable risks.
Through regular and ad hoc reporting, investors are kept
appraised of policies and procedures that are implemented
to mitigate and manage ESG risks and which help toprotect the assets’ social licence to operate.

33

Principle 3
continued

Case study – Origin Energy
An example of the feedback CFSGAM provides tocompanies on their suitability reporting is the dialogue
with Origin Energy. CFSGAM discussed what information
investors need to get a better understanding of ESG
issues. The outcome of this engagement was featured
in the Origin Energy 2010 Sustainability Report whichis reproduced below.
Understanding the drivers of long-termbusiness performance
Traditional financial analysis is based on the assessmentof a company’s current metrics and financial accounts,
with some view of the value of projects going forward.
The Principles for Responsible Investment go beyond
this, to integrate traditional financial analysis withsustainability metrics, in order to make investment
decisions today about which companies are likely toperform well in the longer term.
Colonial First State Global Asset Management’s Amanda
McCluskey, who has carved out a successful career insustainable investment for more than a decade, believes
understanding a company’s approach to sustainability
is one of the best ways to do this.
In her role at Colonial First State, Amanda works with
the investment teams across the company’s global asset
management to help them identify the environmental,social and governance issues that are relevant toassessing the prospective companies in which they
invest. By fully understanding these issues, and theirpotential impact on a company’s value, the investment
teams can ensure they take on the appropriate levels ofrisk for any investments they make.
We asked Amanda what she looks at when assessing acompany’s prospects of performing well in the long term.
“One of the first things I look for is companies thathave taken a really good consideration of the different
stakeholders who can impact on their ability to deliver ona successful business strategy. This means knowing whatthese stakeholders are seeking to understand about thecompany, and then managing their needs effectively, inorder to protect their licence to operate,” Amanda said.
This is an important first step, as different industries
can require a greater focus on a different groupof stakeholders.
“If we look at the example of an airport operator, they
have very physical impacts on the people who are in theimmediate vicinity of their operations as these people
hear the planes. Whereas for a company focused onretailing, the most important thing is their customers,”
she said.

34

Responsible investment report 2010

Beyond stakeholders, Amanda said screening forsustainability involves understanding the issues thatare relevant to a company’s business strategy, andthen looking at how the company demonstrates anunderstanding of those issues and puts in place plans tomanage issues. There also needs to be demonstrated
performance through various data or metrics to giveconfidence that the company is actually doing a goodjob managing the issues. In order to do this, Colonial
First State depends primarily on its own research, butalso uses third party economic, social and governancedata providers to help collate the information.
“If we use the energy sector as an example, clearly one of
the important longer-term issues is carbon emissions. We
would want to understand what companies in the sector
are doing to manage their energy mix, including how
they are weighting their business towards high-carbon or
low-carbon energy sources. Then we are going to look at
the performance data to prove whether the company isactually delivering on its sustainability issues.”
When asked if there are any specific criteria that tend to
be really good indicators to top performing companies
over the long term, Amanda is generally pretty clear
about what’s at the top of her list.
“It always needs to be company specific, but if we
could have our dream metric with which to measure allcompanies, the first one would be staff turnover. Beyond
that, for companies that have a significant environmental
impact, we would select an environmental metric and thenfor more people intensive businesses likes banks or financial
institutions, it would be staff engagement,” she said.
The quality of management also plays an important rolein company performance; however, this is a tougher
thing to measure.
“You actually need to look at the company’s performanceon specific sustainability issues in order to get some rigour
around measuring the quality of management. You can’t
just ask yourself is the CEO a good bloke,” Amanda said.

Challenges to implementation
The biggest challenge to greater disclosure is the mixed
messages companies get from investors as it relates to
ESG information needs. Companies often complain to
us that investors either don’t care about ESG or they
don’t know what they want. Until investors speak with aunited voice this will continue to be a challenge. We do
see this united voice emerging however. With the moveto integrated reporting globally and the collaboration
between the Australian Council of Superannuation
Investors (ACSI) and the FSC in Australia we do expect
companies to be provided with better guidance from theinvestment community on their needs and requirements.

Principle 435

We will promote acceptance and implementationof the Principles within the investment industry

CFSGAM actively engages in dialogue, lobbying and initiatives
pertaining to government policy and industry regulations, primarily
through the Investor Group on Climate Change, the Financial Services
Council, the Asian Corporate Governance Association, the Property
Council of Australia, and the Green Building Council of Australia.
CFSGAM considers ESG issues when selecting proxyvoting specialists, investment research and internal
operations. Service providers, clients and peerorganisations are encouraged to become PRI signatories
and CFSGAM encourages the wider asset management
industry to consider ESG issues. CFSGAM participatedin a number of engagement initiatives to promote
acceptance of the Principles within the investment
industry during the year.

The development of the Code’s implementation acrossthe industry will be monitored and CFSGAM will ensurethat it is always working towards, or achieving, global
best practice. CFSGAM also continuously considers ourposition on the need to become a signatory to the Code.

32. UK Stewardship CodeNine Chief Executives from Australia’s leading
superannuation fund and funds management
organisations, including the CEO of CFSGAM, haveformed a panel to pursue clarity and certainty on
climate change policy, including the design of acarbon price in Australia.

CFSGAM followed the development and introduction of
the UK Stewardship Code (the Code) with interest during
the year. After much consideration, CFSGAM decided
not to become a signatory to the Code at this time.
Representatives from CFSGAM attended a presentationin London introducing the Code and acknowledge thatit aims to enhance the quality of engagement between
institutional investors and companies.
In forming a view, representatives from CFSGAM met
with Stephen Hadrill, CEO of the Financial Reporting
Council (FRC) (UK), and discussed the ‘business as usual’alignment with the principles behind the Code andactive engagement as investors. Direct dialogue withcompanies is a key way to assess management quality
and the risks and opportunities of the companies.
CFSGAM exercises its voting rights thoughtfully, withdiligence and care. CFSGAM believes the PRI provides
a framework and forum for better engagement, andbelieves that there is little, if any, obligation in the Codethat is not already covered by the PRI.
CFSGAM reviewed the ‘Statement of Compliance’ to theCode written by other investment managers and believes
this view is supported, as many of the managers that havesigned the Code have simply referenced existing activities.
In addition, concern was expressed to the FRC about thestrength of the Code and ability for it to make genuine
improvements to real stewardship by investors. There is arisk that the absence of a review mechanism, combinedwith the number of signatories to the Code, may lead tomany signatories failing to fulfil the Code’s intention.

36

Responsible investment report 2010

While CFSGAM has not signed the Code, our statementof compliance can be viewed on the FSI website.

33. CEOs seek certainty on carbon pricing

The panel is the first group of Chief Executives in theAustralian investment sector dedicated to addressing theuncertainty over carbon pricing. It will engage with allpolitical parties on Australia’s carbon pricing framework.
It will also act as a reference group for the Investor
Group on Climate Change (IGCC) input to the Federal
Government’s Business Roundtable on Climate Change.
Formation of the Investor CEO Panel on Climate Change
extends the current work of the IGCC and sends a clear
signal to policymakers that the investment community
wants a resolution on carbon pricing. IGCC will continue
to work on all aspects of the investment impact ofclimate change including carbon pricing, complementarymeasures to a carbon price, company disclosure andinvestor readiness. Most importantly, investors requirepolicy certainty.

34. Government engagement
Representatives from CFSGAM met with Minister
Bowen, representatives of the superannuation andfunds management industry and the policy adviser
from FSC. The purpose of the meeting was to outline
the industry’s position on the need to mainstream ESG
into the investment process and also the need for APRA
to provide clarity on ESG and fiduciary duty, given theongoing concern by some Trustees. The difference
between responsible investment and ethical investing
was also discussed at the meeting and it is hoped there
will be improved engagement in future.

35. Global Reporting Initiative roundtable
CFSGAM hosted a roundtable for the Australian
representatives of the Global Reporting Initiative (GRI).
The objective was to better inform the GRI of the needsof investors in terms of sustainability reporting fromcompanies. Representatives from all aspects of the
supply chain were invited, such as Christian Super, First
State Super, JANA, other fund managers and a sell side
representative from Deutsche Bank. The key messages
to the GRI were that investors need factual reportingthat can be integrated into financial reporting, while
companies need to better identify their stakeholders
and who they are reporting to. The role of the GRI is
to facilitate consistent and comparable data sets.

36. The Property Council of Australia and theGreen Building Council of Australia
CFSGAM is an active member of the Property Councilof Australia (PCA), with both the Head of Sustainability(Property), and the Sustainability Manager Property,
being members of the National Sustainability Roundtable
and the Sustainable Development Committee (NSW and
VIC). As such, CFSGAM actively promotes and encourages
other investment organisations to implement ESG
principles in their ownership models. Through theseorganisations, CFSGAM has actively lobbied governmenton the proposed policy formation and on practicalaspects for implementation of these policies. Suchpolicies and regulation include the National Greenhouse
Energy Reporting (NGERS) act as well as mandatory
disclosure of energy efficiency in office buildings.

Members of these committees, representing other direct
property asset owners, published an industry guide todisclosure under the NGERS Act. This is available on the
PCA website, and assists other owners in completing
their ESG legislative obligations through the reportingof emissions.
CFSGAM was active in working with the PCA to ensure
a practical approach to implementing the Commercial
Building Disclosure (CBD) program, which came into
effect in 2010. A selection of CFSGAM’s properties weremade available to the Federal Government to enable
them to work through the practicalities of the ‘lighting
tool’ part of the legislation in order to help themrefine an implementation approach which is practicalin application.

37. Australian Green Infrastructure Council
CFSGAM was the first, and remains the only, investment
member of the Australian Green Infrastructure Council(AGIC), a member-based industry association committed
to the delivery of more sustainable outcomes fromthe design, construction and operation of Australia’s
infrastructure. A representative from CFSGAM’s Direct
Infrastructure team is Deputy Chair and a Director of
AGIC. Other members of AGIC include:–– NSW Department of Environment, Climate Change
and Water–– Local Government Infrastructure Services–– Brisbane City Council–– Clayton Utz–– Bovis Lend Lease–– Worley Parsons–– Queensland Government–– Port of Brisbane–– Port of Melbourne–– NSW Government Transport Construction Authority–– Queensland University of Technology–– QR National37

Principle 4
continued

38. External presentations
Employees from across CFSGAM have presented at a number of key industry forums on various aspects of ESG
integration, examples of which are given below.

38

Conference nameSpeaking topic

AFR Carbon Reduction
Conference 2010

Carbon emission profiles and investment opportunities, energy efficiency andgovernance and risk management systems

Bloomberg ESG Forum: Socially
Responsible Investing for your FundSRI investing strategies, challenges of SRI, competitive and sustainable returns, anddrivers of industry growth

Carbon Disclosure Project Briefing

CDP Panel on investor perspectives on CDP

CEDA’s ‘Renewable Energy’Growing Australia’s renewable energy industry – investment challenges and opportunities

Citi Group Investment
Conference

CFSGAM approach to Responsible Property Investment

Cleantech Conference

New and emerging Cleantech funds, market performance and accessing
institutional investment

Committee for Economic
Growth of Australia

Panel discussion: Growing Australia’s renewable energy industry – investment
challenges and opportunities

CSR Asia Summit 2010

What investors are looking for on ESG issues

Environment Institute of Australia
and New Zealand

Enabling the environmental practitioners to articulate clearly the risks of climatechange to their organisation and develop adaptation pathways

ESGRA Research Awards

Recognising excellence in ESG research and service

Financial Services Partners
Professional Development

Sustainable investing and the integration of sustainability into investment analysis

Fourth Annual China Investment
Management Summit

ESG and socially responsible investment in Chinese securities

Girls Education Conference

Global and Ethical Responsibility PanelMorgan Stanley Bi-Annual
Environment Day

CFS Retail Property Trust (CFX) responsible property investment

PCA Outlook 2010

Going Green in the Retail Sector

PRI in Person Conference

Improving corporate disclosure in emerging markets

Tasmania Property Council
Tasmanian Future Directions event

Challenges and drivers of responsible investment; what you aim to achieve in next five years

UNEP FI Summit

How the finance sector and capital markets have to act differently as an industry or
as individual organisations to facilitate low-carbon growth. Is low-carbon growth highenough on governments’ agenda and are incentives ambitious enough to unlock
low‑carbon investment at scale

UNPRI Meeting – Launch of PRICountry Network

CFSGAM implementation of PRI

Women in SuperWhy we care about ESG as mainstream investors, how it differs for different
investment strategies and difficulties with ESG integration

Green Cities 2010

Retail property – ‘which is the most sustainable asset class’, session

PRI Webinar Responsible
Property Investment

Tenant engagement session

UNEPFI Property Working GroupAn Australian Member’s Perspective

UNEPFI Property Working Group

Annual meeting of members in Geneva

Responsible investment report 2010

39. Balanced scorecard approach
The PRI are an important part of CFSGAM’s businessstrategy and are used to set key performance indicators
throughout the business. CFSGAM’s effectiveness in
implementing the PRI are embedded into the company’sbalanced scorecard, with the target of achieving top
quartile ranking across five of the six Principles by the2011 reporting year.
Challenges to implementation
There remains a persistent misunderstanding by thebroader market that ESG issues are socially responsibleor ethical issues that are only of interest to a niche groupof investors that want to invest in accordance with theirmoral or ethical beliefs. These investors believe that theirinvestments may be compromised through a reductionin their investment universe or a preference towards
environmentally friendly companies, rather than ones
that will provide the best possible investment outcome.
This isn’t the case for the mainstream investment
managers that have signed the PRI, who effectively use
ESG as a further means to measure the potential impact
on long-term investment performance.

This creates a challenge for ‘mainstreaming’ because
there is a pre-conceived notion of what ‘responsible
investors’ are looking to achieve that sometimes limits
the effectiveness of engagement. For example, whenengaging regulators, if they think an investor is seeking
guidance around fiduciary duty that broadens the
mandate away from investment returns to a ‘social
outcome’, they are less likely to listen to an investor’s
perspective. As a result, engagement of responsible
investment issues takes longer because a restatingof the objectives has to be made.

39

Principle 540

Responsible investment report 2010

We will work together to enhance our effectivenessin implementing the Principles

During 2010, CFSGAM continued to communicate the businesscase for the PRI and promoted a deeper understanding of ESG
issues through education in the industry. CFSGAM participated ina number of engagement initiatives and associations during theperiod to enhance the industry’s effectiveness in implementing
the PRI and contributed to a number of thought pieces, articles
and academic texts.
This collaboration helps CFSGAM to stay abreast ofdevelopments in the sustainability and responsible
investment arena more broadly, and also helps CFSGAM
to work with like-minded investors to facilitate ongoing
improvements in the industry’s approach to sustainability
and responsible investment.

Financial Services Council

40. Collaborative initiatives

ASFA Investment Policy Sub Committee

CFSGAM’s Responsible Investment team members
and executives from across the organisation are wellregarded and active participants in their field andcontribute their expertise to a number of third party
organisations including:

ESG Research Australia
Board member
Chair of Evaluation Committee

Green Building Council of Australia
Member of the Board of Directors

Investor Group on Climate Change

Member of the Investment Committee
Member of the ESG working Group

Australian Green Infrastructure Council
First Deputy Chair and Director
Committee Member
Other collaborative initiatives that CFSGAM participatedin, or continued to be a member of, during 2010 include:–– Asian Corporate Governance Association–– Association for Sustainable & Responsible Investment
in Asia (founding member)–– Carbon Disclosure Project–– Extractive Industries Transparency Initiative–– International Corporate Governance Network–– Forest Footprint Disclosure Project, and–– Water Disclosure Project.

Founding Deputy Chair

41. Substantial initiatives

Member of the CDP Working Group

Launch of the PRI Country Network

Member of the Research Working GroupTo support signatories in the implementation of the
PRI, the Australian Council of Superannuation Investors(ACSI), Financial Services Council (FSC), EPA Victoria, theResponsible Investment Association of Australia (RIAA)
and Cbus (as David Atkin in the co-chair of the PRI) haveformed a PRI Australian Country Network. The aim of thisgroup is to develop and deliver a consistent approach toproviding advice and support to PRI signatories in Australia.

Member of the Property Working Group

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

United Nations Environment Programme
Finance Initiative
Member of the Global Steering Committee

A representative from CFSGAM’s Responsible Investment
team was involved to present at the inaugural meetingsof the network on the activities CFSGAM has undertaken
in Australian equities and CFSGAM continues to beengaged in the network.

Co-Chair, Property Working Group
Member of the Asset Management Working Group41

Principle 5
continued

Hong Kong roundtable on carbon finance
CFSGAM was invited to participate in a roundtableon clean infrastructure which was hosted by the
Asian Development Bank and the UK Government’s
development arm, DFID. The purpose of the roundtable
was to discuss how development institutions may
facilitate a larger flow of capital into clean infrastructurein Asia. Specifically, how funds should be structured, howrisks can be managed and which fund managers may bewilling to work with the development banks. The Headof Infrastructure Investment represented CFSGAM at
the roundtable.

NABERS tool development
CFSGAM has trialled and piloted the new tools developedby the NSW Department of Environment, Climate
Change and Waste (DECCW) for Indoor Environment
and Waste. In the case of NABERS Indoor Environment,
CFSGAM was able to assist by providing feedback andexamples which assisted DECCW to change the protocol.
This resulted in an improved tool for the property
industry to adopt.

42

Responsible investment report 2010

With regard to the NABERS Waste tool, CFSGAM has
provided direct feedback and assistance to DECCW
to help it understand the practical limitations of thecurrent tool. CFSGAM has offered further assistance tochange the protocol to be more industry meaningful
and easily adopted.

Challenges to implementation
The biggest challenge to Principle 5 is finding the time
to participate in all the various initiatives and prioritisingthose that are the most important. It is clear that
executives from across the group spend considerable
time on ESG initiatives. For many of these initiatives tobe successful there needs to be greater participationfrom across the industry. In 2011, CFSGAM will be
undertaking a review of all of the collaborative initiatives
it participates in to ensure maximum possible value
is added.

Principle 6

43

We will each report on our activities and progress
towards implementing the Principles

CFSGAM seeks to be fully transparent in its approach to implementing
the PRI. It is important to keep stakeholders informed on progress
and CFSGAM has undertaken a number of steps to raise awareness of
ESG initiatives. All current policies and reports are publicly available on
the company website, and mainstream communications now feature
CFSGAM’s approach to sustainability and responsible investments.
42. Responsible investment report
In 2010, CFSGAM was pleased to announce the releaseof its third annual responsible investment report, forthe calendar year 1 January to 31 December 2009.
CFSGAM produces this report to encourage discussion
with stakeholders, increase awareness of challenges
and opportunities and to provide transparency on theprocesses taken to implement the PRI.

DPIF is committed to promoting change within
the industry and to facilitating further advances insustainability initiatives not just within the fund’s
portfolio, but by the broader property industry andits stakeholders. DPIF will continue to drive operating
efficiencies within its properties, while increasing the
focus on improving tenant engagement and fostering
improved tenant/landlord partnerships.

43. Direct property reporting

44. Listed property reporting initiatives

The Commonwealth Property Office Fund (CPA) and
CFS Retail Property Trust (CFX) annual reports cover
the responsible property investment and sustainability
initiatives taking place across CPA’s and CFX’s property
portfolios. Both CPA and CFX report on how they have
performed and what the benefits to investors have beenin undertaking sustainability and environmental initiatives.
The reports outline how the funds’ daily operations andapproach to business help drive long-term sustainablevalue. The key philosophies underpinning the engagementin sustainability practices are consistent with CFSGAM’smembership of the PRI. The sustainability component of
the report demonstrates how the funds have upheld the
PRI and monitored its impacts on the environment anddeveloped relationships with stakeholders.
CPA and CFX incorporated their ESG reporting into
the annual report, rather than producing a standalone
sustainability report. This is an important step towards
the mainstreaming of ESG issues as they should not beviewed by investors in isolation from more traditional
financial measures and reporting.

Direct Property Investment Fundsustainability report
The Direct Property Investment Fund (DPIF) released
its third sustainability report to investors on thesustainability initiatives undertaken in the 2009–10
financial year and its plans for the future. While thisis only the third official report to investors on these
activities, DPIF has been actively focused on managing
ESG issues for many years.

44

Responsible investment report 2010

Australian SAM Sustainability Index
Australian SAM Sustainability Index (AuSSI) tracks theperformance of Australian companies that lead theirindustry in terms of corporate sustainability. Based on athorough assessment of economic, environmental andsocial criteria, the AuSSI comprises the top sustainability
driven companies from 21 industry clusters covering
the entire Australian economy. CPA was recognised as
the leader for the Real Estate Investment Trusts Cluster
by AuSSI. CPA and CFX have been listed on this index
since 2005.

Carbon Disclosure Leadership Index
In 2010, CPA was pleased to announce that it was amember of the Carbon Disclosure Leadership Index(CDLI) 2010. The CDLI represents companies with theclearest consideration of business-specific risks andopportunities and the best internal data management
practices for understanding greenhouse gas emissions
and energy use. CPA and CFX have been listed on thisindex since 2006.
CPA is also the only real estate entity to be identified as aleader in the new Carbon Performance Leaders category.
Being the only real estate entity named as a Carbon
Performance Leader is a significant achievement for theFund and recognises CPA’s long-term commitment tosustainability and responsible investment.

Dow Jones Sustainability Index

Client questionnaires

The Dow Jones Sustainability Index (DJSI) tracks thefinancial performance of the leading sustainability-driven
companies worldwide. Currently 70 DJSI licences areheld by asset managers in 16 countries to manage avariety of financial products including active and passive
funds, certificates and segregated accounts. CPA and
CFX have been listed on this index since 2003 and2004 respectively.

In 2010, there was a marked increase in focus on ESG
issues and considerations in investor communications
which reflects the importance that funds and investors
now place on sustainability and responsible investment.
A number of Requests for Information were completed
specifically in relation to ESG practices and the PRI survey.

Environmental Real Estate Index
CPA and CFX ranked third and fourth respectively
on the Environmental Real Estate Index (EREI) for
the top Australian listed property companies. This
index measures the environmental performance ofthe commercial real estate sector globally. The EREI
produced its inaugural report in 2009.

Responsible investment website
CFSGAM’s responsible investment website includes
information on our commitment to sustainability, links
to all current policies and reports, latest news andresearch on sustainability and responsible investment in
the business and profiles of the responsible investment
team. CFSGAM’s responsible investment website can beaccessed at www.cfsgam.com.au/RI.aspx.

FTSE4Good Index
The FTSE4Good Index measures the performance ofcompanies that meet globally recognised corporate
responsibility standards and facilitates investment inthose companies. Both CPA and CFX are listed on the
FTSE4Good Index. CPA and CFX have been listed on thisindex since 2005 and 2001 (inception) respectively.

Corporate governance reporting updates
As one of Australia’s largest asset managers, CFSGAM isan active representative of major shareholders in many
Australian listed companies. CFSGAM uses its influence
to encourage best practice corporate governance in thecompanies in which we invest and produces a twiceyearly report to provide an update on our corporate
governance practices and activity. The corporate
governance update outlines how we voted on key
issues such as director elections/re-elections, executive
remuneration and non-executive remuneration andprovides case studies of engagement.

45

Appendix A
Supporting policies, reports and statements
Responsible investment policy statement
First State Investments stewardship statement
CMIL corporate governance report, June 2010 – unlisted property funds
CFSAMAL guidelines and principles for corporate engagement on governance, environment and social issues
CFSMPL and its corporate governance practices – unlisted funds
Climate change position statement
CMIL and its corporate governance practices – listed funds: CFX and CPA
Direct property sustainability policy
Direct infrastructure corporate engagement guidelines summary

46

Responsible investment report 2010

Appendix B
The six Principles for Responsible Investment
Principle 1
We will incorporate ESG issues into investment analysis and decision-making processes.
Possible actions

Reference*

Address ESG issues in investment policy statements

1

Support development of ESG-related tools, metric, and analyses

2, 3, 4

Assess the capabilities of internal investment managers to incorporate ESG issues

11, 12 ,13Assess the capabilities of external investment managers to incorporate ESG issues

N/A

Ask investment service providers (such as financial analysts, consultants, brokers, research firms or ratingcompanies) to integrate ESG factors into evolving research and analysis
Encourage academic and other research on this theme
Advocate ESG training for investment professionals

7, 9
5, 6, 810

Principle 2
We will be active owners and incorporate ESG issues into our ownership policies and practices.
Possible actions

Reference*

Develop and disclose an active ownership policy consistent with the Principles

1

Exercise voting rights or monitor compliance with voting policy (if outsourced)

18

Develop an engagement capability (either directly or through outsourcing)

15

Participate in the development of policy, regulation and standard setting (such as promoting
and protecting shareholder rights)
File shareholder resolutions consistent with long-term ESG considerations
Engage with companies on ESG issues

27, 29, 32-37
18
16, 19Participate in collaborative engagement initiatives

17

Ask investment managers to undertake and report on ESG-related engagement

N/A

Principle 3
We will seek appropriate disclosure on ESG issues by the entities in which we invest.
Possible actions

Reference*

Ask for standardised reporting on ESG issues (using tools such as the Global Reporting Initiative)

21, 24-28

Ask for ESG issues to be integrated within annual financial reports

21, 27

Ask for information from companies regarding adoption of/adherence to relevant norms,
standards, codes of conduct or international initiatives (such as the UN Global Compact)

21, 29Support shareholder initiatives and resolutions promoting ESG disclosure

23–31* ‘Possible actions’ are takenfrom guidance provided by the
PRI to help signatories fulfil theirfiduciary obligations under the
PRI. Where actions have beenaddressed by CFSGAM, they arereferenced by a number before
the sub-section heading.

47

Principle 4
We will promote acceptance and implementation of the Principles within the investment industry.
Possible actions

Reference*

Include Principles-related requirements in requests for proposals (RFPs)

N/A

Align investment mandates, monitoring procedures, performance indicators and incentive
structures accordingly (for example, ensure investment management processes reflect
long‑term time horizons when appropriate)39

Communicate ESG expectations to investment service providers

38

Revisit relationships with service providers that fail to meet ESG expectations

32

Support the development of tools for benchmarking ESG integration

32

Support regulatory or policy developments that enable implementation of the Principles

33–37

Principle 5
We will work together to enhance our effectiveness in implementing the Principles.
Possible actions

Reference*

Support/participate in networks and information platforms to share tools, pool resources,
and make use of investor reporting as a source of learning

40

Collectively address relevant emerging issues

41

Develop or support appropriate collaborative initiatives

41

Principle 6
We will each report on our activities and progress towards implementing the Principles.
Possible actions

Reference*

Disclose how ESG issues are integrated within investment practices

42–44Disclose active ownership activities (voting, engagement, and/or policy dialogue)

42–44

Disclose what is required from service providers in relation to the Principles

42–44

Communicate with beneficiaries about ESG issues and the Principles

42–44

Report on progress and/or achievements relating to the Principles using a ‘Comply or Explain’ approach

42–44

Seek to determine the impact of the Principles

42–44

Make use of reporting to raise awareness among a broader group of stakeholders

42–44

1

Note:

1. The Comply or Explain
approach requires signatories
to report on how they
implement the Principles, orprovide an explanation where
they do not comply with them.
* ‘Possible actions’ are takenfrom guidance provided by the
PRI to help signatories fulfil theirfiduciary obligations under the
PRI. Where actions have beenaddressed by CFSGAM, they arereferenced by a number before
the sub-section heading.

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