For professional/institutional clients only

Responsible Investment
and Stewardship
Annual Report 2016

First State Investments operates as Colonial First State Global AssetManagement in Australia. The entire company is collectively
referred to as First State Investments in this report.

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EX2900_0516_MR

Contents
Foreword
Our Organisation
Our Approach to Responsible Investment and StewardshipThree Year Strategy Review
2015 in Review – Progress Against Our Strategic Goals
Investment Team Profiles
Unlisted Infrastructure
Global Listed Infrastructure
Global Property Securities
Global Resources
First State Stewart Asia
Indonesian Equities
Australian Equities, Growth
Australian Equities, Core
Realindex Investments
Australian Fixed Income and Global Credit
Emerging Markets Debt
Asian Fixed Income
Multi-Asset Solutions
Unconstrained Global Fixed Income
Improving Our Climate Risk Reporting
Industry Collaboration
Appendix 1 – Companies Subject to the Cluster Munitions Policy
Appendix 2 – RI and ESG Committees
Appendix 3 – RI and Stewardship Measures
Contacts

2
4
6
8
9
12
14
16
18
20
22
24
26
28
30
32
34
36
38
40
41
43
44
45
47
IBC

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

1Foreword“We have taken the step
to integrate ESG data into ourEnterprise Data Warehousesystem. This means we willsoon be able to easily analyseand report on the ESG ratings
across our portfolios...”“We are also pleased to reportthat despite a significant
gender pay gap across manyindustries, our analysis showsthat gender pay equality exists
in our organisation...”2

Across our global business we regularly engage
with our diverse client base and industry peers.
These conversations demonstrate to us that thefocus and importance placed on responsible
investment (RI) and sustainability continues togrow. We have strived to be at the forefrontof RI practices for many years now, and themomentum that responsible investment has
built within the global investment community
is very pleasing to see.
In previous reports, we have reported against
our three year RI strategy and the progressthat has been made as part of this initiative.
While 2016 will mark the end of this three year
journey, our work is by no means done. We arepleased to outline our strategy for continued
improvement and growth in this report andwelcome your feedback on it. 2016 marks thenext chapter in our journey as we aim toconsolidate and extend our position as a
global leader in RI and stewardship.
Our RI governance structure has also beenrevamped to include a new Global RI Steering
Committee which I chair, a new Environmental,
Social and Governance (ESG) Risk Forum, and amore targeted mandate being provided to our
ESG Committee.
We have also included ESG reporting within our
Global Investment Assurance function and Global
Investment Committee (GIC) to ensure we havehigher quality reporting and oversight of ESG
information at the highest levels of ourorganisation.

Consideration of ESG factors has been
embedded within our investment decisionmaking processes for over a decade and wecontinue to evolve and progress in this area.
Over the past few years, we have focused onenhancing our integration of third party ESG
data into our front office investment systems,
including Bloomberg and FactSet for use byinvestment analysts across the organisation.
We have also developed additional tools foranalysts, such as ESG Dashboards, which
consolidate information from multiple sources.
We have taken the step to integrate ESG data
into our Enterprise Data Warehouse system.
This means we will soon be able to easily
analyse and report on the ESG ratings across
our portfolios, which will help with our ambition
to more effectively include ESG factors in
our investment governance processes and,ultimately, in our client reporting. This levelof ESG integration is a significant step forward
for us and is described on pages 6 and 7.
In last year’s report, we highlighted the gender
split within our global investment teams. While
we still have much further to go to achieve ourgoals in this area, some of the new initiatives weare working on to close this gap include
improved support for parents and a focused
approach to our recruitment and development
processes. We are also pleased to report that
despite a significant gender pay gap across
many industries, our analysis shows thatgender pay equality exists in our organisation
for people with similar experience and roles.
More information on our approach to diversity
can be found on page 10.

Looking externally, the Paris Climate Change
negotiations (COP21), held in late 2015,
helped bring the important topic of climatechange into the mainstream. During 2015,
we conducted research in Australia whichhighlighted that superannuation members are
increasingly concerned about the investment
risks associated with climate change. Our
research further underlined the importanceof explaining how we manage these risks onbehalf of our clients. We also released two
papers focusing on the outcomes of COP21
as well as outlining some of the implications ofclimate change from an investor’s perspective.
The risk of stranded assets continues to bea developing topic as global governments
mandate a reduction in fossil fuel energy
production to meet emission targets. In orderto improve transparency around this issue, wehave provided climate risk statements from anumber of our investment teams and their fossil
fuel exposures. This disclosure aims to provide
additional transparency with regard to how ourinvestment teams are managing climatechange-related risks.

In 2015, we were also actively involved ina number of thought leadership activities.
In particular, we have been collaboratingwith the Cambridge Institute for Sustainability
Leadership’s Investment Leaders Group;
exploring the topic of long-term investment.
We were fortunate enough to host HRH The
Prince of Wales in Sydney in late 2015 to discuss
this topic at a roundtable meeting with someof the largest asset owners in Australia.
While we remain focused on the long term, wecannot ignore that investment markets opened
2016 with significant volatility and concerns
around the health of the global economy
becoming more widespread. We believe that
it is in conditions such as these, where thebenefits of our approach to RI are mostapparent. It is pleasing to note that ourinvestment teams have continued to deliversolid investment performance for our clientsduring the turbulent market conditions, with
84% of all our investment funds outperforming
their respective benchmarks over a rolling
three year period to February 2016. We feel
confident that our long-term approach to RI
and stewardship has been a critical componentof the value that we are able to add for ourclients, and will remain so in the future.

“ We feel confident that ourlong-term approach to RI andstewardship has been a criticalcomponent of the value that
we are able to add for ourclients, and will remain so
in the future.”Mark Lazberger
Chief Executive Officer

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

3Our Organisation

First State Investments (known as Colonial First State Global AssetManagement in Australia) is the consolidated asset management
division of the Commonwealth Bank of Australia. We are a global
asset management business with experience across a range ofasset classes and specialist investment sectors.

Edinburgh

LondonFrankfurt

New York

Beijing

Paris

Tokyo
Louisville

ShenzhenDubai
Hong Kong

Singapore
Jakarta

SydneyMelbourne

Auckland

Joint venture

UK, Europe and Middle East

Assets under stewardship

Total staff

Investment staff

US$42.8 billion

324

61

Asia (includes Japan)

US$15.1 billion

184

36

Australia and New Zealand

US$80.0 billion*

292

105

North America

US$4.2 billion^

28

11

Total

US$142.1 billion

828

213

*	Assets under stewardship indicated above includes Realindex Investment which is a wholly owned investment management subsidiary of the Colonial First State group of companies.
^	USA assets under stewardship through CFSAMAL (Australian-based non-domiciled), FSII (UK-based non-domiciled), FSI Singapore (Singaporean-based non-domiciled), USA SEC
Registered Investment Advisers.
Source: First State Investments as at 31 December 2015.

4

About us
We are stewards of over US$142.1 billion* (asat 31 December 2015) on behalf of institutional
investors, pension funds, wholesale distributors
and platforms, financial planners and theirclients worldwide.
We are a global asset management businesswith offices located in Sydney, Melbourne,
London, Dubai, New York, Louisville, Paris,Frankfurt, Edinburgh, Hong Kong, Singapore,
Tokyo, Jakarta and Auckland; and represented
in Beijing and Shenzhen through the First State
Cinda joint venture.

We employ teams of investors who are
specialists in their respective fields and set
their own investment style. Each investment
team is structured so that portfolio managers
and analysts have a strong sense of portfolio
ownership. Incentive structures are directlyaligned to the results they deliver for clients.
Information on the investment philosophy andapproach for each team can be found in in theteam profiles in this report and on our website.
While different investment teams have different
investment approaches, all teams believe thatmarkets are not completely efficient and thatvalue can be added for our clients throughcareful investment analysis and prudent
decision making.

Assets under stewardship for each investment team are:
AS AT 31 DECEMBER 2015

US$ billion
30.4

Stewart Investors#
First State Stewart Asia

21.8

#

Australian Equities

17.5

Global Listed Infrastructure

4.7

Global Resources and Agribusiness

1.3

Global Property Securities

2.3

Indonesian Equities

0.4

Realindex Investments (Global equities and Australian equities)*

7.4

Total Equities

85.8

Short-Term Investments (Cash)

32.8

Australian Fixed Income and Global Credit

15.3

Asian Fixed Income

2.1

US Fixed Income

0.1

Emerging Markets Debt

1.6

Total Fixed Income

51.9

Unlisted Infrastructure

4.3

Total Alternatives

4.3

Multi-Asset**

6.7

Total Multi-Asset Solutions

6.7

Interfund Holdings***(6.6)

Total assets under stewardship142.1

	Effective from 1 July 2015 the First State Stewart team split to form two new teams: one primarily based in Edinburgh (Stewart Investors) and the other primarily based in Hong Kong
(First State Stewart Asia). There is no change to either team’s investment philosophy or primary portfolio management responsibilities. Stewart Investors is a team within First State
Investments which manages a range of Asia Pacific (ex Japan), Global Emerging Markets, Worldwide and Sustainable Development equity funds. First State Stewart Asia is a team withinFirst State Investments which manages a range of Asia Pacific equity funds.
* Realindex Investments is a wholly owned investment management subsidiary of the Colonial First State group of companies.
**	In addition to investment management service, Multi-Asset Solutions also provides investment advisory services over a further US$6.0 billion in assets.
*** Multi-Asset Solutions assets under management invested in underlying investment capabilities included above.
Source: Commonwealth Bank of Australia financials as at 31 December 2015.
#

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

5Our Approach to Responsible
Investment and Stewardship

Our approach to RI and stewardshipWe believe that a stewardship mindset is an
essential component of a strong approach toresponsible investment and that embedding
RI practices into the core of our investment
activities is in the best long-term interests ofour clients. For more than a decade we havesystematically and progressively improved RI
practices across our investment teams globally.

Our strategy
Our RI strategy is based upon three strategicpillars; Quality, Stewardship and Engagement.
This strategy is underpinned by a strong
governance framework and is supported
by our specialist RI team.
The team engages the entire business to deliver
the strategy which is overseen by the Responsible
Investment Steering Group, chaired by the
CEO and comprised of executive committee
members, whose role it is to monitor, direct andchampion RI practices across the organisation.
Our Global Stewardship Principles fulfil therequirements of the UK Stewardship Code andother stewardship codes around the world.
The principles are underpinned by policies
and processes which are overseen by the RI
Steering Group. These policies include ourpolicy on cluster munitions and anti-personnel
mines, engagement policy and RI policy, allof which are available on our website.

6

Each of our investment teams has a lead RI
representative who coordinates information
flows across their respective teams. The RI
representatives also sit on an ESG Committee,
which plays a key governance role byrepresenting their teams, reporting on teamprogress, contributing to thought leadershipand looking at new approaches to addressing
current and emerging ESG risks andopportunities. The ESG Committee is an
important part of ensuring that we havethe highest quality of ESG integration acrossthe organisation.

Our diverse investment capabilities
We employ 15 investment teams acrossa range of asset classes who are specialists
in their respective fields and who set theirown investment philosophies and processes.
Our commitment to RI and stewardship is
a common thread which runs through thesediverse investment capabilities.
In particular, all teams believe that ESG issues
impact investment value and that as a large
institutional investor we can achieve betterlong-term investment outcomes throughactive engagement with companies andby exercising the ownership rights we holdon behalf of our clients.
Each investment team’s approach toincorporating these factors into theirinvestment process has evolved over time.

We believe the diverse approaches of ourindividual investment teams are a key strengthof our collective business as they allow us toshare ideas, develop our knowledge and learn
from each other’s mistakes and successes.
The governance of RI and the systems forcross-collaboration are critical in this regard.

What you can expect when you invest
with one of our teams
While we are proud of our diverse investment
capabilities, the following provides anoverarching view of some of the universal
expectations for all investment teams.
ESG integration
Each team has a process for identifying andassessing the relevance and materiality of
ESG issues for their respective asset classes.
For all active equity teams, company
engagement is a key source of insights
on these risks and opportunities.
These insights, coupled with the best available
third party ESG research, are assessed by therelevant company analyst and incorporated
into stock notes or reviews. Some teams assign
specific ESG scores, while others incorporate
the assessment into broader views of company
management and business quality. All active
equity teams hold regular team meetings
to discuss company assessments, including
ESG factors.

Our fixed income teams have an assessment
process which flows into their view of aparticular security, whether through thesix-factor model used by the Emerging Markets
Debt team or the ESG score and internal credit
rating used by the other Fixed Income andCredit teams.
For all teams, responsibility and accountability
for analysis and integration of ESG factors,
investee company engagement and proxyvoting rests with each investment professional
and the head of the team.
Integration and engagement are mutually
reinforcing; company analysis drives
engagement and engagement outcomesinfluence the analysis. This is why we havechosen not to separate proxy voting,engagement or ESG research into specialisedfunctions.
For our Unlisted Infrastructure team, a morebespoke approach is possible and necessary.
The team has developed separate and detailed
RI policies and assessment frameworks whilestill adhering to the organisation-wide approach.
Company engagement
Engagement with company management
is a fundamental part of our equity teams’
investment processes. Through company
engagement, we seek to highlight areas forpotential improvement and risk reduction,encourage improved disclosure on ESG issues,and commend companies which are making
progress in this area. We have guidelines andprinciples for corporate engagement, which
are available on our website.
Engagement is more difficult for fixed income
investors. We have, however, effectively engaged
with counterparties, semi-government andsupranational issuers and continue to increase
our focus on effectively engaging bond issuers.
We also engage with credit rating agencies
and collaborate with other fixed income
investors to improve ESG integration practices
across the industry. This is an area where we
intend to focus more attention and resources.
For Unlisted Infrastructure, our seats oncompany boards allow greater direct oversightand influence.

Given the varying nature of the asset classes
we manage, the geographies in which they
operate and the size of our holdings, each of
our investment teams’ engagement approaches
are tailored to individual companies and thespecific issues in question. In all cases there isa focus on material ESG issues which could
impact on investment value over all periods,
but particularly over the long term.
On occasions where our engagement activities
with company management are unsuccessful,
we may escalate the issue. This can include,for example, writing to or meeting with thechairperson or lead independent director,
voting against directors who we believe
are not providing appropriate oversight, or
collaborating on further engagement withother like-minded investors. Ultimately, we may
choose to sell down holdings in companies
where we lose confidence in management
following unsuccessful attempts to engage.
Proxy voting
Proxy voting rights are an important asset
for listed equity investors and exercisingthese rights is a core part of our stewardship
responsibilities. We seek to vote on all possible
resolutions at company meetings. Prior tovoting, the relevant investment manager andanalyst carefully consider each resolution,with guidance provided by our ‘Guidelines
and principles for corporate engagement on
governance, environment and social issues’.
Recommendations from a selection of
independent corporate governance research
providers are also sought. Our investment
teams retain full control over their proxy voting
decisions, however, and do not necessarily
follow the guidance provided by third party
governance research providers.
We disclose our full proxy voting record andstatistics on the independence of our team’s
voting in the online version of this report.
All teams have an approval and escalation
process for proxy votes and maintain records
when they vote against management oragainst the recommendations of the proxyvoting adviser.

Investment teams are responsible for their own
voting and, from time to time, different teams
may vote in different ways on the same issue.
To manage this, whilst maintaining teamindependence, we are developing forums
where teams which are voting on the same
company can discuss the key issues (while
always complying with regulatory requirements
related to collusion or takeover provisions).
Teams not covered in this report
Our Short-Term Investment (Cash) team is
captured within the Australian Fixed Income
and Global Credit profile as the relevant ESG
analysis and engagement is shared between
the teams.
Our Stewart Investors team has rebranded
following the split of the First State Stewart
team into two teams. Stewart Investors will
provide information independent of thisreport on their website and directly to clients:
www.stewartinvestors.com

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

7Three Year Strategy Review

Three year strategy review
Our three year strategy concluded at the endof 2015. Overall, we believe that we havemade good progress, but further
improvements can be made. We see our work
to improve our RI and stewardship practices asa journey of constant evolution andrefinement.
Our main achievements over the three years
have been:

Reporting and disclosure–– Comprehensive and enhanced RI reporting;Our new RI strategy and focus
areas for 2016–– Online, interactive report launched in 2015;

Our new three year RI strategy was approvedby our Executive Committee in February 2016.
The new strategy has the following objective:“To consolidate and extend our position
as a global leader in RI and stewardship.”
The three strategic pillars and strong
governance framework remain, with new
objectives centred on strengthening thefollowing areas.
Our strategic goals over the next three year
period include:–– ESG portfolio monitoring systems andprocesses implemented and integrated withinvestment governance processes, inparticular the GIC.

–– ESG data included in Investment Risk
reporting process; and–– European Diversified Infrastructure Fund ESG
Report (2014, 2015).

Governance–– RI strategy developed and implemented;

Thought leadership–– Partnership with Cambridge Investment
Leaders Group formed;–– Global RI Committee and ESG Committee
established;–– Australian Investment Leaders Roundtable
November 2015;–– RI Marketing and Communications Groupestablished;–– Members of Willis Towers Watson Thinking
Ahead Institute; and–– Development and rollout of the Global
Stewardship Principles; and–– Significant commitments to industry
collaborations including key governanceroles in Australian and pan European
industry bodies.

–– Adoption of the CFA Institute’s Asset Manager
Code of Professional Conduct.
ESG integration – investment teams–– Investment team benchmarking completed;

Culture and employee engagement–– 70% of staff completed an internal
RI specific survey;–– New ESG research providers appointed
and rolled out, including integration
with investment systems like Bloomberg
and Factset;–– Clear message to enhance our RI agenda
from staff;–– ESG Dashboard developed for investment
teams using Bloomberg;–– Diversity disclosure and programs developed.

–– Quarterly RI update launched; and–– Development of engagement priorities andexecution plans with investment teams.
–– Implement systems and processes to better
capture engagement activity and outcomes.
–– Establish platforms for greater collaboration
on proxy voting and engagement across teams.
–– Integrate data on carbon sensitivity of
portfolios and risks of asset stranding into
GIC processes.
–– Implement a ’controversial investments’monitoring process.
–– Develop and implement an ESG impact
monitoring and reporting system.

–– Stranded asset risk toolkit developed;–– Add ESG data to Global Fixed Income andCredit investment system ‘ION’.

–– First beta tests of ESG Portfolio Monitor
developed; and–– Improve PRI scores for all categories.

–– Improved PRI Scores – top 10% all manager
signatories.

Focus areas in our new three year strategy

Focusing on RI product/businessdevelopment opportunities

Stronggovernanceframework

Enhancing disclosure andthought leadership, stronger
statements of policy positions

8

Enhancing ESG integration
and understanding of ESG risks

QualityHigh quality
investment practices
and processes

GlobalResponsible
Investment
Leadership

Strengthening our
RI governance modelEngagement

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

Stronggovernanceframework

Stronggovernanceframework

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

Increasing RI engagementin the wider business2015 in Review –Progress Against Our Strategic Goals

Our specific focus for 2016 is to embed thegovernance changes which will support these
improvements. The changes to the governancestructure have been designed to ensure that we:–– Continue to advance the integration of ESG
factors by our investment teams.
–– Implement processes to deal with specificcontroversial investments where there may
be differing views between teams and/or
we may have policy gaps.
–– Develop a more consistent and stronger RI
narrative within the business and with ourclients and prospects.
–– Engage a wider spectrum of colleagues in
our RI agenda – over 40 will be actively
involved across the business.
The main changes are:–– Our Global RI Committee is being dissolved
and will be replaced by a new, smaller andmore focused RI Steering Group comprisingsolely Executive Committee members.
–– A new ESG Risk Forum is being introduced tomonitor investments exposed to ESG-related
controversies.
–– Two new working groups to be formalised:‘Business Development and Client Support’and ‘Human Resources/Staff Engagement’.
–– The ESG Committee is being restructured
to focus on key environmental, social andgovernance issues in greater depth.
Sub-groups are being established, which in2016 will consider executive remuneration,
climate change and human rights issues
with a view to developing guidance that canbe used by all investment teams.

2015 in Review – progress against
our strategic goals.
Below is a description of our progress during
the 2015 calendar year against our strategic
goals of quality, engagement and stewardship.

Quality investment processes
Information management plan
Over the course of 2015, we completed key
components of our ESG Information
Management Plan. As reported in previous
years, we have been working on integrating our
external ESG research providers, ratings andresearch with investment and other systems.
During the course of 2015:–– We finalised the integration of Sustainalytics
and MSCI Governance Ratings into Factset,
a data aggregation and investment
analysis system used by a number of
our investment teams.
–– We have developed early versions ofan ESG dashboard report similar to what
we have already completed in Bloomberg.
By incorporating these ratings into Factset,
every investment professional across theorganisation has access to ratings without
needing to log in to external systems.
–– The Excel ESG Dashboard we reportedon last year, which draws on Sustainalytics,
MSCI Governance Ratings and Bloomberg
ESG data, is now being used by the Global
Resources and US Fixed Income Investment
teams for stock notes. Rollout to other teams
will continue during 2016.

Introduction of CGI Glass Lewis platform
into Indonesia
In May 2015, we implemented the CGI Glass
Lewis platform for our Indonesian Equities team.
Market practices and corporate governanceare still developing in Indonesia; accordingly,
we believe it is critical that investors use their
voice by voting in all company meetings andencouraging market reform. The new voting
platform will help close the loop on our
engagement with companies. Our long-term
support of the Asian Corporate Governance
Association is a key factor in encouraging
improved market practices and regulation.
New investment teams and investment
team changes
During 2015, a number of changes to ourinvestment capabilities influenced our RI work.
During the year, our US-based Global
Unconstrained Fixed Income team received
regulatory approval to begin investing. The
team has adopted various aspects of thestrong ESG integration approach used byour global and Asian fixed income teams.
In addition, the team’s proprietary investment
opinions database was rolled out across thebroader Global Fixed Income team, enhancing
the collaboration between the group andcapturing ESG information and views forall of our bond investments.
The team provides a Q&A in this year’s RI
report to introduce its investment philosophy
and approach to RI. From next year, its
activities will be covered in the report in full.

–– In addition to ESG ratings, recommendations
and special reports from our Australian Proxy
Advisor, Ownership Matters, are flowing
through Factset, which provides our Australian
Equities teams access to a history of reports
for ASX-listed companies.
We finalised the integration of Sustainalytics
and MSCI Governance Ratings into our data
warehouse ‘Eagle’. This is a significant step,
allowing us to perform portfolio level analytics
for our listed equity portfolios. This will be
used to provide reporting to investment teamheads, and the Global Investment Committee(GIC) and ESG risk forum. In the future it will
also allow us to enhance client reporting.

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

9

2015 in Review – Progress Against Our Strategic Goals (cont.)

Realindex and Multi-Asset Solutions
teams’ inclusion in the RI Report
This is the first year where our Realindex andMulti-Asset Solutions teams are profiled
in the RI Report.
First State Stewart
On 1 July 2015 the First State Stewart teamsplit into two new teams:
one primarily based in Edinburgh (Stewart
Investors) and the other primarily based in
Hong Kong (First State Stewart Asia). The
split will allow the two successor teams todevelop as smaller, dynamic investment groups,
recognising that this has been critical to theirsuccess over the last 20 years. There is nochange to either team’s investment philosophy.
Stewart Investors has, in effect, become aninvestment division in its own right. Bothteams remain part of First State Investments,
reporting to the Chief Executive Officer.
Although Stewart Investors’ more autonomousmodel means that they will no longer becovered in this report, clients and otherinterested parties can access information on
their investment philosophy on their website
www.stewartinvestors.com
First State Stewart Asia will continue to becovered by this report and the team has its
first independent profile in this year’s report.

Engaged people
Diversity
Last year we reported the gender diversity of
our investment professionals for the first time.
A lack of diversity in all its forms, and mostvisibly gender diversity, has been a high profile
governance concern for companies for anumber of years. It is appropriate that investors
who are calling for more diverse boards andmanagement should also be transparent about
the diversity in their own organisations.
It stands to reason that if greater diversity inthe companies we invest in will produce better
corporate decision making and long-term
outcomes for investors, the same must be trueof diversity amongst teams of investment
professionals.
The percentage of women in our investment
teams remains steady at 21% from last year’s
report to now, which falls short of where wewould like to be. We are committed to closing
this gap and are implementing a new programof initiatives to focus on this.
We believe this program will, over time, enable
us to attract the best people to ensure we havediversity of thought, which we see as animportant success criteria for any high quality
investment management firm.

10

Diversity Initiatives
Objective: To increase diversity of thought

Initial focus on improving the gender balance
Attracting talented
women with focusedrecruitment

Retaining engaged
team memberson the parental
leave journey

Developing
valued women

Enabling different ways of working for everyone
Leadership and Culture

We also want everyone to feel that they can beauthentic and perform to their full potential in
an inclusive working environment. The
program includes a focus on enabling different
ways of working, support for new parents,
focused development for women and theestablishment of a Global Diversity Committee
to review our progress in this space.
Our gender diversity scorecard
Our base line scorecard for gender diversity
is summarised below. We will be reporting
against these figures in future years:–– 21% of our investment professionals are
women.
–– 25% of new hires to investment teams
in 2015 were women.

Stewardship
Investment Leaders Group – Long-Term
Mandates Working Group
During 2015, we continued our active
investment in the Cambridge University
Investment Leaders Group’s (ILG). In addition,
we led the Long-Term Mandates workstream.
The mission of the ILG is “to shift theinvestment chain towards responsible,
long-term value creation, such that economic,
social and environmental sustainability aredelivered as an outcome of the investment
management process alongside robust,
long-term investment returns”.
The group has been working towards thedevelopment of a toolkit for asset owners whowish to design investment strategies that will
make a contribution to this objective, or toassess the extent to which existing strategies
contribute to it.

The Working Group will be releasing the toolkit
in May along with papers for the ILG’s otherworkstreams.
Investment Leaders Group – Australian
Leaders Roundtable
In November 2015, we facilitated an AustralianInvestment Leaders roundtable in collaboration
with the ILG. The event was hosted by HRH The
Prince of Wales at Admiralty House in Sydney.
The event brought together trustees and senior
executives from some of Australia’s largest asset
owners, with an objective of discussing thechallenges for implementing RI best practicewithin the Australian financial system. We lookforward to making more announcements
regarding this initiative in 2016.
Collaborative engagement
During 2015, our main collaborative
engagement focused on the Australian market,
where we supported the US-based Teachers
Insurance and Annuity Association (TIAA) andAustralian Council of Superannuation Investors(ACSI)-led engagement with 38 Australiancompanies to adopt poll voting, where the‘one-share one-vote’ principle applies. In
addition to joining the letter campaign, we haveraised the issue in company meetings.
Almost two-thirds of companies improved
practices in their 2015 shareholder meetingscompared to 2014, with most moving to pollvoting for all resolutions. We continue toassess collaborative engagement opportunities
when they are of interest to our clients andwhen we can add value.

Investor Group on Climate Change –Disclosure Working GroupWe have been following the developments inincreasing levels of climate change disclosure,including changes to French law and otherinvestor led initiatives. However, we haveconcerns with the way this disclosure has been
provided by some investors, in particularwhere ‘carbon footprints’ have been provided
without contextual information on how
footprinting influences investment decision
making, or around limitations with theunderlying data for the footprints themselves.
For this reason, we have agreed to lead a newworking group through the Australian Investor
Group on Climate Change with the objectiveof developing best practice guidance forinvestor disclosures on climate change related
risk. For more on our thoughts on climatechange disclosure and carbon footprinting
please see page 41.
Reporting improvements – climate change
Following last year’s report, where we disclosed
sector and country-based ESG risk exposures
for some teams, this year we are disclosing
our fossil fuel exposures. Each team has also
made a statement regarding its approach to
managing climate change-related risks.

–– Publicly stated commitment to RI;–– RI policy;–– Commitment to transparency of processes
and approach;–– Systematic process for ESG integration andevidence of how this process is applied
within traditional financial analysis;–– Evidence of activity in other areas of ‘Active
Ownership and Stewardship’ including
voting and engagement;–– Membership of collaborative investor
initiatives; and–– Coverage of total AUM by RI or ESG practices.
We were pleased to be among only
11 Australian fund managers who scoredabove 80% in the RIAA assessment.

Awards and other recognition
In 2015, we were pleased to win the ESG
Strategy of the Year Award at the Financial
News Awards for Excellence, Institutional AssetManagement, for the second consecutive year.
In winning the award, the judges noted ourdecision to disclose the gender diversity of ourinvestment professionals for the first time inour 2015 RI and Stewardship Report.
We were also the co-winner of the ‘Best
Application of ESG’ award at the Asia AssetManagement Best of the Best Awards 2015.
In addition, our 2015 RI and Stewardship
Report was shortlisted in the top three entries
in the ‘External Publication’ category of the
Asia-Pacific Excellence Awards 2015. The
awards attracted over 2,600 applications
around the globe, so we were pleased that
our report was recognised in the top three.
Formal recognition is not something we
specifically seek or target; however, it provides
an indication of the progress we have madeand importantly highlights areas where we
can improve.

PRI assessment ratings
Module2014 level(pilot)

2015
level

Medianmanager

External benchmarking

Overarching Approach

A

A

B

Our approach to RI and stewardship has always
been client-focused and investment-driven. We
also benchmark our progress against various
standards and look to those standards which
can help us identify areas where we can improve
our practices. These standards also allow us tobe more transparent about our progress.
For this reason we are pleased to be able
to include for the first time our Principles for
Responsible Investment (PRI) assessment results.
Every PRI signatory reports to the PRI annuallyon their progress. In 2013, the PRI launched a
new assessment frameworkand in 2015 we received the first assessment
report following the pilot, the results ofwhich are shown in the table. The full report
can be downloaded on our website
ri.firststateinvestments.com.
We are encouraged that our results have
improved from the pilot year and we will work
to further improve these results where possible.

Listed Equity Incorporation

A

A+

A

Listed Equity Active Ownership

A

A

B

Fixed Income Corporate

A

A+

C

Fixed Income Government

B

B

E

Infrastructure

A

A

B

Responsible Investment Associationof Australasia (RIAA) benchmark
report assessment
In 2015, in a first of its kind, RIAA1 assessed the
RI practices of 76 Australian asset managers in
its annual benchmark report. The assessment
rated investment managers across thefollowing areas:
1 O ur Head of Responsible Investment Asia Pacific is the current chair of RIAA. To avoid conflicts of interest the benchmark report is created without involvement from any of the RIAA
board including the chair and is prepared in collaboration with and reviewed by Ernst and Young.

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

11

Investment Team Profiles

12Introduction
This section contains profiles for each of ourinvestment teams. More information isavailable in our online, interactive report
including:–– The full proxy voting records for each teamand relevant statistics;–– An ESG risk profile for the country andsectors the teams invest in;–– Areas where each team is looking to improve
its approach in 2016;–– The largest active and total holdings for eachof our equity teams;–– Additional case studies including video
reports from some of our teams.

Our profiles include a number of financial andnon-financial measures to more fully reflect
the philosophy, processes, ESG risk profile andlong-term performance of each team. To ourknowledge, some of the indicators have notbeen used before. In addition, this year wehave included a climate risk statement and thefossil fuel exposure for most teams for the firsttime. These statements and more information on
our approach to improved climate change
disclosure can be found on page 41 and in the
online version of the report.
When considered together, we believe ourreporting provides a full and objective viewof the RI and stewardship performance of theteams and how it influences investment
outcomes over time. However, there are
inherit limitations with any metric and so werecommend reading the RI and stewardshipmeasurement definitions section included inAppendix 3.
While there are many reasons to invest
responsibly, we would not do it if we did not
believe that it was in the long-term interests ofour clients. The chart below shows the weighted
average outperformance of our investment
teams’ portfolios over the last five years.
While isolating the contribution of each team’s
responsible investment and stewardshippractices in these performance numbers isdifficult, we hope that this report clearly
demonstrates the value it has added.
The online report can be found at
ri.firststateinvestments.com

Extent of outperformance by team (five years) – 31 December 2015^% p.a.
6.0%

Equity teams

5.25%

Fixed Income andMulti-Asset teams

5.0%

4.21%

4.18%

4.0%

3.28%
3.0%

2.62%

2.0%

1.32%
1.0%

0.50%

0.42%

0.06%

0.14%

Realindex

Multi-Asset
Solutions

0.0%
UnlistedFirst StateInfrastructure Stewart Asia

Australian
Equities,
GrowthAustralian
Equities,Core

Global Listed
Infrastructure
Securities

GlobalProperty
Securities

GlobalResources

0.07%-0.49%

Australian
Asian
Fixed Income Fixed Income
and Global
CreditFirst State
Investments
Average^ Please refer to Appendix 3 for details of these performance statistics.

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

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

Perry ClausenManaging Partner,
Infrastructure
Investments

Niall Mills
RI Steering Group
memberInvestment philosophy and approach
We invest directly in infrastructure businesses
with very long-life assets over a long-term
investment horizon. In some instances, thisis 20 years or more. Our portfolio companies
offer essential or strategic infrastructureservices to the communities they serve.
Our approach to investment is governed byfour key factors:
1.	Category of infrastructure: we selectinfrastructure businesses with assets that arevital to economic activity and development;such portfolio companies provide morestable and sustainable long-term returns.
2.	Asset life-cycle: we invest predominantly
in infrastructure businesses with brownfield
assets that have a proven need and future
usage expectations. We actively look for
infrastructure businesses with high quality
ESG performance in their core operations.
3.	Geography: we invest in infrastructurebusinesses located in stable, developed
economies which tend to offer more robust
regulatory and institutional safeguards.
4.	Market competition: our portfolio
companies are by nature subject to little
or, in some cases, no competition within
their markets. We prioritise infrastructurebusinesses with excellent customer service
and strong governance.
These infrastructure businesses requireongoing proactive management at board
level. Our investment strategy is to typicallymanage a large enough interest, in many cases
100% ownership, to enable value-added
contribution via board and board committee
representation.
Through direct board-seat representation, theteam provides strategic input on ESG issues,
business strategy, operational and capital
expenditure, capital structure and many otherkey drivers of value.

Stewardship and ESG integration

Volker Häussermann
ESG Committee member

We believe that proactive ESG management
improves long-term investment returns
and that adopting a responsible investment
policy across the business enables greateralignment with our clients’ long-term interests,
and the customers who rely upon the service
being provided.
Businesses and organisations do not operate ina vacuum, and while ESG considerations apply
to all, we think they are particularly relevant
to infrastructure businesses due to:–– The long-term investment horizon.
–– The need to deliver stable long-termrisk-adjusted returns.

Rowan Element
ESG Committee member

14–– The role infrastructure companies
have in providing essential services
to their communities.

–– The significant positive impact that
infrastructure businesses can have on
environment and carbon reduction targets.
In addition, infrastructure businesses often
operate as monopolies or quasi-monopolies
and therefore good ESG practice is paramountto the long-term sustainability of the business.

Team profile
Our Unlisted Infrastructure investment teamconsists of 33 investment professionals withsignificant operational management, investment
skills and experience within infrastructurebusinesses. Led by Perry Clausen, with 25 years
of infrastructure investment experience, theteam has people located in close proximity to
the assets which span Europe and Australia.
The RI leads for the Infrastructure team are
Volker Häussermann and Rowan Element.
Volker has a strong operational backgroundgained with over 15 years experience. Rowan
has over 13 years experience in infrastructure
finance and has worked closely on many of theteam’s projects in energy, social infrastructure,and transport.
Number in team

33

Average experience

15 years

Average years in team

7 years

Case Studies – Responsible
Investment in Practice

HH FerriesCompany Industry: Transport
Country of domicile: Sweden
Issue description: Safety, Environment
In 2015, the European Diversified Infrastructure
Fund (EDIF) acquired HH Ferries from Scandlines
and Stena. As part of the transaction, HH Ferries
also took over ownership and responsibility for thequay walls in Helsingor.
During the due diligence process, we discovered apotential risk of land subsidence within themarshalling area in the Helsingor port.
Consequently, the quay walls securing themarshalling area were in need of significant repair
work in order to maintain safe ferry operations into
the future. The quays are also used by locals forfishing and other recreational purposes.
On our initiative, and immediately after acquiring
the asset, HH Ferries started to develop
a remediation program, making a significant
investment into the upgrade of the berth. This
work developed, using large natural boulders,provides not only improved safety around themarshalling area, but also improved wildlife
conditions for fish and birds and a more visuallypleasing view of the coastline (for the community).
Furthermore, the chosen solution is sustainable
and will significantly reduce the need for ongoing
maintenance costs.

ESG implementation
Ongoing asset management

High quality corporate
governance and board reporting

Pre-investment

We seek to ensure that management provides
information to the board which enables thebusiness to fully understand the approach thebusiness is taking in managing potential risks andrealising potential opportunities. Examples of thetypes of reporting include:–– Environmental and social risks impacting
materially on corporate earnings, including
contingent liabilities.
–– Governance policies and procedures forassuring compliance with internal ESG
policies, improving performance andmitigating risks across operations, thesupply chain and products and services.
–– Human capital processes, including training
and development of new staff, equality
analysis and focus, retention programs,
workplace health and safety performance,
staff turnover, succession planning andtraining and development programs.
–– Performance reporting on measurable
environmental factors, for example: carbon
footprint, energy use; water usage; andgreenhouse gas emissions.
Where we own less than 100% of an
infrastructure business, we engage directlywith our co-investment partners to ensure
they understand and fully support the logic
for our focus on ESG issues and we also seek
to learn from their approach to this importantarea. We have found that our co-investment
partners are very open to sharing bestpractice and that significant value can begenerated for all parties.

Prior to an investment being made in an
infrastructure business, the team looks toevaluate all relevant ESG issues. No checklist
can appropriately cover all possible issues,
so evaluations are made on a case-by-case basis.
Risk assessment tools as well as country-leading
expert advisers are used to help in this analysis.
These tools also provide opportunities forbenchmarking against similar assets and enable
us to identify the early priorities post-acquisition,
ensuring that no time is lost when we acquire
a new infrastructure business.

International standards
for ESG management

We have seen an increasing focus bymany regulators, who set the operating
frameworks for our portfolio companies’.
We target ISO certification or similarinternational accreditations and standards
for all of our infrastructure businesses;
safety and environmental management
are always part of this.
A particular focus in the last 12 months has
been on productivity, energy consumption
and supply chain management. Several of
our portfolio companies have delivered
very significant savings in, for example
minimising carbon, via reduced energy use
and supply chain improvements.

DigitaBroadcasting towers
Electricity
North WestElectricity
distribution
Anglian Water
Water and waste
water utility

Helsingør-Helsingborg
Ferry Route
London

EVG and Ferngas
Gas distribution
Paris

Reganosa
LNG
regasification
plant

Direct engagement throughboard-level representation
We have the distinct advantage of being able
to engage directly with our portfolio
companies via our board representation and/or workshops with management. This direct
involvement provides the opportunity to drive
cultural change, to set ESG KPIs, and allows
an open two-way conversation between
management and owners to ensurealignment on long-term value creation andprotection.
We regularly convene workshops andcommittees to undertake deep-dive analysis
and debate opportunities and new initiatives.
We also visit business sites in our capacity as
owner, board member and/or board
committee member. Recent initiatives have,for example, included carbon reduction andenergy management programs, and fuel cell
technology development as part of smart
networks and energy management systems.

Five year performance

Current assets and offices
CarunaElectricity distribution

Once an infrastructure business is acquired,
our team implements an ongoing process ofactive oversight to enhance performance andidentify and manage risk. Our specialist fundmanagers and asset managers meet regularly
with infrastructure business management teams
to discuss various matters, including ESG issues.

Infrastructure
Asset Locations
Office Locations

Portfolios outperforming theirrelative benchmark over five
years (FUM weighted)

100%†

We have been investing on behalf of over
50 institutional clients for over 21 years. Since
inception the core assets have generated
a gross internal rate of return of 13.4%.** For the period from September 1994 to December 2015.
†	Note that the Global Diversified Infrastructure Fund wasrestructured with an inception date of 6 May 2015 andas such five-year data is not yet available; its successor
fund (the original vehicle for the foundation assets)
had five-year performance above benchmark as at
31 December 2015.

Adelaide Airport
Airport
Brisbane Airport
AirportSomerton
Pipeline
Etihad Stadium
SocialAdelaide

SydneyMelbourneInternational Parking
ParkingFirst Gas
Gas network
Australian and NZ
storage terminals
Bulk liquids storage

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

15

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

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

United Utilities Group

Stewardship and ESG integration
Peter Meany
Head of Global Listed
Infrastructure

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

Team profile

Rebecca Sherlock
ESG Committee member

Led by Peter Meany, the investment teamconsists of eight infrastructure specialists, withcomplementary skills and experience in bothinfrastructure and equities markets.
This industry experience is enhanced byover 500 company visits each year. We meetwith company management, competitors,
suppliers, customers, regulators, government
officials and industry bodies. The informationand insights gleaned from these meetings are
our most important sources of idea generation
and risk management.
Stock coverage within the team is split by sector
to maximise the team’s specialist knowledge
and to identify global best practice. Team
members are encouraged to contributeviews on all stocks, not just those under
direct coverage, and all stock calls are openly
discussed and debated on an ongoing basis.
The team’s RI lead is Rebecca Sherlock, Senior
Investment Analyst, who has 14 years ofexperience in infrastructure and eight years
in the funds management industry.
Number in team

16

Case Studies – Responsible
Investment in Practice8

Average experience

13 years

Average years in team

6 years

Company industry: Water and Sewage Services
Country of domicile: UK
Holding value: US$0
Issue description: Social – Licence to Operate
United Utilities Group provides water andsewage services. The company also offers
various services with relation to waste to energy
consultancy. These services include engineering
advisory on design, build, and operationof on-site treatment plants and rainwater
harvesting and greywater recycling services.
United Utilities announced that ‘low’ tracesof the microbial parasite Cryptosporidium had
been found at their waterworks in Lancashire.
We engaged with company management togain a full understanding of the implicationsof this discovery. We wanted to learn what was
being done by the company to remedy thesituation and what impact this event could haveon the company’s relationship with customers,
its earnings profile, regulatory relationships, aswell as potential fines and penalties.
Our contact with the company gave us
comfort that this incident was not due to any
shortcoming at the company level; that it had
acted appropriately in its response to the issue
and that no breach of licence had occurred.
Lingering concerns about the issue could
potentially impact relationships with customers
and the regulator. This type of risk was alreadyreflected in a below-average Social quality
score for this company. We will continue tomonitor this risk.
We do not currently hold United Utilities in our
portfolio; a relatively low Social score made it
harder to justify owning it.
Pleasingly, although it was not obliged to do so,
the company paid affected households
between £50 and £60 depending on thelength of time they were affected. This is agood example of an infrastructure company
paying attention to its social licence to operate.

ESG implementation
Assessment and monitoring
Infrastructure companies are assessed ona broad range of ESG-related factors which
are relevant for every company we look at.
Some notable examples include:–– Environmental issues are key drivers forelectricity utilities, energy infrastructure (oiland gas pipelines and storage) and railways.
–– Social issues are particularly important toutility companies, as they have obligations
to the communities where they provide
essential services.
–– Governance issues are important
performance drivers for all infrastructure
stocks. Board composition and alignmentof interests are considered to be particularly
important, so they are rated separately in
our ESG scoring process.

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

Engagement
We look to positively influence companies
towards ESG best practice. Through company
engagement, we seek to highlight areas forpotential improvement, encourage disclosure
on ESG issues, and commend companies thatare making progress in this area. We typicallyengage companies on material issues to achieve
specific outcomes, namely to ensure good
ESG practices to help protect investor interests.

Investment information and performance^
All information as at 31 December 2015.

Investment characteristics
Average turnover

52.90%

Stock name retention

44.07%

Top five active holdings

PG&E Corporation
NextEra Energy, Inc.
ITC Holdings Corp.
Power Assets Hldgs Ltd
Eversource Energy% of portfolio companies met with100%

Five year performance*
Portfolios outperforming benchmark

100%

Weighted average outperformance

1.32%

Absolute return
Wholesale Global Listed Infrastructure
Securities Fund

14.76% p.a.

* Performance is quoted pre-fees and in $A hedged terms.

Case Studies – Responsible Investment in Practice

NextEra Energy
Company industry: Electricity Generation and Distribution
Country of domicile: US
Holding value: US$153,604,526
Issue description: Environmental – Renewable Energy
NextEra Energy operates as an investment holding company with interests in generating anddistributing electricity. Through its subsidiaries, the company provides retail and wholesale electricity
services to customers and owns generation, transmission and distribution facilities to support its
services. It also produces electricity from solar facilities and owns and operates fleets of nuclear power
stations in the United States.
We wanted to gain a deeper understanding of drivers influencing renewable cost curves, wind market
dynamics, competitive behaviour and opportunities/threats for the renewables space. To achieve this,
we initiated a meeting with several members of NextEra Energy’s management team, including
Armando Pimentel, CEO of NextEra Energy Resources, the world’s largest generator of renewable energy.
An illuminating conversation covered a wide range of topics and provided a number of valuable insights.
The costs of renewable energy continue to fall as technology progresses, leading to growing demand.
Turbines are getting taller, blades are getting longer and solar panels are being installed and stacked in
more effective ways. We believe that the experience of companies at the forefront of renewable
development, such as NextEra Energy, will give them a significant advantage over utilities that are juststarting to invest in this space.
A video case study for this company is available in the online report.

^ Figures are representative of all team portfolios. Please see Appendix 3 for important information on the calculation and use of the metrics provided.

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

17

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

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

Stewardship and ESG integration

Stephen Hayes
Head of Global
Property Securities

Joseph Daguio
ESG Committee member

We have implemented sustainability
considerations into our investment process.
We believe that the consideration of ESG
issues will lead to better risk return outcomes,
which will ultimately improve long-term
returns for investors.
Corporate governance is a particular focus,
where board independence, as well as respect
for shareholder rights, is of paramountimportance. We also consider any specificsustainability initiatives implemented by acompany and the environmental impact ofexisting assets and developments. A company’s
history as a responsibly managed business istaken into account, as well as evidence of
meaningful contributions it might have madeto benefit society more broadly.

Federal Realty Investment Trust
Company industry: Real Estate Investment Trust
Country of domicile: US
Holding value: US$0
Issue description: Environmental – Various
Federal Realty Investment Trust engages in theownership, management and redevelopmentof high quality retail and mixed-use properties.
These assets are primarily located in denselypopulated and affluent communities in the
Northeast and Mid-Atlantic regions of the US.
We met with management to deepen our
understanding of Federal Realty’s operations.
The company employs sustainability concepts
and considers ESG impacts as a regular part ofoperations, from day-to-day activities to property
development. A high ESG score was awarded,
which then fed into our valuation calculations.
The company’s valuation already looked
attractive; a high ESG score resulted in higher
discounted cashflow valuation and madethe investment case even more compelling.
Subsequent to taking an initial position in thestock, Federal Realty performed very strongly,
producing a 17% total return from our initialentry price. Post these gains, the stock ranked
in the third quartile of our expected returns
for our investment universe, and we took
an opportunity to sell out of the position.
The company remains highly rated, and wewill continue to monitor it for future buying
opportunities once the valuation becomes
more attractive.

Team profile

Federation Centres

Led by Stephen Hayes, team members arelocated across the world’s major property
markets with offices located in Sydney,
Singapore, New York, London and
Amsterdam. This gives the team a global
reach, and on-the-ground local property
access. Team members are experienced
industry experts, focused solely on investingin publicly traded property securities.
The team’s RI lead is Joseph Daguio, Senior
Analyst, who has 14 years of industry experience.

Company industry: Real Estate Investment Trust
Country of domicile: Australia
Holding value: US$102,935,005
Issue description: Governance – CEO removal
Federation Centres (now Vicinity Centres)
engages in the development, operation, andmanagement of shopping centres.
We wanted to understand the reasoning
behind the sudden removal of the CEO andassess whether it was justifiable. We met with
the Chairman and independent board members,
who took us through the background andreasoning behind the decision. Following our
discussion, we concluded that the board had
acted with due care, and we maintained our
position in the stock.

Number in team

18

Case Studies – Responsible
Investment in Practice

12

Average experience

15 years

Average years in team

4 years

ESG implementation
Assessment and monitoring
We have developed a tailored ESG frameworkthat is part of our stock review process. Whenan analyst reviews a property company, an
ESG review will also be done. While theprimary source of ESG information is company
dialogue, the team also utilises Sustainalytics
and MSCI Governance Ratings to streamline
the sourcing of data and information. Despite
sourcing third-party research, we believe thatin-house research remains the most importantsource of reference when integrating ESG
considerations into the investment process.

Integration
We approach ESG issues using a two-pronged
approach. Firstly, ESG considerations are
implemented into the investment process as avariable in the initial screen to determine ourdefined investible universe. A low ESG score(in combination with low scores on otherfactors) can lead to a stock being excluded
from the investment universe.
Secondly, each company in our universe is
rated on specific ESG factors which are usedin determining the beta in the capital asset
pricing model which directly impacts ourvaluation of a stock. The higher the teamrates a company’s ESG profile, the lower the
beta, which leads to a higher valuation. Thisoutcome would make it more likely that wewould invest in the stock.

Engagement
We are firm believers in investor rights
and take a proactive stance on ESG issues,
especially with regard to corporate
governance. Communication with CEOs
and board members is undertaken where
it is deemed appropriate in order to try
and influence and encourage change.
During our real estate investment trust(REIT)/company meetings, we will typically
discuss any changes to the REIT’s/company’s
ESG considerations. We will relay back ourviews on how the REIT/company rates versus
its peers. In abnormal circumstances, where
we believe that ESG considerations arematerially below par, we will directly seek
to influence change.

Investment information and performance^
All information as at 31 December 2015.

Investment characteristics
Average turnover

42.22%

Stock name retention

34.21%

Top five active holdings

Hudson Pacific Properties, Inc.
Simon Property Group Inc
General Growth Properties, Inc.
SL Green Realty Corp.
Essex Property Trust, Inc.

% of portfolio companies met with100%

Five year performance*
Portfolios outperforming benchmark**

73%

Weighted average outperformance

0.50%

Absolute return
Wholesale Global Property Securities Fund

13.77% p.a.

* Performance is quoted pre-fees and in $A hedged terms.
**	The head of the investment team and most of the team changed in November 2012; figures represent management
under both regimes.

Case Studies – Responsible Investment in Practice

Vonovia SE
Company industry: Residential Real Estate
Country of domicile: Germany
Holding value: US$0
Issue description: Governance, Risk Management
Vonovia SE is a holding company, which engages in the residential real estate business. The company has
activities relating to residential property management, lease management, maintenance andmodernisation, and tenant assistance. The company’s also deals with the sale of residential buildings andcommercial properties.
We held concerns about the quality of corporate governance and risk controls at Vonovia. The company
was pursuing rapid growth via increasingly-risky acquisitions, funded by dilutive equity raisings. We met
with management to discuss concerns about their strategy. We subsequently adjusted the company’s ESG
score downwards in order to reflect our view of poor corporate governance.
The company’s valuation looked less attractive after a lower ESG score led to increased beta within DCF
calculations. Balance sheet risk continued, with increased leverage and dilutive equity raisings. We sold theholdings when the company listed on the German DAX, providing a liquidity event.

^ Figures are representative of all team portfolios. Please see Appendix 3 for important information on the calculation and use of the metrics provided.

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

19

Global Resources>	Inception Date
1997>	Location
Sydney, London>	Strategies
Global Resources

Dr Joanne Warner
Head of Global
Resources

Tal Lomnitzer
ESG Committee member

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

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

Team profile
Our Global Resources team is led by
Dr Joanne Warner and has nine investment
professionals who are amongst the mostexperienced in the industry. We are atechnically-oriented team with backgrounds
spanning multiple sectors, including mining
and petroleum engineering, metallurgy,
physics, chemistry and economics.
We operate in a collegiate environment withsector responsibilities allocated to each teammember, in addition to their portfolio
management roles. All members of the teamunderstand the key reasons for investing inevery stock in the portfolio and are awareof any stock-specific catalysts for shareprice movement.

20

Tal Lomnitzer, a portfolio manager with over
17 years’ investment experience, is the team’s
RI lead.
Number in team

9

Average experience

16 years

Average years in team

7 years

Case Studies – Responsible Investment
in PracticeSamarco Mineração S.A(Samarco – a 50/50 JV between
BHP Billiton and Vale)
Company industry: Mining
Country of domicile: Brazil
Holding value: US$118,389,211 (BHP)
Issue description: Social and Environmental
The Samarco operations include a three-tiered
tailings dam complex. Within this complex,
the Fundão dam failed, and the downstream
Santarém dam was affected. This resulted in asignificant release of mine tailings, flooding thecommunity of Bento Rodrigues and impacting
other communities downstream. The third damin the complex, the Germano dam, is being
monitored by Samarco. At this time, there is no
confirmation of the causes of the tailings release.
Immediately following the dam failure, we held avideo conference call with representatives fromVale, and subsequently BHP’s CEO conducted agroup conference call with investors and analysts
in which we participated.
In November 2015, we met with Vale’s CFO in
Brazil and were assured that the company is fullycommitted to its remediation responsibilities.
We also undertook a visit to its Carajas
mining operation.
Samarco, Vale, BHP and the Brazilian authorities,
including the states of Minas Gerais and Espírito
Santo, signed an agreement for the compensation
and restoration of environment and affected
communities on 2 March 2016. This provides acompensation and remediation framework overthe next 15 years ranging between US$2.4 billion
and US$3.0 billion on a 100% basis. The
agreement is still subject to court approval. Thereis still uncertainty around potential private civil
claims, public civil claims and criminal charges.
The companies (BHP and Vale) have beenproactive in keeping the market informed ofdevelopments as they come to hand. At thistime, there is no confirmation of the causes of
the tailings release. We continue to monitor
the developments at the Samarco operation,
which we expect to remain closed for an
extended period of time.

ESG implementation
Assessment and monitoring
Rigorous analysis of ESG factors and risks has
been a core part of our investment process
and philosophy since the flagship fund’s
inception in 1997. The framework is focusedon better understanding the risks related tohealth and safety, industrial relations,community, environmental performance,board structure, compensation and thealignment of all stakeholders.
Although we use various independent ESG
research tools, we find that the clearest
understanding of ESG risks comes from oursite visits. We have conducted more than
1,450 site visits to over 76 countries since
the inception of our flagship fund. These
visits enable us to use our expertise togain a more detailed and comprehensive
assessment of the magnitude of theseissues and risks. For some companies, thekey risks will be external and need to beconsidered in a regional context, forexample political risk, permit challenges,
lack of infrastructure.

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

Engagement
Engagement on ESG issues is primarily
carried out directly with company
management and indirectly through our
proxy voting process. Where company
management does not respond adequately
to our engagement, it may impact negatively
on its valuation assessment and could resultin the team divesting its holding of theparticular company.
As a result of being part of a large and highly
regarded organisation, we find that wetend to get good access to management. In
general, we prefer to engage in a constructive
two-way dialogue with key decision makers
in a company. This way, our opinions aretaken into consideration, and we are able
to develop a deeper understanding of theissues and the constraints.

Investment information and performance^
All information as at 31 December 2015.

Investment characteristics
Average turnover

54.52%

Stock name retention

32.76%

Top five active holdings

Rio Tinto Limited
Exxon Mobil Corporation
Lundin Mining Corporation
Enbridge Inc.
Antofagasta plc% of portfolio companies met with100%

Five year performance*
Portfolios outperforming benchmark

100%

Weighted average outperformance

0.42%

Absolute return
Wholesale Global Resources Fund-12.15% p.a.

* Performance is quoted pre-fees and in $A terms.

Case Studies – Responsible Investment in Practice

OceanaGold
Company industry: Mining
Country of domicile: Australia
Holding value: US$11,607,001
Issue description: Environmental – Various
OceanaGold operates as a multinational gold producer with a portfolio of operating, developmental andexploration assets. OceanaGold operates three mines in New Zealand and owns and operates thehigh-grade gold-copper Didipio Mine on the island of Luzon in the Philippines.
We are a shareholder in Romarco Minerals Inc, which was the subject of a takeover bid from OceanaGold.
The bid was all shares, so we stood to become an OceanaGold shareholder if the bid was successful.
OceanaGold owns Reefton mine, which is scheduled for closure in 2016. We had concerns about the costof closure and potential for the future rehabilitation liabilities.
A member of our team undertook a site visit to New Zealand to visit the Reefton mine. The mine is in a forest
park and has been operating since 2008. OceanaGold and on-site management have worked closely withNew Zealand’s Department of Conservation to ensure minimal environmental impact.
Rehabilitation has been undertaken progressively, since production first began. It was clear from our site visit
that the rehabilitation had been carefully planned and well executed. The site consists of two open pits, oneof which has already been backfilled with processing tailings and the surface rehabilitated. The plan is to allow
the second pit to fill with water, leaving it as a lake.
On the site visit, we saw rehabilitated areas that were indistinguishable from the surrounding naturallandscape. We believe that the ongoing rehabilitation program will ensure that the entire site is left in thisstate. The company plans to plant 100,000 trees in 2016 and 50,000 on 2017.
Reefton is a zero-discharge site. All water on-site must be collected and processed. This will continue forat least two years after mining operations cease.
Prior to the site visit, the team was concerned that the NZ$13 million set aside for rehabilitation was notenough. However, the site visit allowed us to see the state of the operation, and the impact ongoingrehabilitation has had. We concluded that the rehabilitation liability was adequate.
After the site visit, we voted for the OceanaGold takeover of Romarco. The takeover was successful, andwe became a shareholder in OceanaGold. We continue to hold shares in OceanaGold today.
A video case study for this company is available in the online report.

^ Figures are representative of all team portfolios. Please see Appendix 3 for important information on the calculation and use of the metrics provided.

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

21

First State Stewart Asia

>	Inception Date
1988>	Location
	
Edinburgh, Hong
Kong and Singapore>	Strategies
	Greater China
equities
China, China A,
Greater China andHong Kong	
Asia Pacific equities
Asia Pacific, India
and Japan
Michael Stapleton
Managing Partner,
First State
Stewart Asia

Martin Lau
Managing Partner,
First State
Stewart Asia
Gokce Bulut
ESG Committee member

22

Investment philosophy and approach

Stewardship and ESG integration

First State Stewart Asia’s investment philosophy
is founded on the concept of responsible
stewardship. Most importantly, we invest
our clients’ capital as if it were our own. We
believe that investment ought to have a social
purpose, this being the efficient allocationof clients’ assets to high quality companies at
sensible prices.
When we make an investment, we regard
ourselves as buying shares, on behalf of ourclients, in a real business. This entails
responsibilities as well as rights, and weengage extensively on environmental, labourand other governance issues.
We are conviction-based, bottom-up stock
selectors with a strong emphasis on highquality proprietary research and direct contact
with the companies in which we invest. The
most significant source of investment ideas
comes through country and company visits.
As a team, we conduct over a thousand
direct company meetings throughout theyear, seeking to identify a small sub-set ofcompanies possessing superior levels of
stewardship in addition to a strong franchiseand solid financials.
As a result, our asset allocation on a country
and industry level is a residual of our stock
selection process. Formal limits on absolutelevels of exposure to individual countries andindustries are prescribed for risk-control
purposes to ensure that sensible diversification
is maintained at all times.
We are long-term investors and prefer toinvest in quality companies that we canhold on to for many years. Our investment
approach adopts an absolute return mindset
and is inherently conservative, focusing on
capital preservation as well as capital growth.
By focusing on the potential downside (notjust the upside) when making an investment
decision, we ensure that the risk to long-termclient returns is significantly reduced.

First State Stewart Asia is a long-term
investors and is focused on investing in a
responsible way. We believe that ESG factors
highlight the long-term sustainability of acompany and can have an important impact
on investment performance. Therefore, we
carry out a comprehensive analysis on ESG
issues and have taken steps to incorporate
ESG factors as an integral part of ourinvestment process.

Team profile
Number in team

15

Case Studies – Responsible Investment
in Practice

Ryohin Keikaku
Company Industry: Retail and FoodCountry of domicile: Japan
Holding Value (US$ 04/02/2016):
US$6,377,295
Issue description: Social and Environment
Ryohin Keikaku is a speciality retailer sellinghousehold goods, apparel and food under the
MUJI brand. The company has a focus on social
responsibility, environmentally friendly products,
reduced waste and quality materials.
Investment rationale: High quality retailer (MUJI)
expanding into Asia from a strong base in Japan.
Company focuses on simplicity in its products, byminimizing packaging and using environmentallyfriendly materials with the aim of minimisingwaste and conserving natural resources.

ESG implementation
Assessment and monitoring
ESG factors provide a set of standards thatinvestors can use to assess investments.
We are very aware of the potential risks andopportunities associated with environmental,social and governance factors, and weincorporate ESG research and analysis– no matter whether positive or negative –into our investment decision-making. Our
primary source of ESG information is
one-on-one meetings with companies, aswell as an ESG news source subscription. An
increasing amount of regulations requiring
companies to disclose their ESG
performance have been adopted globally.
We believe it has become increasingly
important for investors to understand the
ESG factors of their investment portfolios.

Investment information and performance^
All information as at 31 December 2015.

Investment characteristics
Average turnover

20.8%

Stock name retention

88.8%

Top five holdings
First State Asian Equity Plus

Taiwan Semiconductor
CK Hutchinson Holding
Delta Electronics
CSL
Housing Development FinanceTop five holdings across portfolios

CK Hutchison Holdings
Delta Electronics
Taiwan Semiconductor
ENN Energy Holdings
China Mengniu Dairy
AIA Group Ltd

Integration
In our view, fundamental company analysis
should always include a view on ESG factors,
as they are likely to have an impact on thesustainability of a company’s business andshare price performance. We haveintegrated environmental, social andgovernance (ESG) factors to sit alongside
traditional financial analysis, as we believethat the effective integration of ESG criteria
could result in better investment decisions.
We use RepRisk, an ESG risk platform, whichruns an online searchable database on therisk exposure of companies and projects
related to ESG issues.

Engagement
We identify engagement issues throughour investment research, analysts’ meetings
and the ESG news platform. Company
engagement plays a critical role in helping
to understand the business in terms ofcompany history, culture, long-term strategy
and governance structure. As long-term
shareholders, we are focused on identifying
companies that are driving sustainableoutcomes. Through active engagement,
we believe we are able to raise legitimate
concerns and persuade management toaddress the issues at hand, thus adding
to portfolio performance.

Five year performance*
Portfolios outperforming benchmark

100%

Weighted average outperformance

4.21%

Absolute return
First State Asian Equity Plus Fund

6.8% p.a.

* Performance is quoted pre-fees and in US$ terms.

Case Studies – Responsible Investment in Practice

Delta Electronics

Vitasoy

Company Industry: Electronics
Country of domicile: Taiwan
Holding value (US$ 04/02/2016):
US$538,398,271
Issue description: Environment: Energy
Efficiency, Automation
Delta Electronics engages in the research anddevelopment, design, manufacture and saleof electronic control systems, industrial
automation products, digital display products,
energy-saving lighting application, and energy
technology services.
Investment rationale: Great track record ofreinventing new businesses with a focus on
products that offer energy efficiency andautomation. The company has a proven abilityof moving up the value chain as evidenced byresults and margin improvement. The balance
sheet of the company is solid. The family whoowns it has a good track record of looking afterminority shareholders.

Company Industry: Beverages
Country of domicile: Hong Kong
Holding value (US$ 04/02/2016):
US$82,245,840
Issue description: Healthy Beverages and Soya
Milk Drinks, Consumption of Soya Milk,
GovernanceVitasoy International Holdings manufacturesand sells soy-based food and beverages.
The company operates in Hong Kong, China,
Australia and New Zealand, North America,and Singapore. It offers its products underthe brands VITASOY, VITA, SAN SUI, CALCI-PLUS,
TSING SUM ZHAN, NASOYA, AZUMAYA,
and UNICURD.
Investment rationale: A conservative, familyowned, professionally managed manufacturer of(mostly) health foods with a 70 year history anda dominant position in a number of markets.
In the process of what feels like a successful
foray into mainland China with strong cash flows
backed by a very solid franchise in Hong Kong.

^ Figures are representative of all team portfolios. Please see Appendix 3 for important information on the calculation and use of the metrics provided.

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

23

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

Investment philosophy and approach

Team profile

The three key foundations to our investment
philosophy are:Our investment team has a balanced compositionof both senior and younger members that allows
marrying deep knowledge and experience in themarket with the energy and vigour to deliver
outperformance.
Hazrina Ratna Dewi is the Head of Indonesian
Equities and is responsible for equity analysis,
strategy, and portfolio management, as well
as sector and stock selection. She has beenworking in the financial industry since 1993 andshe has experienced several economic cycles,
including the Asian financial crisis in 1998.
Hazrina is the RI lead.
Ni Made Muliartini is a Senior Equity Investment
Manager who is responsible for equity analysis
and portfolio management. She has worked in
the Indonesian equity market since 2000.
Amica Darmawan is an Equity Investment
Manager and is responsible for equity analysis
and stock selection. She is also responsible forthe implementation of the ESG database theteam is working on. She has been working in
the financial industry since 2002.

Active management strategy–– Our ability to manage large amounts of
information and successfully apply it to our
individual security selection process gives
us a competitive advantage.
–– We make investment decisions based on
our continual assessment of which assets
are likely to maximise wealth creation. In
applying this active approach, a medium-tolong-term decision-making framework has
been adopted.

Hazrina Dewi
Head of Indonesian
Equities and ESG
Committee Member

Invest in quality assets
We believe in buying good assets at sensible
prices rather than mediocre assets atperceived bargain prices. To identify quality
assets, we combine solid research with soundinvestment judgement.
Disciplined investment process
We continuously monitor and control various
investment risks. As a professional investment
manager, our role is not to avoid risks, butrather to understand the relationship between
risk and return and to manage risk appropriately.
Our disciplined methodology also conveys ourpractice of not relying on short-term predictions
in our decision-making process. Instead, we
focus on the medium-to-long-term ones.
We place strong emphasis on high quality
proprietary research and direct contacts withthe companies in which we invest.

Stewardship and ESG integration
In a fast growing and volatile environment,such as Indonesia, we believe that companies
with a good understanding and managementof ESG risks and opportunities are more likely
to succeed over the long term.
The consideration of ESG factors from both aninvestor and a corporate perspective is still fairly
new in Indonesia, with standards lower than inmore developed economies. While this meansthat we must be flexible in our consideration of
ESG factors, we believe that as the understanding
and adoption of leading approaches to ESG
issues grow, the market will adopt higher
standards over time.
In this regard, we appreciate companies that
communicate openly with investors and whocarry out their business plans as disclosed.
We have incorporated our ESG scores withcompanies’ financial forecasts and also usedthem to influence the discount or premium ofcompany valuations. However, given the depthof the Indonesian equity market, we arelimited in how fully we can integrate thismethod. We also use our understanding ofa company’s ESG risks as a flag to monitor
the company more closely.
24

Number in team

6

Average experience

14 years

Average years in team

7 years

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

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

Engagement
We have visited every company in our
portfolio and we are in regular contact withmanagement and/or investor relations. We
collectively completed around 113 management
meetings and company visits during 2015.
Issues for engagement are identified throughthe detailed company research and analysis.
Progress on ESG issues is monitored by analysts
through a review of the company visits record.
Subsequent meetings with management
provide the opportunity to monitor progresson particular topics of concern.
Engagement activities are designed to
improve our understanding of the policies
and practices of companies.

Investment information and performance^
All information as at 31 December 2015.

Investment characteristics
Average turnover

38.9%

Stock name retention

56.25%

Top five active holdings

Telekomunikasi Indonesia
HM Sampoerna
Unilever Indonesia
Bank Central Asia
Bank Rakyat Indonesia% of portfolio companies met with100%

Five year performance*
Portfolios outperforming benchmark

66.1%

Absolute return
First State IndoEquity Sectoral Fund

26.99% p.a.

* Performance is quoted pre-fees and in IDR terms.

Case Studies – Responsible Investment in Practice

PT Indosat Tbk
Company industry: Telecommunications
Country of domicile: Indonesia
Holding value: US$0
Issue description: Governance, Treatment of Minority Shareholders
PT Indosat Tbk is a telecommunications services and network provider in Indonesia. The company offers
communication services for mobile-phone users. The company also provides fixed-voice services multimedia,
internet and data communication services.
The Indonesian telecoms sector has experienced a period of fierce competition which has now subsided.
Within the sector, earnings growth is improving and companies have begun to deleverage their balance
sheets. Increasing tariffs have resulted in companies reducing their financial risk exposure.
PT Indosat has been monitored by the team for some time, with valuations looking increasingly promisingand the company seen as an attractive potential addition to our existing holding in Telekomunikasi Indonesia.
Through our monitoring process, we had increasing concerns regarding the corporate governanceof the company in relation to the protection of the rights of minority shareholders. In addition, the parent
company of PT Indostat announced that it would charge the company royalties for the use of a brand,
that in our view, had little commercial value. These issues have triggered an engagement process with thecompany so we can fully understand the impact that these issues may have on our view of the company
as a long-term investment opportunity.

^ Figures are representative of all team portfolios. Please see Appendix 3 for important information on the calculation and use of the metrics provided.

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

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

Investment philosophy and approach
Our Australian Equities, Growth team is one of
the largest in the Australian sharemarket andhas the resources to complete deep industry
analysis to understand the drivers of return on
invested capital. While listed companies tend
to be well covered by the sell-side broker
community, they are not always well researched.
Accordingly, we maintain a significant levelof contact with listed companies, unlistedcompetitors, suppliers, customers and industry
experts to identify opportunities.
Our philosophy is that:–– Growing companies which generateconsistent long-term returns and canreinvest above their cost of capitalprovide the greatest shareholder value.
–– Changes to company returns on invested
capital have high explanatory power for
stock outperformance.
–– Understanding industry drivers is critical tounderstanding what drives stock performance.

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

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

Team profile
The Australian Equities, Growth team is
one of the largest and most experienced
in the Australian equities market. The teamis led by Marcus Fanning, who has ultimate
responsibility for the performance of all
Australian Equities, Growth portfolios.
The team is organised into four sub-groups;
large caps, small caps, dealers andinvestment systems.
Alex Gallard, Senior Analyst, is the team’s RI
lead. Alex has 25 years of experience.
Number in team26

16

Average experience

18 years

Average years in team

10 yearsCase Studies – Responsible Investment
in Practice

Crown Resorts
Company industry: Gaming and Entertainment
Country of domicile: Australia
Holding value: US$0 – we have now exited
our position
Issue description: Governance – Board
Independence
Crown wholly owns and operates two integrated
resorts in Australia; Crown Melbourne
Entertainment Complex and Crown PerthEntertainment Complex. Crown also owns andoperates Crown Aspinall’s casino in London.
Crown holds a significant interest in Melco
Crown Entertainment Limited (MCE), listedon NASDAQ, which operates casino and hotel
properties in Macau.
During 2015, Crown Resorts purchased a numberof non-gaming assets, including 20% of the Nobu
restaurant chain for US$100 million in Octoberand a 50% acquisition of the related-partytransaction of Packer’s Ellerston Farm for $60
million in August 2015. These acquisitions raised
concerns about the governance, risk appetite andindependence of the board.
Post these transactions, the board announced
that James Packer will be leaving the board
as chairman and reducing his time spenton the core business. This has been designed
to take away any further potential conflicts.
Unfortunately, speculation around the privatisationof some of the Crown Resorts businesses andpotentially an increase in advisory fees to James
Packer and his investment company (Consolidated
Press Holdings) have not improved the perceptionof the board.
On concerns surrounding governance and board
independence, together with diversification awayfrom its core casino business, we have now
exited our position in Crown.

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

Investment information and performance^
All information as at 31 December 2015.

Investment characteristics
Average turnover

40.66%

Stock name retention

42.55%

Top five holdings

Commonwealth Bank of Australia
Westpac Banking Corporation
CSL
Australia and New Zealand Banking Group
Transurban Group Ltd% of portfolio companies met with

100%

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

Five year performance*
Portfolios outperforming benchmark

100%

Weighted average outperformance

4.18%

Engagement

Absolute return
Wholesale Australian Share Fund

9.78% p.a.

We have active dialogue with many chairpersons
and/or senior company management onmaterial ESG issues which we identify throughour consideration of ESG risks. We try to gain
comfort that the company’s senior management
and board are aware of, and accountable for,the management of material issues.
Where we feel material issues are not being
appropriately, addressed it can ultimately flow
into our proxy voting and investment decisions.

* Performance is quoted pre-fees and in $A terms.

Case Studies – Responsible Investment in Practice

Sealink Travel Group
Company industry: Tourism and Transport
Country of domicile: Australia
Holding value: US$8,439,766
Issue description: Governance – Remuneration
Sealink Travel Group is a tourism and transport company. It offers ferry services, tours, packaged holidays,
retail travel services and accommodation facilities in South Australia. The company’s Captain Cook Cruises
segment runs tourist cruises, charter cruises and ferry passenger services on Sydney Harbour.
We discussed with senior management our intention to vote against several proxy voting resolutions,most notably an equity grant suggested for a non-executive director which was dependent on company
performance. We are of the view that non-executive directors should be on standard, fixed remuneration
to maintain the highest possible degree of independence.
We discussed the resolution with senior management and the chairman. They listened to our concerns,
and the contested resolution was subsequently removed. Sealink remains one of our favoured positionsin the small caps portfolio.

^ Figures are representative of all team portfolios. Please see Appendix 3 for important information on the calculation and use of the metrics provided.

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27

Australian Equities, Core>	Inception Date
1993
>	Location
Sydney>	Strategies
	Australian Equities,
Tax Aware, Equity
Income, Geared,
Indexed, Small
Companies andSmall Companies
Long ShortInvestment philosophy and approach
Our strategies seek to protect and create
long-term wealth for our investors by taking anactive and disciplined approach to managing
investments in the Australian equity market.
Our investment process has no persistent stylebias and seeks to add value regardless ofmarket cycles or thematics. We employ asensible, transparent investment process,which has been unchanged for more than
20 years. Disciplined and risk-aware portfolio
construction is a key feature of our style.
The business has been built on people withsound judgement. The experience of working
through multiple business cycles over the years
provides us with the knowledge and expertiseto outperform in a range of market conditions.

Stewardship and ESG integration

Matthew Reynolds
Head of Australian
Equities, Core

Robin Balcomb
ESG Committee member

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

Team profile
Led by Matthew Reynolds, the investment
team is highly experienced and has a mixof complementary skills. Specialist investors
within the team manage a range of Australian
equity strategies, including active large cap,
active small cap, equity income, tax awareand passive.
Our incentive structures are directly aligned
to the results we deliver to our investors.
We believe that this promotes commitment
and intellectual engagement, aligning ourinterests and success with those of ourinvestors.
The team’s RI lead is Robin Balcomb, Portfolio
Manager, who has 17 years of experience inthe funds management industry.
Number in team28

19

Average experience

15 years

Average years in team

8 years

Case Studies – Responsible Investment
in PracticeAnsellCompany industry: Healthcare
Country of domicile: Australia
Holding value: US$6,078,445
Issue description: Governance, Remuneration
Ansell is a healthcare safety and protection
solutions company. It develops, manufacturesand markets a wide range of latex rubber
surgical and industrial gloves, condoms andprotective clothing.
Remuneration issues continue to attract
significant attention and, at times, theconsternation of investors. An example thatcame to light during 2015 was with Ansell,
where the board proposed changes to the shortterm incentive (STI) metrics for members of
the senior management team. These changes
appeared to offset around half of the potential
long term incentive payments from 2014, whichwere not made, as key performance metrics had
not been achieved. Essentially, the board wasrecommending the award of STI paymentseven though hurdles had not been met.
The rationale for the proposal appeared to
be predicated on exchange rate movements,
which had worked against Ansell during themeasurement period and made it morechallenging for performance targets to be
met, or exceeded. Whilst we recognise this, it
is incongruous to adjust performance metrics
lower based on adverse currency movements
without similarly adjusting them higher during
periods of favourable currency movements. In
Ansell’s case, there also appeared to be morethat management could have done to help
mitigate currency impacts, such as optimising
its manufacturing footprint. Accordingly, we
voted against this resolution.
Our stance on management remuneration isunchanged. It is critical that companies develop
remuneration policies that are appropriate andwhich help attract and retain key management
talent for the long-term benefit of shareholders.
We are not against the award of potentiallysignificant incentive payments, as long as a clear
link between remuneration and performancecan be demonstrated.
In all cases, we expect the chairman of the
remuneration committee to be able toprovide appropriate justification for levels of
remuneration and the link of these to company
objectives and performance. There should also
be full disclosure of directors’ total remuneration
packages, including share options, fringe
benefits and retirement benefits.
Our concerns regarding this particular issue
appeared to be shared by other shareholders,
as the proposal failed to be passed at the Annual
General Meeting. Notwithstanding our concerns
regarding remuneration policy, Ansell rates
relatively well on ESG grounds. The company
has demonstrated an improved focus on areas
including workforce safety and energy use.

ESG implementation
Assessment and monitoring
We have adopted a bottom-up approach toidentifying key ESG risks. Our internal analysis
is supplemented by company disclosures,
media and external research. Our analysts
consider ESG and sustainability issues as oneof six factors in the stock research and selection
process. A consideration of a company’s ESG
policies and practices is therefore an explicit
part of the stock research process and has
been in place since 2007.

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

Engagement
We engage with all companies held in our
portfolios and many others in the investment
universe and beyond. Issues for engagement
are identified through the detailed company
research and analysis described above.
Progress on ESG issues is monitored byanalysts, through a review of the company
visits historical record. Subsequent meetings
with management provide opportunities
to monitor progress on particular topics
of concern.
Engagement activities are designed to
improve our understanding of the policies
and practices of companies and assess
their effectiveness in managing ESG risks.
The outcomes of our engagement withcompanies flow through to proxy voting
decisions and, ultimately, investment decisions.

Investment information and performance^
All information as at 31 December 2015.

Investment characteristics
Average turnover

49.89%

Stock name retention

44.44%

Top five active holdings

Commonwealth Bank of Australia
Rio Tinto Limited
Aristocrat Leisure
Macquarie Group
Suncorp Group Limited% of portfolio companies met with100%

Five year performance*
Portfolios outperforming benchmark

100%

Weighted average outperformance

2.62%

Absolute return
Wholesale Australian Share – Core Fund

8.17% p.a.

*	Performance is quoted pre-fees and in $A terms.
Passive portfolios are not included the outperformance calculations.

Case Studies – Responsible Investment in Practice

Alumina
Company industry: Mining
Country of domicile: Australia
Holding value: US$5,266,496
Issue description: Environmental – Pollution/Waste Management
Alumina explores and mines for nickel, alumina, copper, gold and uranium. It invests in bauxite mining,alumina refining and selected aluminium smelting operations through its subsidiary, Alcoa World Alumina
and Chemicals.
The Australian Equities, Core team held investments in Alumina Limited during 2015 even though alumina
refining is an intense, chemical process with significant waste streams.
Following site visits to the company’s Australian operations, in our view Alumina Limited has gone toimpressive lengths to meet stringent environmental requirements. No material environmental or safety
problems were observed during our research trips, or have been identified in our company analysis.
Further, Alumina Limited is investing in red mud filtration technology. This is expected to further reducethe company’s waste footprint, allow for better recycling of caustic and water and, potentially, result insome construction-related by-products which have value. These initiatives not only provide an
opportunity for the company to reduce its environmental impact, but might also reduce sustaining
capital expenditure requirements. This example highlights how sustainability issues can have a genuine
impact on company financials.

^ Figures are representative of all team portfolios. Please see Appendix 3 for important information on the calculation and use of the metrics provided.

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29

Realindex Investments>	Inception Date
2008>	Location
Sydney>	Strategies
	Systematic Equities
Australian Large andSmall Caps, Global
Hedged andUnhedged andEmerging Markets

Investment philosophy and approach

Team profile

We believe that markets are not perfectly
efficient, meaning that there is mispricing
of companies relative to unknown fair values.
This mispricing means that there is small
number of systematic factors such as Value(cheap stocks outperform expensive stocks)
Momentum (stocks with strong pricemomentum outperform stocks with low pricemomentum) and Quality (low quality stocks
underperform) which can lead to excess
returns over and above those of the market
over a long-term horizon.
We use systematic strategies targeting thesefactors and aimed at outperforming traditional
market cap weighted indices. These strategies
may vary from rules-based non-price weighted
methodologies such as the Fundamental
Index or Equal Weighting, to customised
solutions which may target exposure to
a combination of factors.

The Realindex team comprises sevendedicated investment professionals, with astrong background in quantitative research.
The team is led by Andrew Francis, who has
more than 20 years’ investment experiencein consulting, funds management andinvestment banking.
Our dedicated team of portfolio managers
and analysts is responsible for research,
portfolio construction and implementation.
We work collaboratively to develop robust
and consistent solutions which meet ourclient’s needs and deliver value.
Megan Ford, a Portfolio Manager with over six
years’ industry experience, is the team’s RI lead.

Stewardship and ESG integration
Andrew Francis
Chief Executive,
Realindex Investments

Megan FordESG Committee member

30

As part of our stewardship responsibilities,
we exclude specific companies involved inmunitions and armaments across all of ourportfolios, as well as apply screens to exclude
tobacco and other ESG ‘red flag’ companies
for certain clients. In addition, we believe thatvoting on company resolutions is an important
responsibility of any equity holder, and we voteon company resolutions using the servicesof CGI Glass Lewis.
Direct access to ESG ratings and data provides
us with a comprehensive database of ESG
scores for global companies. This has facilitated
ESG research into customised client solutions,with a focus on the interaction between ESG
awareness and our portfolios.
For our Fundamental Index portfolio, thesystematic rules-based investment methodology
does not explicitly target ESG considerations.
However, attention to governance is an outcomeof the investment process, as we include
additional screens such as a quality score
which measures the financial strength of acompany providing correlation with good
corporate governance.

Number in team

19

Average experience

12 years

Average years in team

4 years

ESG implementation
Assessment and monitoring
We utilise the capabilities of two external
ESG vendors, Sustainalytics and GMI Ratingsin addition to CGI Glass Lewis (for proxyvoting). This has enabled us to incorporate
environmental, social and governancescores and underlying historical data into
our research and has facilitated ESG research
into customised client solutions, with a focus
on the interaction between ESG awarenessand Realindex portfolios. The systematicincorporation of ESG into the Realindex
investment process remains an ongoingarea of research for our business.

Investment information and performance^
All information as at 31 December 2015.

Five year performance*
Portfolios outperforming benchmark

51%

Weighted average outperformance

0.06%

Absolute return
Realindex Global Share Fund11.97% p.a.

Top five active holdings
Realindex Global Share Fund

Industrial and Commercial Bank of China
Limited Class H
PetroChina Co. Ltd. Class H
Agricultural Bank of China Limited Class H
Wal-Mart Stores, Inc.
Nippon Telegraph and Telephone Corporation

Integration* Performance is quoted pre-fees and in $A terms.

ESG research is conducted with a focus ondeveloping customised solutions for clients.
All research is designed to be implemented
as systematic, rules-based overlay applied
over a core portfolio and utilises data
provided by GMI Ratings and Sustainalytics.
Some key examples of where we haveincorporated and/or researched ESG overlays
include the following:
1.	The removal of cluster munitions, tobaccoand other ESG ‘red flag’ companies from
portfolios.
2.	Penalising poorly ranked companies onaggregate ESG and top level Environmental,
Social and Governance metrics respectively.
This research found that penalising and/or
excluding such companies from theportfolio did not significantly change theoverall risk return profile of the portfolio
despite potential sector and country
biases between the different metrics.
We have published our findings in a
research paper for clients which
can be downloaded from our website.
3.	The relationship between governanceand shareholder interests for closely held
public companies.
4.	Penalising and/or rewarding companies
based on their carbon footprint and thatof their suppliers.

^ Figures are representative of all team portfolios. Please see Appendix 3 for important information on the calculation and use of the metrics provided.

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

31Australian Fixed Income and Global Credit>	Inception Date
1986>	Location
	Sydney, Hong Kong,
Singapore, Louisvilleand London>	Strategies	
Global Credit,
Global Fixed Income,
Australian Fixed
Income, InflationLinked Bonds, Asset/
Liability Management
and Indexed Fixed
IncomeInvestment philosophy and approach
The key to our investment philosophy is“Value for Risk”. We believe that fixed income
and credit markets are sometimes inefficientas market participants approach investingwith different timeframes and different
motivations. By adopting a longer-term
viewpoint, we are able to take advantage ofshorter-term price movements to generatevalue for our clients. We know that to generate
returns we need to take on a degree of risk.
As a result, we evaluate and measure risks
carefully to make sure our investors arecompensated.
For our credit-based strategies, we also believethat returns are asymmetric over the medium
term and that avoiding the losers is more
important than picking the winners. For
this reason we construct a highly diversified,benchmark unaware portfolio that seeks
to balance returns with lower tail risk.

Stewardship and ESG integration

Tony Adams
Head of Australian
Fixed Income andGlobal Credit

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

Team profile

Yen Wong
ESG Committee member

Tony Adams is the Head of Australian Fixed
Income and Global Credit. He is responsible formanaging one of the largest and mostexperienced teams in this asset class inAustralia. Tony brings 29 years of experience tohis role, and is responsible for managing oursuite of global credit products. Tony is also
actively involved in the investment processes
across all of our diverse strategies.
Yen Wong, a Credit Manager with 18 yearsof experience, is the team’s RI lead. Yen
provides support to the Head of Credit
Research, Toni Spencer (25 years’ experience),
and together they are responsible for ensuring
the consistency and quality of the outputs of
the research process.
Number in team

32

25

Average experience

16 years

Average years in team

7 years

Case Studies – Responsible Investment
in Practice

Deutsche Bank AG
Company industry: Financial Services
Country of domicile: Germany
Issue description: GovernanceDeutsche Bank (DB) is a leading global
investment bank with a strong and profitableprivate clients franchise. A leader in Germany
and Europe, the Bank is continuously growing inNorth America, Asia and key emerging markets.
In October 2015, we downgraded our internalrating on DB following recent poor
performance, due to further extraordinary
charges brought against them, as well as
ongoing concerns regarding poor governanceand business ethics issues. Issues, amongst otherallegations, included: reports of staff being
remanded in custody on charges of tax evasion
and fraud; a US$2.5 million fine by the US
Commodity Futures Trading Commission forderivatives reporting failure under Dodd Frank;
UK FCA fines for errors in reporting related toequity swaps; and a US$2.5 billion fine to US and
UK authorities after admitting to LIBOR
manipulation.
Capital, whilst improved, remains low relative
to global banking peers and against increasing
regulatory requirements. Organic capital
generation is constrained by poor earnings
generation/lack of cost efficiencies. Substantial
fines and settlements relating to misconduct
are also likely to continue to negatively impact
capital. Our negative outlook reflects the strong
possibility of further asset impairments, weak
profitability from core banking divisions,litigation risks and the likely need for further
capital to support current and new businesses.
It also reflects substantial execution risks related
to strategy changes under new CEO. DB hasa mixed track record of delivering against
targets. We continue to watch the outcomeof outstanding unresolved litigation charges andwhether the restructuring will produce
a more sustainable business.

ESG implementation
Assessment and monitoring

Integration

Engagement

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

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

Our key engagement is with banks andcounterparties to understand their ESG risks
and their approach to managing those risks.
For example, climate change and otherenvironmental risks relating to the bank’sloan book and financing and aspects of theirlending policies.
A challenge for responsible credit investors has
been effective ESG engagement with issuers.
This is in part due to the contractual nature ofbond investments and the fact that a majority
of securities are purchased on secondary
markets. We do actively incorporate ESG
questions into meetings with primary issuers.
Our brokers are aware of our ESG focus andfacilitate ESG discussions where possible.
We continue to build on this program ofengagement over time.
We are continuing our engagement with theAustralian semi-governments when meetingwith senior Treasury officials. Our engagement
to date has focused on the trade-offs madebetween the state government and different
stakeholder groups and between long-termand short-term outcomes. The aim of theengagement is to assess the governanceframework as well as gather insight andassurance into the capability of individual
governments to make decisions whichsustainably manage different stocks ofcapital (financial, manufactured, intellectual,human, social and natural).

Investment information and performance^
All information as at 31 December 2015.

Investment characteristics
We have broken down the team’s passive vs. active strategies and the relative exposures
to sovereign, corporate and securitised debt. We have also included the split between developedand emerging markets.
This breakdown is designed to give a better sense of how different aspects of the investment
approach described above are relevant to the different types of the team’s investments. Please
note that passive funds use our internal credit rating which incorporates our ESG assessment.
Our online report includes analysis of the relationship between our ESG scores, internal credit
rating and default experience.

Strategies

Sovereign,
semigovernment andsupra-national

Corporate(financials)

Corporate(nonfinancial)

Securitised

Total

Passive

85.6%

9.4%

3.9%

1.0%

100.0%

Active (Fund)

66.2%

11.6%

20.5%

1.6%

100.0%

Sovereign,semi-government andsupra-national
Developed market

87.5%

Emerging market

12.5%

Total

100.0%

Five year performance*
Portfolios outperforming benchmark

38%

Weighted average of outperformance

0.07%

Absolute return
Global Credit Income Fund

5.64%

* Performance is quoted pre-fees and in $A terms.
Passive portfolios are not included the outperformance calculations.

^	Figures are representative of all team portfolios. Please see Appendix 3 for important information on the calculation anduse of the metrics provided.

Volkswagen AG
Company industry: Automotive
Country of domicile: Germany
Issue description: Governance, Fraud
Volkswagen AG develops and produces passenger
cars, light commercial vehicles, trucks and buses.
It also produces large-bore diesel engines, turbo
compressors and industrial turbines.
We downgraded the Internal Credit Rating
and revised our ESG risk assessment following
Volkswagen’s admission in Sep 2015 that it haddeliberately defrauded the US EPA on theemissions testing of its diesel-engine vehicles.
The total costs from reputational damage, brandimage, litigation and regulatory penalties are
difficult to quantify, but are likely to be in thebillions of dollars.
Prior to the downgrade, our internal rating on
Volkswagen was already lower than the agencies’
ratings, reflecting our assessment of high ESG risk
from weak corporate governance, the complex
group structure and business ethics controversies.
The scandal was particularly difficult to predict,even with a robust ESG risk assessment framework.
This issue highlights the importance of portfolio
diversification, which recognises that some risk
events are beyond an analyst’s frame of reference,and helps mitigate the impact on portfolios shouldsuch events occur.

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33

Emerging Markets Debt

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

Helene Williamson
Head of Emerging
Markets Debt

Manuel Cañas
ESG Committee member

Investment philosophy and approach
The team believes that:–– Emerging markets are inefficient and slow
to price in developments.

Paraguay sovereign–– Experience and strong networks are
essential for adding value.
We use a disciplined and risk-controlled
investment approach based on our
proprietary Key Factor Model. This forms
the basis for our investment decisionand is designed to produce long-termrisk-adjusted outperformance.
The investment process has three distinct
stages:1.	An assessment and forecast of themarket environment and individual
emerging markets.
2. Portfolio construction and implementation.
3.	Portfolio monitoring and ongoing adjustment.

Stewardship and ESG integration
Our approach to investing is driven by acommitment to providing the best possible
outcomes over the long term for our clients.
Our analysis of countries focuses on six factors,
which we believe are the main drivers ofinvestment returns. These are: politics,
structural reforms, fiscal policy, monetary
policy, the external sector and technicals. Threeof these factors are intimately related to RI andstewardship: fiscal policy, politics, andstructural reform.

Team profile
The team comprises nine investment
professionals and is led by Helene Williamson,
who has 20 years investment management
experience. Manuel Cañas, Deputy Team Head,is the team’s RI lead and has 16 years ofexperience.
Number in team

34

Case Studies – Responsible
Investment in Practice

9

Average experience

13 years

Location

LondonIn the context of an otherwise promisingmacro improvement situation, we find thatvery low levels of Human Development
translate into considerable contingent liabilities
which could impair, or derail, Paraguay’s
long-term development.
Our Country Research Paper produced in June2015 reflects our concerns about the poor
state of human development in Paraguay andit weighs negatively on our assessment of thecountry. The rate of potential growth is limited
by few prospects of improvement in labour
productivity and contingent liabilities.
It takes decades to improve the levels ofhuman development, but we look for earlysignals of any prospective improvements.
The Paraguayan economy has been growing
faster than peers, and thus acting as anenabler of change. But the United Nations
Human Development Index for Paraguay
has remained stable at low levels.

Costa Rica sovereign
In our ESG analysis, Costa Rica scores relatively
high when compared to other peers. Thatsaid, its worst ranking is in the Government
Effectiveness Index. In addition, our Momentum
indicator is pointing to rapid deterioration(-13%). At the core of this problem lies theinaction of the government to introduce
much-needed fiscal reforms to support thereturn to a sustainable fiscal path. During a visit
to Costa Rica, we took the opportunity to raise
our concerns regarding the lack of progress.
Since our engagement, there has been
no material progress on fiscal reform andsubsequently Costa Rica lost its investmentgrade credit rating.

ESG implementation
Assessment and monitoring

Integration

Engagement

ESG issues are identified and considered in
the course of the team’s investment analysis.
At the core of the process is the Key Factor
Model, which comprises six factors, fromwhich we approach the analysis of the issues
in our investment universe.
One of the key factors in our country analysis
is political risk. In emerging countries, where
democracies are relatively fragile and young,
it is not uncommon for elections to be highlypolarised. The political spectrum can bequite broad and so is the range of possible
outcomes when key elections are held. In thiscontext, we try to gauge social cohesion, toensure that whatever the election outcome,the government will enjoy a broad and diversebase of support. To the extent that this may
not be the case, the willingness to service its
debt by the incoming government could bechallenged or questioned.

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

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

Investment information and performance^
All information as at 31 December 2015.

Investment characteristics
We have broken down the team’s passive vs. active strategies and the relative exposures tosovereign, corporate and securitised debt. We have also reported the split between investment
grade and high yield debt as this is a factor when investing in emerging markets, both in terms ofrisk and return and the challenges of integrating ESG factors.
This breakdown is designed to give a better sense of how different aspects of the investment
approach described above are relevant to the different types of the team’s investments.

Strategies

Sovereign,
semigovernmentand supranational

Active (Fund)

95.2%

Corporate(financials)

Corporate(nonfinancial)

Securitised

Total

2.1%

2.7%

0.0%

100.0%

Corporate(financials)

Corporate(nonfinancial)

Investment grade

56.2%

59.3%

High-yield securities

43.8%

40.7%

Total

100.0%

100.0%

Three year performance*
Portfolios outperforming benchmark

71%

Weighted average outperformance

0.04%

Absolute return
First State Emerging Markets Bond Fund (VCC)

14.95% p.a.

*	Performance quoted is pre-fees and in US$ terms. Three year performance has been provided as the teamhas not been in place for five years.

^ Figures are representative of all team portfolios. Please see Appendix 3 for important information on the calculation and use of the metrics provided.

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35

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

Jamie Grant
Head of Asian
Fixed Income and
ESG Committee
memberInvestment philosophy and approach
We seek attractive, risk-adjusted returns
through an active approach to managing
investments in the Asia region.
Our investment philosophy is based on the
belief that an active approach to managing
Asian Fixed Income (AFI) is best delivered
through a factor-based assessment of thedrivers of credit spreads, foreign exchange
and local government yields.
At the heart of our philosophy is a disciplined
risk management approach designed andsupported by a team of highly experienced
people. We have experienced many challenging
market cycles in recent decades. The experience
gained through these challenging cycles
provides the team with the experience andunderstanding of the factors that drive
markets in the region.

Stewardship and ESG integration
Our approach to investing is driven by acommitment to providing the best possible
outcomes over the long term for our investors.
Our analysis focuses on the factors we believe
drive outcomes in AFI which, in our experience,
are the main drivers of investment returns
for Asian currency rates, credit and foreignexchange as well as US dollar credit. These are:
Valuations, Technicals, Market Sentiment, thePolitical Environment and the Macro Outlook.
ESG issues are identified and considered in thecourse of the team’s credit analysis. ESG is
integrated into the process for assigning aninternal credit score. ESG has been extremely
beneficial in highlighting those non-financial
risks that could become financial, and ultimately
negatively impact the credit quality of the issuer.

Team profile
The team, managed by Jamie Grant,
comprises of eight highly-experienced
investment professionals based in Hong Kong,
Singapore and Indonesia. Jamie has more than
20 years’ industry experience specialising in
corporate credit.
Number in team36

8

Average experience

16 years

Average years in team

6 years

Case Studies – Responsible Investment
in Practice

Citic Securities Company
Company industry: FinanceCountry of domicile: China
Issue description: Governance, Corruption
Our outlook for Citic Securities was revised tonegative from stable, due to a large numberof senior executives being arrested by Chinese
authorities in relation to illegal trading in equity
markets during the July/August 2015 equity
market drop. Citic Securities is also being
investigated by the Chinese Securities Regulatory
Commission in relation to potential insider
trading and falsification of official documents.
While this is not isolated to Citic Securities, itis the most affected securities firm in China.
As the largest securities firm in China and astate-owned enterprise, the company is lessaffected in comparison to the executives
personally. We have since seen some of theexecutives released and have returned to work.
We have factored into the internal rating of
BBB- since initially rated in October 2014 a‘very high’ ESG risk. Internal controls and risk
management practices of this firm have been
weak. We believe the current situation is an
eventuation of these weaknesses.

Ping An Life Insurance Co of China
Company industry: FinanceCountry of domicile: China
Issue description: Governance, Board Structure
The BBB+ internal rating was initially given in
January 2016. This rating takes into account
China’s current active anti-corruption
investigation into the financial sector, which is
exposing firms in the sector to increased risks.
Rated as an ‘industry laggard’ in its governancepractices, this reflects, amongst other things,
the company’s weak board structure. Theinternal rating is rated one-notch lower than
it would otherwise be rated, given its strong
credit metric and good market growthpotential in the Chinese life insurance sector.

ESG implementation
The Australian Fixed Income andGlobal Credit team and the Asian
Fixed Income team share analyst resources
and the same ESG implementation process.
Assessment and monitoring
Analysts identify ESG risks during theirbottom-up credit research. We use customised
ESG rankings as a starting point for assessments.
Analysts consider these alongside their own
research with reference to a variety of otherexternal sources.
By analysing and assessing ESG issues
within a company, we can identify sourcesof non-financial risk. In line with our credit
philosophy of avoiding the losers, we are able
to identify companies with a higher default
risk than the balance sheet implies. This gives
us greater insight than that offered by a ratingfrom a traditional credit agency.

Integration
We assign a proprietary internal credit rating(ICR) to every bond we review. The ICR is aforward-looking measure of default risk and is
one of the key outputs of our research
process. It reflects all risks relevant for thatissuer, including ESG risk. Our ICR is on thesame scale as ratings assigned by the ratings
agencies but is often materially different forindividual issuers.
The ICR is also used by the credit portfolio
managers when making their decision to buy
or sell bonds and to determine position sizefor the funds that we manage. The Head of
Credit Research is responsible for ensuring theconsistency and quality of the ESG inputs.

Investment information and performance^
All information as at 31 December 2015.

Investment characteristics
We have broken down the team’s passive vs. active strategies and the relative exposures tosovereign, corporate and securitised debt. We have also included the split between developedand emerging markets.
This breakdown is designed to give a better sense of how different aspects of the investment
approach described above are relevant to the different types of the team’s investments.

Strategies

Sovereign,
semigovernmentand supranational

Corporate(financials)

Corporate(nonfinancial)

Securitised

Total

Active (Fund)

41.2%

32.9%

25.8%

0.2%

100.0%

Sovereign,semi-government andsupranational
Developed market

50.0%

Emerging market

50.0%

Total

100.0%

Five year performance*
Portfolios outperforming benchmark
Weighted average outperformance
Absolute return
Global Credit Income Fund0%-0.49%
4.3%* Performance is quoted pre-fees and in US$ terms.

Engagement
Issues for engagement are identified
following our thorough company research.
A challenge for responsible credit investors
has been effective ESG engagement withissuers. This is in part due to the contractual
nature of bond investments and the fact thata majority of securities are purchased on
secondary markets. We actively incorporate
questions into meetings with primary issuers
where relevant. Our brokers are aware of
our ESG focus, and facilitate ESG discussions
where possible. We continue to build on
this program of engagement over time.

^ Figures are representative of all team portfolios. Please see Appendix 3 for important information on the calculation and use of the metrics provided.

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

37

Multi-Asset Solutions>	Inception Date2012>	Location
	Singapore, Sydney
and London>	Strategies	Traditional balanced,
Objective-based,
Implemented
solutions andAdvisory services

Investment philosophy and approach
Our Multi-Asset Solutions team investment
philosophy is based on the following beliefs:–– In the long term, fundamental valuations
will assert themselves and be the mostimportant driver of returns.
–– In the short term, markets are not completely
and globally efficient due to a variety ofclientele effects (liquidity requirements,
regulatory constraints, mandatory hedging
and even simple home biases), providing an
opportunity to protect and enhance returns.
–– Investment decisions should be taken withrespect to the overall portfolio’s objective.
Therefore, we believe a global multi-asset
investment process can deliver on objectives
and consistently add value by:–– Designing the asset allocation to reflecteconomic climate expectations andresponsively adjusting to market developments.

Epco van der Lende
Head of Multi-Asset
Solutions–– Systematically exploiting market inefficiencies
by focusing on key fundamental driversof returns (Value, Momentum, Carry,
Fundamental, and Market Structure).
–– Blending disciplined quantitative underpinnings
with qualitative experience and expertise
across the broadest possible opportunity
set of markets and financial instruments.
We base these views on research (bothacademic- and market-based) and ourexperience delivering on client objectives. For
our research related to these topics, pleaserefer to our website.

Andrew Harman
ESG Committee member

38

Stewardship and ESG integration
We partner with our clients to provide solutions
that maximise the probability that they can meettheir investment objectives. We assess our clientneeds based on three key criteria being: risk
tolerance, investment horizon and return ambitionlevel. We utilise third party monitoring services
for our direct holdings.
As part of our stewardship responsibilities, we
exclude specific companies involved in munitions
and armaments across all of our portfolios. We
can also apply screens to exclude, for example,
tobacco and other ESG ‘red flag’ companies
for certain clients. In addition, we believe thatvoting on company resolutions is an important
responsibility of any equity holder and we voteon company resolutions using the advice andservices of CGI Glass Lewis.

Direct access to ESG ratings and data provides
us with a comprehensive database of ESG scoresfor global companies. This allows us to replicate
the intended equity market exposures andremove the poorly rated ESG companies, which
we use as a negative indicator, within their sector
classifications. Over time, this is expected to
add value to the portfolio by avoiding negative
investment outcomes.

Team profile
The Multi-Asset Solutions team provides
a range of services to institutional clientsaround the world in the fields of portfolio
management, asset allocation, asset/liability
management, portfolio construction and risk
management. We are a highly experienced
and cohesive team of eight investment
professionals located in Singapore, Sydney
and London.
Our dedicated team of portfolio managers andanalysts is responsible for research, portfolio
construction and implementation. We work
collaboratively with our clients to develop
robust and consistent investment solutions
which maximise the likelihood that our clients
will meet their stated investment objectives.
Andrew Harman, a Portfolio Manager withover eight years’ industry experience, is theteam’s RI lead.
Number in team

8

Average experience

13 years

Average years in team

4 years

ESG implementation
Assessment and monitoring
ESG research is currently conducted by theMulti-Asset Solutions team with a focus ondeveloping customised solutions for clients.
All research is designed to be implemented
systematically using data provided by MSCI
Governance Research and Sustainalytics.

Integration

Investment information and performance^
All information as at 31 December 2015.

Five year performance*
Portfolios outperforming benchmark

74%

Weighted average outperformance

0.14%

Absolute return
CFS Wholesale Balanced Fund

6.63%

* Performance is quoted pre-fees and in $A terms.

As part of our stewardship responsibilities,
we exclude specific companies involved inmunitions and armaments across all of ourportfolios, as well as apply screens to exclude
tobacco and other ESG ‘red flag’ companies
for certain clients. In addition, we believe thatvoting on company resolutions is an important
responsibility of any equity holder and we voteon all company resolutions where we can. Dueto the top-down investment process, we do
not normally directly meet with company
management.

^ Figures are representative of all team portfolios. Please see Appendix 3 for important information on the calculation and use of the metrics provided.

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

39Unconstrained Global Fixed Income–– Our process also defines and treats the
management of investment risks as
everyone’s responsibility. As fund failures
are most commonly associated with the
failures of risk management and control,
this approach makes the risk management
process more transparent and elevates
its status across the team.
Stephen Johnson
Head of Unconstrained Global Fixed Income–– We have developed an investment opinions
database and workflow system called theInvestment Opinion Network (ION) to
support this approach.

Our newest investment team is ourUnconstrained Global Fixed Income team
based in Louisville, Kentucky. In order toprovide some insights into the process and
ESG approach, we have included a Q&A
discussion with the Head of the team, Stephen
Johnson. From next year, the report will
include a dedicated profile on this team.

–– ION also systematises our research andinvestment view elements of our process,which are the building blocks for any
portfolio we manage. The system capturesand measures research and formalises its
linkage to our portfolios. This naturally
elevates the importance of our research,and creates a process for reflection andimprovement.

Please tell us about the history of the team
Most members have worked together for over
20 years. We have operated the same basic
investment process, inspired by a durable
investment philosophy, at two prior firms.
Our shared history includes the leadershipof two large fixed income managers, offering
a wide range of investment products,
managing a range of retail and institutional
offerings, tailored to an extensive range ofclients across the globe.
We are client-led, striving to align with ourclients at all times, providing them with
innovative solutions, as opposed to being
product-led. This stewardship mindset binds
our team and underpins how we have evolved
and grown over the years.
Please summarise investment process
and philosophy
Perhaps the team’s most important
accomplishment has been the design ofa unique investment process. Our processincludes some core principles and features
which allow us to achieve sustainable long-term
investment outcomes for clients. These include:–– Breaking down the portfolio manager role
into a series of smaller, manageable andmeasurable tasks and in doing so, removing
key person risk in addition to isolating andattributing outcomes to the various
contributions to the product.

40

ESG factors have long been used inequity and direct investments to add
value, with strong evidence to that
effect. Why do you think it has been
more difficult for fixed income investors?
When we think of ESG in our investment
process, we tend to think of investing incompanies that build sustainable products or
related services. Green funds, i.e. funds thatmake private and public equity investments inenvironmentally friendly products, are perhaps
the most well-known examples in the US.
We invest in public bonds. The universeof potential investments for public bondfunds is the public debt of large companies,
debt of sovereigns, and debt issued bygovernment-related or sponsored entities
such as Fannie Mae or Freddie Mac. Virtually
all of these entities create products orprovide services that are not explicitly
focused on sustainability factors.
In our process, we view the comparison of
ESG policies and the practices of bond issuers
as a risk management exercise, making the
ESG risk-assessment an integral part of our
security selection process. Provided that the
ESG analysis is future-focused, the benefits
to investors will show up over time.
How have you overcome some ofthese challenges when establishingyour investment process?
We have accepted this reality, with the plan
to reshape it over time. Our research process
requires ESG factors for the issuers we follow,
so for now, we have a method for registering
our ESG assessments and considering
these assessments as part of our portfolio
management process. Over time, we will beable to demonstrate the effectiveness of theseassessments and the impact and relationship of
ESG practices to bond returns and default risk.

You have a global database called ION
which allows teams across our fixedincome capabilities to share informationand ideas. How important is this system
to fully integrate ESG factors into yourinvestment process?
ION will help us integrate ESG factors on
a number of levels. To start, ION will help
register ESG assessments for the issuers wefollow. It will also help us measure our ESG
ratings and understand how ESG assessments
influence returns. It will help in designing ESG‘sensitive’ products and help to control thatthese products are managed according to thefund’s design.
Finally, ION will help improve collaborationand demonstrate how our process works,
including how we use ESG to manage risk,build products and refine our views. ION
will be central to our ESG capabilities.
Over the last couple of years there seems
to have been a real shift with large US
managers and pension funds adopting
responsible investment practices. How
do you see this developing from here?
The shift toward responsible investing has
been fairly dramatic over the past five years
and we would expect this trend to continue.
The team in Louisville designed and operated
an ESG ‘sensitive’ absolute return bondproduct at our prior employer and the productreceived a surprisingly cool reception. At thattime, many of the large asset owners were
only concerned with return and they saw
ESG as something more likely to constrain
opportunity, therefore potentially undermining
returns. This view has proven to be shortsighted, but still has some advocates.
What changed? A number of things changed
and contributed to the growth in interest. First,
a number of high profile asset owners publicly
declared their allegiance to RI and ESG
principles. This coincided with consultantschanging their practices, adding ESG-related
consulting services to the other services they
provide. Perhaps the most important reason
was, and continues to be, a number of highprofile corporate events and collapses, mostof which should be identified as ESG-related
problems. Examples include BP, Tesco andVolkswagen. These high profile failures remain
the best advertisement for an ESG integrated
investment process.

Improving Our Climate Risk Reporting

We fundamentally accept the science ofclimate change and that a transition to a low
carbon global economy is underway. We
understand this will impact different assets
in different ways, both in relation to theircontribution to climate change in the formof greenhouse gas emissions, and also their
exposure to the physical impacts of climatechange. In addition, many companies are
well-positioned to provide the solutions
needed to reduce emissions and adapt
to a changing climate. Our Global Listed
Infrastructure team’s case study on NextEra
Energy is a good example of this.
We also accept that as allocators of capital,
stewards and shareholders, the individual andcollective decisions investors make will
influence the nature of the transition. The
wicked challenge of climate change is that noindividual or group are solely responsible, but
without good faith efforts by governments,
companies, investors and individuals, the bestsolutions will come too slowly to mitigate theworst impacts.
This shared responsibility requires transparency
from all stakeholders so that each group cansee and gain confidence in the actions ofothers. In this light, we have been following
the growing trend towards improved climatechange disclosure, including for example, thechanges to French law.
However, as a relatively new form of investor
disclosure we have been concerned with theway it has been provided by some investors,
in particular the focus on carbon footprinting.
We believe that carbon footprinting without
contextual information on how carbon
emission intensity influences investment
decision making, or around limitations withthe footprints themselves can be misleading.
For this reason, we are not disclosing a carbon
footprint at this time and have instead elected
to have a number of our teams provide an
additional statement on their approach toclimate change and their exposure to fossil
fuel companies. When considered alongside
the substantial disclosure we already provide
on ESG integration and engagement, we
believe this provides the appropriate context
clients and other stakeholders require.

We believe investors must adopt disclosure
practices which avoid the risk of someinvestors ‘forum shopping’ for the provider
that calculates the lowest emissions fortheir portfolio.
–– Emissions over revenue is not always thebest intensity measure – Revenue is thestandard intensity measure used tonormalise emissions so comparisons can bemade between companies of different sizes.
However, it is not always the most relevant.
For example, revenue can be significantly
affected by commodity prices for resources
companies even though the carbon
efficiency of the company is better
determined by tonnes of output. Similarly
for office-based enterprises, the number of
employees or square metres of office space
are more useful than revenue to determine
relative efficiency.
–– Stranded asset risk not captured – The
term ‘stranded assets’ refers to assets whichcarry a value today but which are at risk ofbeing heavily written down or written off
due to market or other changes. For fossil
fuels, this has been focused on resource
reserves, which carry a value but which may
not be extracted due to a shift away fromcarbon-intensive energy sources. Stranded
assets can also be used to describe
electricity generators, ports, pipelines andother supporting infrastructure. These risks
are not covered by carbon footprints.

One way to consider this from an investment
perspective is that carbon footprinting only
covers actual emissions relevant to the profit
and loss (if including a cost of carbon), butdoes not capture stranded asset risks which
are more relevant to the balance sheet. For
some sectors, stranded asset risks are asimportant as carbon intensity.
–– Other risks not captured – Footprinting
does not capture risks to industries where thecarbon emissions occur up or downstream.
Examples include auto manufacturers whowill be impacted by vehicle emission standards
and shifts towards alternative fuels, eventhough the emissions being targeted occur
in the products’ use phase rather thanduring the manufacturing process. Carbon
footprinting also does not capture geographic
and structural issues, for example the costs
and, ability to be substituted, which vary
between countries and activities. An
example of this is the difference between
thermal coal used for electricity generationand metallurgical coal used for steel making,where the former is far easier to substitutewith low emission alternatives than the latter.
For these reasons, we are concentrating on
building the contextual base for our disclosure
and will only include our carbon footprint once
we believe it can be assessed in context. We
expect this will be within the next two years
and in the interim are happy to discuss issues
related to climate change with our clients andother interested stakeholders.

Limitations of Carbon Footprinting
We currently see the following limitations
with carbon footprinting and therefore
disclosures which do not provide sufficient
contextual information:–– Data quality and availability issues – Thesecan be split into the quality and timelinessof collection by providers, the number andquality of company disclosures, and thequality of the processes which providers
use to estimate emissions for non-disclosing
companies. As a result of these issues, reports
from different providers can provide
significantly different results.
Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

41

Improving Our Climate Risk Reporting (cont.)

Team Climate Change Statements
Introduction
We have asked each team to make a climatechange statement in terms of how they see andmanage the issue. We are also disclosing ouractive equity team’s exposure to companies witha significant proportion of revenues reliant on
fossil fuels.
A sample of these disclosures can be found below
with the remainder available in our online report.
The fossil fuel exposures are provided at a teamlevel for the active equity teams where we wereconfident we could obtain good quality data. It
captures companies who extract, use andtransport fossil fuels. The methodology we used
is described in appendix three.
The reporting is at a team level because wewant to highlight the overall exposure,regardless of the fund, on the basis that thegreater the overall exposure to climate changerisks (of which fossil fuels is only one), the moresophisticated the thinking and deeper the
analysis should be.
We don’t see high exposure as necessarily
negative as often this is driven by the sectors
invested in. For example our Global Resources
team and Global Listed Infrastructure teams
have significant numbers of companies in theirinvestment universes with fossil fuel exposureand have developed processes to consider andmanage carbon risks.
This expertise benefits other teams, for example
our Global Resources team made a significant
contribution to the development of theStranded Assets Tool kit which we described inlast year’s report.

Holdings in companies with material
fossil fuel revenues
No. ofCompanies %%of FUM

Predominantly Gas

13.7

10.3

Other Fossil Fuels

9.8

11.4

Non-Fossil Fuel

76.5

78.3

Global Property Securities
Carbon emissions from REITs are generated by
the combustion of fossil fuels providing heating,cooling and lighting and powering of appliancesand equipment. The effective management ofcarbon emissions through energy efficiency
measures provides real estate companies withthe ability to lower their energy costs. It alsoenables them to reduce their carbon footprints.
Our team has a focus on REITs with clear
initiatives in place to reduce their property
portfolios’ carbon footprints through energy
efficient practices. We also have a focus on
REITs that are improving their overall portfolio
quality and reducing obsolescence via thedevelopment of new properties withsustainable and renewable design features.
REITs with the above characteristics receive a
better rating during our ESG assessment of thecompany, resulting in a positive impact on ourvaluation assumptions for those stocks. In
contrast, those that do not follow the above
approach receive a lower ESG rating, resulting ina negative impact on our valuation assumptions.
Holdings in companies with material
fossil fuel revenues

Global Listed Infrastructure
A company’s carbon exposure is taken accountof in various ways. For example, our quality
score includes an environmental assessmentof each company that considers the carbon
intensity of that company. This means thatcompanies with higher levels of carbon
exposure are naturally discounted more thanthose with cleaner generation portfolios.
We also take account of carbon risk within our
financial models, to the extent that it has direct
implications for the earnings potential of abusiness. For example, due to the evolution of
shale gas in the US, coupled with the reduced
cost curves and tax incentives for renewables,
we have seen the amount of coal used decline
rapidly. Since the volume of coal hauled is
explicitly modelled within our freight rail volume
numbers, we adjust those accordingly to
account for the structural change that we haveseen in the market.

42

which our client’s money is invested shouldbe the most capable of adapting to the everchanging regulatory environment. In addition,
we are seeking investment opportunities in listed
alternative and renewable energy companies as
this sector offers attractive growth prospects forour clients.
Holdings in companies with material
fossil fuel revenues

No. ofCompanies %%of FUM

Predominantly Gas

0.0

0.0

Other Fossil Fuels

0.0

0.0

Non-Fossil Fuel

0.0

0.0

No. ofCompanies %%of FUM

Predominantly Gas

4.2

3.6

Other Fossil Fuels

22.0

41.2

Non-Fossil Fuel

73.9

55.2

Australian Equities, Core
The Australian Equities, Core research processassesses every potential investment onsustainability factors. Carbon risk is one of the key
environmental factors considered when analysts
form a sustainability rating. One illustrative
example is the team’s current investment view on
AGL Energy. AGL is one of the largest carbon
emitters in Australia. The company’s brown
coal-fired power generation facility at Loy Yangcreates a substantial risk that those assets mightbe ‘stranded’ in the long term. However, thisnegative is offset by the fact that AGL has accessto one of the largest portfolios
of renewable generation in the market. The
company also has a large bank of renewableenergy credits that are dramatically ‘in themoney’. Much of AGL’s business, as a result,benefits from the effects of rising renewables
costs. Balancing these two factors currently
results in AGL Energy being rated ‘neutral’ froma sustainability perspective by the team.
Holdings in companies with material
fossil fuel revenues
No. ofCompanies %%of FUM

Global Resources

Predominantly Gas

2.7

1.8

As investment managers, we encourage all of
our companies to lower their carbon footprint.
We do invest in the producers of oil, gas andcoal, as we believe that the market for thesecommodities will continue to be relevant toglobal energy requirements for some time. It is
our belief that the transparency and reporting
requirements demanded by the shareholders ofa publiclly listed company provide an incentive
to be responsible operators.
In their absence, the demand for these products
would otherwise be met by less regulated private
operators, often with lower standards of safety
and environmental practices. Our approach ofinvesting in companies with low costs and strong
balance sheet ensures that the companies in

Other Fossil Fuels

5.4

13.0

Non-Fossil Fuel

91.6

85.3

Industry Collaboration

Each year we conduct a review of the various
initiatives that we have been involved with toensure we can continue to effectively
contribute and that the purpose aligns withour clients’ interests. We have reduced theoverall number of initiatives to ensure focused
attention and to ensure we are able to provide
sufficient resources to support each initiative.
The initiatives that we remain actively supportiveof and engaged with are listed below and are
current at 31 December 2015.

Asia Pacific

EMEA

Financial Services Council–– Member of the Investment Committee

Institutional Investor Groupon Climate Change–– Member

Global initiatives

Infrastructure Sustainability Councilof Australia–– Member

Cambridge University Investment
Leaders Group–– Founder member–– Member of the ESG Working Group
Responsible Investment Association
Australasia–– Chair–– Member of Governance Committee–– Chair of Long-Term Mandates Working GroupESG Research Australia–– Research Evaluation Committee member

Towers Watson – Thinking Ahead Institute–– Founder member

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

Integrated Reporting–– Business Reporting Leaders Forum (Australia)–– Research Working Group member

UK Sustainable Investment Forum–– Board Member–– Chair, Nominations Committee
EUROSIF–– President
Institute Chartered Accounts in Englandand Wales–– Member of the Corporate GovernanceCommittee–– Chair Investor Disclosure Working Group

PRI–– Reporting Framework Advisory Group

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

43Appendix 1 –Companies Subject to the Cluster Munitions Policy

In May 2013, First State Investments (First
State) became a signatory to the Cluster
Munitions Exclusions List. This gives
an explicit commitment not to invest incompanies across the globe involved in the
production and sale of anti-personnel mines
and cluster munitions. For First State, this is the
only example where we have applied a blanket
ban or negative screen to investment decision
making. Our approach has always been
centred on engagement rather thandivestment or exclusion.

BackgroundAs the Convention on Cluster Munitions(see below) outlines:
Cluster munitions are unacceptable as they
have wide area effects and are unable todistinguish between civilians and combatants
and leave behind large numbers of dangerous
unexploded ordnance, which kill and injure
civilians, obstruct economic and social
development, and have other severe
consequences that persist for years
and decades after use.

Singapore Engineering Technologies
ceases involvement in cluster
munitionsSingapore Engineering Technologies (STE),
one of the largest arms producers in Asia,
announced last November that it “is now nolonger in the business of designing, producing
and selling of anti-personnel mines and cluster
munitions or any related components thereof.”
As such and following the annual review ofcompanies affected by our Policy on Investment
in Cluster Munitions and Anti-personnel Mines,
we have been informed by Eumedion andSustainalytics (who are tasked with identifying
such companies for the purposes of the Dutch
Financial Regulation on this issue), securities in
STE became permitted investments effectivefrom 1 February 2016.
The list of companies subject to this Policy
effective from 1 February are:–– Aeroteh SA–– Hanwha Corporation–– Orbital ATK, Inc–– Poongsan Corporation–– Textron, Inc–– Motovilikha Plants JSC
The list will next be reviewed in January 2017
and will be published in next year’s RI and
Stewardship Report.

44

Convention on Cluster Munitions
The Convention on Cluster Munitions (CCM)
is an international treaty that addresses thehumanitarian consequences and unacceptable
harm to civilians caused by cluster munitions,through a categorical prohibition and aframework for action. It was adopted on
30 May 2008 in Dublin, Ireland, signed on
3-4 December 2008 in Oslo, Norway, andentered into force on 1 August 2010. As of
1 October 2015, a total of 118 states havejoined the Convention, 98 as state parties
and 20 as signatories.
The Convention prohibits all use, production,transfer and stockpiling of cluster munitions andestablishes a framework for cooperation andassistance to ensure care and rehabilitation tosurvivors and their communities, clearance ofcontaminated areas, risk reduction educationand destruction of stockpiles.

Appendix 2 –RI and ESG Committees

RI Steering Group
Name

Title

Location

ChairMark Lazberger

Chief Executive Officer

SydneyMembers

Chris Turpin

Managing Director, EMEA

LondonKanesh LakhaniManaging Director Distribution, EMEA and Asia

LondonEx Officio
Co-ordinatorPaul Griffiths

Chief Investment Officer, Fixed Income and Multi-Asset Solutions

LondonDavid Dixon

Chief Investment Officer, Equities

SydneyJoe Fernandes

Regional Managing Director, Asia

Singapore

Michael Stapleton

Managing Partner, First State Stewart Asia

Hong Kong

James Twiss

Managing Director, Americas

New York

Perry Clausen/Niall Mills

Head of Global Infrastructure Investments

Sydney/London

Will Oulton

Global Head, Responsible Investment

London

Pablo Berrutti

Head of Responsible Investment, Asia PacificSydneyLorna Tweedie

Executive Manager

SydneyESG Risks Forum
Name

Title

Location

Chair

Will Oulton

Global Head, Responsible Investment

LondonMembers

Paul Griffiths

Chief Investment Officer, Fixed Income and Multi-Asset Solutions

LondonCo-ordinator

David Dixon

Chief Investment Officer, Equities

SydneyClare Wood

Head of Investment Assurance

Edinburgh

Adrian Hilderly

Head of EMEA Risk and ComplianceLondon

Pablo Berrutti

Head of Responsible Investment, Asia PacificSydneyLorna Tweedie

Executive Manager

Sydney

Name

Title

Location

ESG Committee
Chair
Members

Co-ordinator

Rotates between members
Tal Lomnitzer

Portfolio Manager

SydneyManuel Canas

Deputy Head of Global Emerging Market Debt

LondonRebecca Sherlock

Senior Analyst

SydneyJoseph Daguio

Investment Analyst

SydneyYen Wong

Manager Credit

SydneyHazrina Dewi

Head of Equity

Jakarta

Gokce Bulut

Investment Analyst

Hong Kong

Robin Balcomb

Senior Portfolio Manager, Structured Equities

SydneyAlex Gallard

Senior Investment Analyst

SydneyJamie Grant

Head of Asian Fixed Income

Hong Kong

Andrew Harman

Portfolio Manager

LondonMichael Arnold

Senior Credit Analyst

Louisville

Toni Spencer

Head of Credit Research

SydneyVolker Häussermann

Director, Infrastructure Asset Management

LondonRowan Element

Investment Analyst

SydneyPablo Berrutti

Head of Responsible Investment, Asia PacificSydneyResponsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

45

Appendix 2 –RI and ESG Committees (cont.)

Marketing/Communications Group
Name

Title

Location

Chair

Will Oulton

Global Head, Responsible Investment

LondonMembers

Pablo Berrutti

Head of Responsible Investment, Asia PacificSydneyHeidi Sutton

Global Head of Marketing

Singapore

Co-ordinator

Simone Dunn

Global Head of Communications

LondonGiles Starkey

Head of Marketing, EMEA

LondonTracy Brown

Senior Manager, Marketing and Communications

SydneyUna Clarke

European Marketing and Communications Manager

LondonJames Molony

Investment Writer

LondonSarah Mahomed Ross

European Marketing and Communications Manager

LondonSabrina Leung

Head of Marketing, Asia and Global Marketing Projects

Hong Kong

Brodie Neader

Online Marketing Manager EMEA

LondonRodney Dickson

Global Head of Digital and Head of Marketing ANZ

SydneyElizabeth Dourof

Team Assistant, Responsible Investment

London

Name

Title

Location

Will Oulton

Global Head, Responsible Investment

LondonBusiness and Client Support Group
Chair
Members

Co-ordinator

Harry Moore

Head of Business Development, ANZ

SydneyFrank Glennon

Business Development Director

LondonMarc Bishop

Sales Director

LondonClare Wood

Head of Investment Assurance

Edinburgh

Hajime Kobayashi

General Manager, Japan Business Development

SydneyLauren Prendiville

Head of Distribution, South East Asia

Singapore

Vivian Tang

Head of Distribution, North Asia

Hong Kong

Ryan Felsman

Investment Manager, Global Resources

SydneyDaniel Bristow

Head of Client Relationships and Service

SydneyHugh Tancred

Relationship Manager

New York

Chris Gower

Head of Client and Consultant Relations, Europe

LondonRebecca Sherlock

Senior Analyst

SydneyLorna Tweedie

Executive Manager

SydneyHR and Employee Engagement Group
Name

Title

Location

Chair

Delia Harris

Organisational Development Manager

SydneyMembers

Will Oulton

Global Head, Responsible Investment

LondonCo-ordinator

46

Pablo Berrutti

Head of Responsible Investment, Asia PacificSydneyJames Twiss

Managing Director, Americas

New York

Chris Turpin

Managing Director, EMEA

LondonJoe Fernandes

Regional Managing Director, Asia

Singapore

Elizabeth Dourof

Team Assistant, Responsible Investment

LondonAppendix 3 –RI and Stewardship Measures

Limitations and qualifications
Some of the additional information has only
been provided for listed equity teams (e.g.
turnover) as it is more relevant to them. As wefurther develop these enhanced reporting
measures, in consultation with our clients andtheir consultants, we will progressively include
better information for our fixed income anddirect infrastructure capabilities.
For the information to be relevant it isimportant to note its context and limitationsof the information. In particular:Team level reporting
Our RI report is at the team level and as such
will not always fully reflect the experience ofclients at the portfolio level. This is because
team level reporting includes a number ofdifferent strategies run by each team.

We believe team level reporting is appropriate
because the purpose of this report is tohighlight the culture and approach of eachteam, which we believe will translate into
portfolio outcomes over time. Measures likefive year average turnover at the team level
therefore is intended to highlight the general
attitude to trading, not to provide portfolio
specific outcomes.
The other reason for team level reporting isthat we manage hundreds of funds and so weare conscious not to overwhelm readers of thereport with information that lacks insight or
descriptive power. Over time we believe wecan achieve the benefits of both strategy level
and team level reporting through use ofinteractivity on our website.
We hope clients will find this approach usefulfor seeing their investments with us in context
and how they are influenced by the relevant
team’s approach to RI and stewardship.

New measures
From last year we began including a numberof new measures which we believe help
evidence the influence of each team’s RI and
Stewardship practices on the long-term
performance of the team. As far as we areaware, these measures have not been used
before at a team level.
We hope that publishing them starts aconversation within the industry on how we
can provide better quality and more insightful
reporting. If this occurs, it may turn out that
we may find better measures which we canadopt in future. To aid in this conversation, we
have made the measures simple and aredisclosing the methodology for each in thisAppendix.
On the following page is the list of indicators,
what they mean, why we believe they areimportant and any specific limitations.

Responsible Investment and Stewardship – Annual Report 2016 | ri.firststateinvestments.com

47

Appendix 3 –RI and Stewardship Measures (cont.)

Indicator

Why it is important

Definition and methodology

Limitations

Team profileShows the number and experienceof people managing client funds.

––

Top five holdings

Shows largest investment by the teamby economic value.

–

Some teams have an absolute returnmindset and so over/under weightvs benchmark may not be the bestindicator for conviction. We haveprovided both for most teams.
Top five holdings shows the largest
economic exposure which should
translate into increased engagement.

Top five active holdings

Shows highest conviction investments.

Five highest overweight securities
in flagship fund.

Some teams have an absolute returnmindset and so over/under weightvs benchmark may not be the bestindicator for conviction.

Returns % of portfolio aheadof relevant benchmark over
five years (FUM-weighted)

Shows proportion of funds undermanagement which have exceededbenchmarks and so added value.
RI and stewardship practices are
one aspect of our team’s investment
processes which allow for thisperformance.

% of funds ahead of benchmark
weighted by FUM.
Returns calculated using the global
investment performance standards(GIPS).

Different asset classes and sectors will
perform differently at different times.
Benchmarks are inherently bluntand not always reflective of the style orobjectives investors are trying toachieve. Therefore they should not belooked at in isolation.
Past performance is not indicativeof future performance.

Weighted average ofoutperformance (five years
annualised)

Shows weighted average of value
added by team over five year period
against benchmark.
RI and stewardship practices are
one aspect of our team’s investment
processes which allow for thisperformance.

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

As above.

Absolute return over five years(Flagship fund)Shows absolute return achieved
Returns calculated using
annually by team on their flagship fund. GIPS standards.
Absolute returns represent actual
outcomes for clients as opposed torelative performance which may bepositive despite clients losing money indown markets.

Portfolio turnover(five years annualised)

Shows team culture towards tradingover extended period of time.
Should be used in conjunction withname retention for fuller view.

Total purchase OR total sales(whichever is less) for the fund overthe period/total net asset value.
Annualised.

Simple measure, does not account fordifferent market conditions in different
countries/sectors.

Name retention(five years)

Shows importance of stewardshipmindset as long-term holders ofcompanies and the potential benefitsof engagement.
Should be used in conjunction withturnover for fuller view.

Compares the portfolio at two different
points in time. For example, if there are
50 stocks in the portfolio at point one
and 40 of named stocks are still thesame at point two you get a retention
ratio of 80%.

Does not cover instances wherea company is owned, completely
divested and then rebought. However,
the importance of long-term
stewardship mind set remains as
engagement can occur throughout.

Climate change statement
and fossil fuel exposure.
Number of companies andpercentage of funds.

Climate change poses many risks andCompanies with greater than 30%
Revenue segment and productopportunities for investors. It is important revenue (or generation capacity)
disclosure is inconsistent. For somefor our clients to understand how these were included. As were transport
teams we found the data too unreliable
risks are being managed so they cancompanies (mostly rail) with greater than to use. Companies in different
more effectively engage with their asset 30% of volume. Oil, gas and somecountries will be impacted differently
managers. This is our first attempt at this mining services companies were also
as will companies with different costs
form of disclosure and we intend toincluded, as were oil and gas pipelinesof production, our approach does not
improve the breadth, depth and reliability and storage companies. We also
account for this. The most significant
over time.
separated out predominantly gas
fossil fuel exposure remains with nationcompanies from coal and oil given its
states, which distorts the overall impact
lower carbon intensity. The list wasof the transition on listed companies.
developed with reference to multiple
sources and refined in collaboration witheach investment team.

48

Contacts

Will Oulton
Global Head, Responsible Investment
will.oulton@firststate.co.uk+44 (0) 20 7332 6529
Pablo Berrutti
Head of Responsible Investment, Asia Pacificpablo.berrutti@colonialfirststate.com.au+61 (0) 2 9303 0433
Lorna Tweedie
Executive Manager+61 (0) 2 9303 7408
lorna.tweedie@colonialfirststate.com.au
Elizabeth Dourof
Team Assistant, Responsible Investment
elizabeth.dourof@firststate.co.uk+44 (0) 20 7332 6801
We welcome your comments and feedback.
Please email stewardship@firststate.co.uk

AucklandFirst State Investments
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