GLI 2022
Sustainability
ReportContents
Introduction

1

Our approach2

A snapshot of our progress3

ESG focus areas

4

Energy transition

5

Climate risk

6

Modern slavery

7

Corporate governance8

Proxy voting

9

Introduction
Welcome to the First Sentier Investors (FSI) Global
Listed Infrastructure Sustainability Report for
the year ended 31 December 2022. This reportintends to provide transparency on how we assess
the environmental, social and governance (ESG)
performance of companies we invest in, how weengaged with leadership and insights from our researchduring the year. Through reporting on our approachto ESG, we want to communicate how we integrate
responsible investment principles into our investment
approach.

on important topics including board composition,
remuneration packages and climate transition plans.
Through company engagement we seek to better
understand risk in our portfolio, suggest areas for
improvement, increase transparency on ESG issues,and support companies that are making progress inthis area. We typically engage companies on material
issues to achieve specific outcomes. More broadly, we
participate in industry groups such as Climate Action
100+ to push for change on complex issues such asenergy transition and the pathway towards net zero.

Countries across the world are grappling with issues
such as climate change mitigation, climate change
adaption, energy security, reliability and affordability.
We recognise these issues are complex and will require
a wide range of financial and technology solutions. In
particular, global listed infrastructure companies will beat the forefront of the global energy transition and willplay an integral part in achieving net zero emissions.

Aligning with FSI’s firm-wide commitment, we arecommitted to building investment portfolios with atarget of net zero by 2050 and are pursuing interim
targets by 2030 to reduce the Weighted Average
Carbon Intensity of our investment portfolios1. We willseek to prioritise the direction of capital to infrastructurecompanies that are aligned or aligning with a pathway to
net zero by 2050 and encourage the investment of thiscapital into real assets that reduce absolute emissions.
As stewards of our clients’ capital, we will continue toengage with companies on these issues with a view todelivering more sustainable risk adjusted returns.

As long-term and active investors, we know that theinvestment decisions we make today will impact future
generations. We take an active approach to proxyvoting to convey our views to boards and management

Important Information
This material contains measurements and data relating to ESG factors and metrics, together with specific ESG related commitments and targets.
The measurements and data relating to ESG factors and metrics are estimates based on information sourced by the relevant investment team from third parties including portfolio companies andsuch information may ultimately prove to be inaccurate.
These commitments or targets are current as at the date of publication and have been formulated by the relevant investment team in accordance with either internally developed proprietary
frameworks or are otherwise based on the Institutional Investors Group on Climate Change (IIGCC) Paris Aligned Investment Initiative framework. The commitments and targets are based on
information and representations made to the relevant investment teams by portfolio companies (which may ultimately prove not be accurate), together with assumptions made by the relevant
investment team in relation to future matters such as government policy implementation in ESG and other climate-related areas, enhanced future technology and the actions of portfolio
companies (all of which are subject to change over time). As such, achievement of these commitments and targets depend on the ongoing accuracy of such information and representations aswell as the realisation of such future matters.
Any commitments and targets set out in this material are continuously reviewed by the relevant investment teams and subject to change without notice.

1.

The team’s net zero target applies to all Global Listed Infrastructure and Responsible Listed Infrastructure pooled vehicles, and to separate client accounts that are subject to equivalent
investment guidelines.

4First Sentier Investors | Global Listed Infrastructure 2022 Sustainability ReportOur approach
ESG issues are fundamental to infrastructurecompanies, given they have significant service
obligations and moral accountability to the communities
in which they operate. We assess infrastructurecompanies on a broad range of ESG-related factors,
including but not limited to energy transition, climate
risk, modern slavery and corporate governance. We
are conservative investors of our clients’ capital,
recognising that capital preservation is critical toachieving long-term capital growth. We focus on
fundamental value and conduct thorough due diligenceto minimise risk. We place strong emphasis on
proprietary research and direct contact with companies
and regulators.
At a group level, FSI has identified four main investment
stewardship priorities: climate change, human rights
and modern slavery, nature and biodiversity anddiversity. These priorities address the ESG issues thatpose the most significant long-term financial risks to
our investments, while also presenting the greatest
opportunities.
Engage with management and board on ESG
issues and performance
The most important source of research for the FSI
Global Listed Infrastructure (GLI) team is internallygenerated analysis based on regular meetings wehold with senior management and other stakeholders
including suppliers, competitors, regulators and industry
bodies. When the GLI team engages with companies
on ESG issues, we use meetings with management to2.

better understand the situation from their perspective,
and to openly raise concerns where we see a potential
gap in ESG performance. If we don’t see performance
improvement, we will escalate the issue to thecompany’s board of directors to outline our concerns.
Ultimately, we will consider divestment if we do not see
a willingness to change or address the issue.
ESG assessment integrated into investment
process
The assessment of ESG issues, strategy andperformance represents an essential part of ourinvestment process. We seek to understand the risks
for each company and assess them in our proprietary
quality ranking which consists of 25 criteria that
influence stock returns for infrastructure securities. A
score is assigned to each criteria; a lower quality score
makes it harder for a stock to be included within theoverall portfolio. ESG assessment is both a scienceand an art that blends data points and qualitative
engagements. We then build on those findings byconducting asset tours, and spending time withcompany management and board of directors. We havebeen doing this for over 15 years.
ESG Metrics
The GLI team maintains a database of key ESG metrics
across the strategy’s entire investible universe (focus
list)2. These metrics include a range of climate-related
statistics, including absolute carbon emissions,carbon footprint and carbon intensity. It includes key

GLI investment universe includes ~140 listed companies, which meet the GLI strict definition of core infrastructureFirst Sentier Investors | Global Listed Infrastructure 2022 Sustainability Report5safety metrics like total recordable incident rates andlost time injury rates. We look at diversity measures
including the number of independent directors andpercentage of female directors, to track progress overtime. We encourage companies to report climaterelated statistics in a way that is consistent with theframework provided by the Task Force on ClimateRelated Financial Disclosures (TCFD). A TCFD compliant
carbon footprint report is generated on a quarterly basis
for each of our underlying portfolios, and for the strategy
overall, based on MSCI ESG data.
Principle Adverse Impacts
The Principal Adverse Impact (PAIs) on sustainability
factors are part of the EU’s Sustainable Finance
Disclosure Regulation (SFDR) to improve thecomparability of the sustainability profile of funds andaim to better display the negative impacts investments
have on various sustainability factors. While many ofthe metrics that fall under the PAIs were already being
assessed by our team as part of our ESG assessment
outlined above, the new framework provides aconsistent way to meet the strategy’s obligations
under SFDR. As part of our approach to PAIs, wecommit to assess every active equity investment for
relevant adverse impacts and documenting the results.
Where adverse sustainability impacts are identified,
we seek to engage with the company in accordancewith the commitments made under FSI’s Responsible
Investment and Stewardship Policy and Principles.
Proxy voting and reporting
The GLI team votes on all issues at company meetings
where we have the authority to do so. Voting rights
are a valuable asset and are executed with care anddiligence. We take this responsibility seriously andthe research we gather ensures we make informed
decisions. If we believe that our concerns andperformance gaps are still not being addressed, we
may vote against the company via proxy voting. During
the 2022 calendar year, we invested in 74 infrastructurecompanies across 7 subsectors and in 16 countries
around the world. We voted on 1,067 resolutions, ofwhich we voted against management on 131 occasions(12%) on issues including lack of board independence,poor alignment of interests and inadequate climaterelated targets. Our voting record is included fortransparency on our website3 and in the proxy voting
section of this report.
United Nations Sustainable Development
Goals (SDGs)
Within the GLI team’s suite of products, the Responsible
Listed Infrastructure Strategy has an additional
mandate; namely, to invest in companies that cancontribute to or benefit from sustainable development,
as guided by the UN Sustainable Development Goals.
Given its importance to any functioning modern
economy, infrastructure has a central role to play inaddressing global challenges that need to be overcome
in order to deliver a sustainable future.
Key areas that investment in infrastructure can have ameaningful effect on include:• SDG 6 - Clean Water and Sanitation• SDG 7 – Affordable and Clean Energy• SDG 9 – Industry, Innovation and Infrastructure• SDG 11 – Sustainable Cities and Communities• SDG 12 – Responsible Production and Consumption• SDG 13 – Climate Action
Each of these main categories contains several more
specific secondary or “sub” goals that infrastructure
investment can have a direct influence on. We monitor
how much capital expenditure (capex) is being spent by
each company on activities that correspond directly tothe sub-goals of each of the six SDGs outlined above.
Given infrastructure’s capital intensive nature, we
believe this represents a sensible and consistent way
to monitor a company’s contribution to sustainable
development. Reflecting the importance of taking abalanced approach, all capex is taken into account. We
then categorise it as positive, neutral or negative.
For example, Italian-listed utility company andrenewables leader Enel Group is forecast to spend
50% of its capex on the buildout of renewable energy
generation (such as wind farms and solar power)
between 2023 and 20254. Over the same period, 40%
of its capex will be spent on networks, predominantly
distribution grids. This will help to bring clean energy tothe end-user5.

3. FSI Proxy voting
4. This is directly supportive of SDG 7.2 (By 2030, increase the share of renewable energy in the global energy mix). Source: Enel Group, First Sentier Investors. Data as at 22 November 2022
5. This is directly supportive of SDG 9.1 (Rural access)

6First Sentier Investors | Global Listed Infrastructure 2022 Sustainability ReportA further 4% of capex will be invested by the Enel X division in areasthat support the transition to a clean economy (such as EV charging
infrastructure and energy efficiency initiatives)6. The remaining 6%of the company’s capex will be spent on their energy retail business.
We deem this capex to neither positively or negatively affect any of
the SDG sub goals, and so assign it to the neutral category7.
Overall, we are of the view that the current holdings of the
Responsible Listed Infrastructure Strategy make significant
positive contributions to SDG 7 (Affordable and Clean Energy)
and SDG 9 (Industry, Innovation and Infrastructure). This reflects
the portfolio’s high weighting in utility stocks. Many utilities areinvesting substantial amounts of capex both into renewable energy
generation, such as wind and solar; and into the new or upgradedtransmission and distribution networks that are needed to connect
these clean energy sources with population centres where thedemand is.
Responsible Listed Infrastructure Strategy’s capex
supporting sustainable development8

SDG 6: Clean Water and Sanitation.
SDG 7: Affordable and Clean Energy.
SDG 9: Industry, Innovation and Infrastructure.
SDG 11: Sustainable Cities and Communities.
SDG 12: Responsible Consumption and Production,
SDG 13: Climate Action. “Other” represents capex
spent in areas with a neutral effect on the SDGs.
Source: First Sentier Investors and company reports.
Data as at 31 March 2023.

6. This is directly supportive of SDG 7.1 (Access to electricity), 7.2 (Share of renewable energy), 7.3 (Energy efficiency)
7.

Source: Enel Group and First Sentier Investors. Data as at 22 November 2022.

8. Capex numbers reflect forecast spending levels of current portfolio holdings over the next 12 month period. “Net capital investment” figure of 83% consists of 86% positive contribution and
3% negative contribution. Positive, neutral and negative labelling represents the opinion of the FSI GLI Team. SDG 6: Clean Water and Sanitation. SDG 7: Affordable and Clean Energy. SDG
9: Industry, Innovation and Infrastructure. SDG 11: Sustainable Cities and Communities. SDG 12: Responsible Consumption and Production, SDG 13: Climate Action. “Other” represents capex
spent in areas with a neutral effect on the SDGs. Source: First Sentier Investors and company reports. Data as at 31 March 2023.
First Sentier Investors | Global Listed Infrastructure 2022 Sustainability Report7Our climate change commitment
Decarbonisation is happening in our asset class, particularly by utilities who are responsible for more than 90% of
the emissions in our opportunity set. Our target reflects the developments that we are already seeing in this spaceand enables us to engage and encourage companies to make greater efforts on this front.
The GLI team are committed to reducing greenhouse gas emissions across our investment portfolios8 consistent
with an ambition to reach net zero emissions by 2050. This aligns with our firm-wide commitment to reducegreenhouse gas emissions across investment portfolios by 2050 or sooner. We recognise there is an urgent needto accelerate the transition towards net zero emissions and support global efforts to limit warming to 1.5 degrees.
As a responsible and active manager of capital on behalf of our clients, we commit to the following9:
•
•
•
•
•
•
•
•
•

Build investment portfolios aligned to net zero by 2050
Pursue interim targets, by 2030, to reduce the Weighted Average Carbon intensity (WACI)10 of our investment
portfolios to -35% (Global strategy) or -50% (Responsible strategy) below the 2019 benchmark index11
Take account of portfolio Scope 1 and 2 emissions and consider material Scope 3 emissions12
Prioritise the direction of capital to infrastructure companies that are aligning or on a pathway to be aligned withnet zero
Encourage the investment of this capital into real assets that reduce absolute emissions (rather than prioritising
the use of offsets)
Engage with companies to improve disclosures (e.g. GHG emissions, TCFD reporting, transition plans) andaccelerate change (e.g. coal power closures by 203013), with a focus on those companies that produce themost carbon emissions
Implement an escalation and voting strategy consistent with achieving net zero
Provide information and analysis on net zero progress and climate risks and opportunities
Collaborate with industry stakeholders (e.g. PRI14, IIGCC15, NZAM16, CA100+17) to provide a consistent andcollective voice when engaging with companies

The GLI team’s climate statement can be found on our website.

8. The team’s net zero target applies to all Global Listed Infrastructure and Responsible Listed Infrastructure pooled vehicles, and to separate client accounts that are subject to equivalent
investment guidelines.
9. These commitments and targets are based on information and representations made to the relevant investment teams by portfolio companies (which may ultimately prove not be accurate),
together with assumptions made by the relevant investment team in relation to future matters such as government policy implementation in ESG and other climate-related areas, enhanced
future technology and the actions of portfolio companies (all of which are subject to change over time). As such, achievement of these commitments and targets depend on the ongoing 		accuracy of such information and representations as well as the realisation of such future matters. Any commitments and targets set out in this material are continuously reviewed by therelevant investment teams and subject to change without notice.
10. Intensity being a measure of carbon efficiency, and WACI measures the exposure within a portfolio to carbon-intensive assets compared to the benchmark.
11. 2019 was selected as the base year as it represents the most recent and complete dataset which was not impacted by the pandemic.
12. Scope 3 includes encompasses emissions that are not produced by the company itself, and are not the result of activities from assets owned or controlled by them, but those that it’s 		
indirectly responsible for, up and down its value chain. Companies may currently face challenges in reporting accurate and reliable Scope 3 emissions data. Where a company is unable tocalculate its Scope 3 emissions for some or all of the categories outlined in the GHG Protocol’s guidance, it should still identify the relevant upstream and downstream Scope 3 emission
categories relevant to it.
13. As per International Energy Agency (IEA) guidelines phase out by 2030 in developed markets and 2040 in emerging markets.
14. United National Principles for Responsible Investment
15. Institutional Investors Group on Climate Change
16. Net Zero Asset Managers
17. Climate Action 100+

8First Sentier Investors | Global Listed Infrastructure 2022 Sustainability ReportInterim targets
We commit to pursuing interim targets to reduce the WACI of
our investment portfolios by -35% for our Global Strategy and-50% for our Responsible strategy, by 2030 relative to the 2019benchmark index18. This target was developed through a detailed
evaluation of our portfolios emissions, progress achieved to date
and their likely achievements in the years ahead.
The Paris Agreement calls for a -45% reduction in emissions
by 2030 from a 2010 baseline. It is important to recognisethat companies have already made significant progress on thistarget. US utilities represent more than 90% of total emissions
in our portfolios and we estimate that from 2010 to 2019 thesecompanies had already reduced emissions by -29%. Therefore todeliver their fair share requires a further -23% reduction from 2019
to 2030. Adjusting absolute emissions to emissions intensity wearrive at the -35% target for our Global Strategy.

Weighted Average Carbon Intensity

2,000

BenchmarkGlobalResponsible

Scope 1+2 tCO2e / $m Sales

1,750
1,500
1,250
1,000
750
500
250

2030

2028

2027

9

2025

2029

2026

2024

2023

2022

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability Report

2021

2020

2019

2018

2017

0

Source: First Sentier Investors. Data as at 30 June 2023

18. Benchmark data provided by MSCI

A snapshot of our progress

10First Sentier Investors | Global Listed Infrastructure 2022 Sustainability Report

570
23
15

1,067

meetings
heldresolutions voted on

countries

against12% voted
management

20

subsectors19

31%

Net Zerocommitments
made by71%

reduction in weighted
average portfolio carbon
intensity over last 5 years22of our portfolio companies2130%

An average 30% female
representation on our portfolio
company boards (23% 5 years ago)23-35%

for GLI
strategyInterim 2030
WACI targets for
GLI strategy:-50%

for RLI
strategy

Graded 4 stars
or above in
7 out of 9
categories

UN PRI
LeaderRanking24 RIAA ranking
19.

Company meetings held during the 12 months to 31 December 2022

20. Proxy voting for the 12 months to 31 December 2022
21.

Portfolio holdings as at 30 June 2023

22. Represents portfolio holdings as at 30 June 2023 for the five year period December 2017 to December 2022
23. Information sourced from FSI as at 31 December 2022;
24. Information sourced from FSI as at 31 December 2021; Firm level rankings

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability Report11

ESG focus areas

12

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability ReportDuring 2022, the GLI team focused on assessing ESG risk and performance in four key areas –energy transition, climate risk, modern slavery and corporate governance.
Whilst we see energy transition and climate change as the biggest area for infrastructure companies
to focus on, we also wanted to tackle human rights and modern slavery risks, and the need for good
corporate governance.
Energy transition
Energy transition was at the forefront of our engagement with companies. Transition risk represents
the single largest climate-related risk for listed infrastructure companies, as the world moves awayfrom fossil fuels and towards lower-carbon sources of energy. However, energy transition also
represents a substantial opportunity. Attempts to reduce carbon emissions are having significant
implications for the way in which electricity is generated, transmitted and distributed.
Climate risk
Physical impact risk from climate change and global warming pose systemic risks to society and theglobal economy. It affects the availability of resources, the price and structure of the energy market,
the vulnerability of infrastructure assets and the valuation of companies. As investors in infrastructure
assets, we understand that climate change poses a complex problem which has already impacted,
and will continue to impact, different assets in different ways. We believe it is our responsibility tounderstand and mitigate these risks within our investment portfolios.
Modern slavery
As stewards of our clients’ assets, we believe we have a responsibility to identify and act to eliminate
human rights abuses, including, but not limited to, modern slavery. This is part of a wider societal
responsibility that impacts the performance of our investments. Companies have legal, moral andcommercial responsibilities to respect human rights and to manage the risks of modern slavery
on their operations. If these responsibilities are not met, a company may face regulatory, financial,
reputational and legal risks.
Corporate governance
Infrastructure companies provide essential services such as energy, transportation, water andtelecommunications that are vital to the functioning of societies and economies. They are often large
scale projects with significant capital expenditure requirements. Effective corporate governancemeans companies are managed with the interests of all stakeholders considered: shareholders,
employees, customers, suppliers, the environment and the broader community.
The following section provides insights on the trends and overall portfolio performance we have seenin these focus areas during 2022. We have used specific case studies to provide examples
of companies we invested in and actively engaged with throughout the year.

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability Report13Engagement examples in this report
SectorRegionPrimary engagement objectives

NextEra Energy

Utilities/Renewables

United States

Collaborative engagement (Climate action 100+)
Establish net zero emissions target

19

Xcel Energy

Utilities/Renewables

United States

Accelerate transition towards renewables
Prioritise investment in electric vs gas utilities
Establish targets for scope 3 emissions

20

PPL Corp

Utilities/Renewables

United States

Bring forward closure of existing coal plants
Incorporate ESG metrics into remuneration targets

22

Transurban

Toll Roads

Australia NZ

Extend renewable PPAs to all regions
Increase investment in electric vehicle adoption
Greater transparency of scope 3 emissions

23

Entergy

Utilities/Renewables

United States

Prioritise investment in resilience spend
Balance net zero targets with mitigating climate risks
Further investment in climate change modelling

25

SSE

Utilities/Renewables

United Kingdom

Incorporate climate change into forecasts
Minimise impact of wind farms on ocean and marine life
(Biodiversity)

27

Vinci

Toll Roads

Europe xUK

Improve modern slavery policy and procedures
Understand response to Russia Ukraine exposure

30

Rubis

Energy Midstream

Europe xUKStrengthen approach to modern slavery risks
Accountability for supplier audits and risk assessment

31

West Japan Railway

Railroads

Japan

Increase number of independent directors
Separation of Chairman and CEO duties
Increase diversity of skills and experience on the board

36

Aena

Airports

Europe xUK

Improve alignment of interests with minority shareholders
Ensure capital discipline in international expansion

38

Name

Page

Energy transition

Climate risk

Modern slavery

Corporate governance

14First Sentier Investors | Global Listed Infrastructure 2022 Sustainability ReportEnergy transition
Transition risk represents the single largest climaterelated risk for listed infrastructure companies, as
the world moves away from fossil fuels and towards
lower carbon sources of energy. This transition has
implications for freight railways, whose coal haulage
volumes will decline materially over the next ten years.
It will affect the energy midstream space, where oil andrefined product pipelines could face stranded asset riskby 2040. While natural gas is likely to represent a key
transition fuel, a long-term decline in demand is likely to
begin once battery storage technology has advanced
sufficiently.
However, energy transition also represents a substantial
opportunity. Attempts to reduce carbon emissions arehaving significant implications for the way in whichelectricity is generated, transmitted and distributed.
Renewable energy is currently experiencing a virtuous
cycle of falling costs, improving productivity and growing
market share. In contrast, non-renewable energy isin a vicious cycle of declining market share, reduced
revenues and rising costs.

Portfolio carbon metrics
Across our portfolio companies we have seen a -13%
reduction in absolute emissions over the last five
years25. This reduction reflects a range of initiatives
including: closing coal power plants and replacing withwind, solar and batteries, signing renewable powerpurchase agreements, reducing transmission line
losses, capturing landfill methane and processing into
renewable natural gas, converting vehicles from diesel
to compressed natural gas or electric, or switchingventilation systems from fixed to variable speed.
The list of initiatives and technologies continues
to grow.
Importantly this reduction in emissions came despite
substantial growth in the underlying businesses andchanges in scope related to acquisitions. As an
indication this -13% decline in absolute emissions
translates to -31% decline in WACI when adjusted
by revenue.

25. Represents portfolio holdings as at 30 June 2023 for the five year period December 2017 to December 2022

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability Report15

Absolute carbon emissions

Carbon intensity
CO2 emissions tonnes per $USD revenue

CO2 emissions (Scope 1+2) thousand tonnes
2,500-31% decline in WACI over 5 years

1,600

2,000
1,200

1,500
800

1000

400

500

0

0
2017

2018

2019

2020

Source: First Sentier Investors

2021

2017

2022

100% portfolio coverage

2018

2019

2020

2021

2022

Source: First Sentier Investors

More than 90% of our portfolio’s emissions come from utilities so naturally this is where we invest the most timeon analysis and engagement. With the main source of emissions being power generation, utilities tend to express
carbon intensity as a function of power produced. This measure of carbon intensity has reduced by -28% over thelast 5 years as utilities have switched from power generation fuelled by coal to natural gas to renewables.
This measure of carbon intensity is also useful to consider pathways towards net zero. All of our portfolio utilities
disclose historic carbon intensity and many provide a pathway forward. We can also analyse information from
integrated resource plans and plant asset lives to project the likely carbon intensity of the generation fleet overtime. Our portfolio utilities have already reduced carbon intensity by close to -40% from 2005 to 2020 and webelieve they are on a path consistent with net zero by 2050. We acknowledge that the degree of certainty in thisregard falls materially after 2030 / 2035 given resource planning and government incentives are typically limited to
10-15 years and networks / storage are untested with 100% renewables at scale.

Carbon intensity | Utilities only

Net zero pathway | Utilities only
Tons CO2 emissions per MWh

Tons CO2 emissions per MWh
0.70

0.70

0.60

0.60

0.50

0.50

0.40

0.40

0.30

0.30

0.20

0.20

0.10

0.10
0

0
2017

2018

2019

2020

Power generated by utilities represents 90% of portfolio emissions

16

2021

2022

2005

2010

2015

Source: First Sentier Investors

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability Report

2020

2025

2030

2035

2040

2045

2050

So what level of conviction do we have that these pathways to net zero will be achieved? The chart below provides
a snapshot of the level of disclosure and commitment to energy transition across our current portfolios:
Commitment to energy transition

100%% of portfolios

80%

60%

40%

20%

0
TCFD Report

Net Zero Target

Science BasedClimate Comp

Source: First Sentier Investors

95% report against TCFD

71% have set a net zero target

Reporting against the recommendations of the Task
Force on Climate-Related Financial Disclosures has
become the global standard. Disclosures aroundgovernance, strategy, risk management, metrics
and targets should help investors understand how
companies consider and assess climate-related risks
and opportunities. Companies that do not support
TCFD disclosures are generally in emerging markets.
A few do not formally support TCFD but do have credible
disclosures and commitments. For example, Flughafen
Zurich (Zurich Airport) supports the Global Reporting
Initiative (GRI) and Airport Carbon Accreditation (ACA)
and has set a target for net zero without offsetting by
2040. We will continue to engage to achieve 100%
support of TCFD.

Most companies target net zero by 2050. A few haveset more aggressive targets including NextEra Energy
by 2045 and CenterPoint Energy by 2035. Companies
that have not set a net zero target are generally inenergy midstream, emerging markets or wirelesstowers. Other sectors like railroads and waste have set
strong interim targets but are not yet ready to commit
to net zero. For example, waste company RepublicServices has set an (SBTi approved) interim target for-35% reduction in emissions by 2030 but does not yet
see a pathway to 100% capture of landfill methane gas.
We will continue to engage with these companies topush for a commitment to net zero.

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability Report17

37% are confirmed as science based
Adding a pathway to achieving net zero includinginterim targets is critical for transparency andaccountability. We will continue to engage withcompanies to align net zero pathways with science andseek external validation. The Science Based Targets
Initiative (SBTi) is widely used for validation of net zero
pathways. We acknowledge criticisms that it relies
on a single scenario to achieve net zero and does not
capture historic carbon reductions – this is important for
US utilities given what was achieved between 2005 and2020. We will also seek further disclosure of specificplans to achieve these outcomes, for example coalplant closures and renewable / storage / transmission
projects.
42% have climate-linked compensation
Incentives drive behaviours and we believe executionof the pathway towards net zero is more likely tobe successful if management are remunerated
accordingly. Depending on the materiality for thecompany and the responsibilities of the individual, we
recommend 10-30% of variable remuneration is linked
to ESG-related risks. For an example of best practice,
Xcel Energy has linked 100% of short-term incentives
to ESG metrics including safety, reliability, customer,
environment and diversity, with a 50-150% overlay forearnings per share relative to guidance range. It has
also linked 38% of long-term incentives to carbon
reduction with 62% on relative total shareholder
return26.

We recognise the challenges of addressing scope 3
emissions. Many companies do not have the systems inplace to track and report emissions that occur outside
their operation but associated with their activities.
A lack of standardised methodologies and reporting
frameworks also makes it challenging to compare
emissions across different companies. We will continue
to engage with companies to raise awareness about theimportance of Scope 3 emissions.
Future steps
We actively encourage companies to take this issue
seriously and report high quality data in line with TCFD
recommendations. Across all ESG issues, we needsustainability reporting that has the same rigour as
financial reporting (i.e. double materiality) and weare aware of our responsibility as active investors
to encourage this from the companies we invest in.
We will report on our progress against our net zerocommitment at an underlying portfolio level on anannual basis.

Challenges
Carbon intensity metrics can sometimes increase year
on year due to changes such as in demand, corporate
structure and weather impacts. Whilst longer term
targets such as Net Zero 2050 are important, ourimmediate priority is to set medium-term expectations
and assess company performance against thosemeasures. We challenge management on where they
expect to get to by 2025 and 2030. We need to be
forward looking and also identify the laggards who could
be the leaders of the future.

26. Source: Xcel Energy. Data as at 24 May 2023.

18

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability ReportCase study

Defining a net zero goal fora decarbonisation leader:
NextEra Energy
NextEra Energy has a plan to lead America’s decarbonisation efforts, leveraging
low-cost renewables to drive affordable, clean energy for customers27. Although it isan industry leader in the push for reducing carbon emissions in its own operations
and in its solutions, it was slow to set a net zero target.
A Florida-based integrated utility, NextEra Energy(NextEra) is the largest renewables developer andowner in the US28. Climate change mitigation andadaptation are key investment opportunities forthis company but despite its position in leading
the decarbonisation charge, it lacked a clear net
zero target for its efforts.
Taking a two-pronged approach to encourage
NextEra to define a net zero target, our teamindividually engaged with NextEra as well as
being part of Climate Action 100+, an investor-led
initiative ensuring the world’s largest corporate
greenhouse gas emitters are taking necessary
action on climate change. Our team has been

members of the Climate Action 100+ working
group for NextEra since 2019.
After several years of individual and collective
engagement, NextEra announced, in June
2022, an ambitious goal of achieving ‘Real
Zero’ by 2045 in its updated climate strategy29.
The Real Zero goal sets a new benchmark forenergy producers, making NextEra’s intent toeliminate all carbon emissions from its operations
without the use of carbon offsets to achieve
success. Pleasingly, NextEra has also set interim
milestones every 5 years, adding visibility andaccountability to this long-dated target.

Projected Generation

65%

77%

83%

92%

100%

2025

2030

2035

2040

2045

Renewables
and Storage46%

Renewables
and Storage
62%

Renewables
and Storage
71%

Renewables
and Storage
80%

Renewables
and Storage
89%

Nuclear19%

Nuclear15%

Nuclear12%

Nuclear12%

Nuclear11%

Fossil35%

Fossil23%

Fossil17%

Fossil8%RNG<1%27. A real plan for real zero
28. Source - https://energydigital.com/top10/top-10-biggest-renewable-energy-companies
29. NextEra Energy sets industry-leading Real Zero™ goal to eliminate carbon emissions from its operations, leverage low-cost renewables to drive energy affordability for customers
Source: NextEra Energy – Zero Carbon Blueprint Report;

Case study

Minimising Xcel’s carbon
footprint by accelerating
renewables investments
Xcel Energy has made significant progress in closing legacy coal-fired assets tominimise its carbon footprint but could be doing more to accelerate its transition
towards renewables.
A regulated utility with operations across 8 US states,
Minneapolis-based Xcel Energy (Xcel) provides
electricity and natural gas services to approximately
3.7 million electric customers and 2.1 million natural
gas customers30. The company is well-positioned
to deliver steady, low-risk earnings growth bytransitioning towards renewables. However, we felt
there was potential to accelerate its decarbonisation
story by maximising tax credits offered by the Inflation
Reduction Act (IRA) to incentivise investments insolar, wind and energy storage. Our view was that
Xcel should also prioritise investment in its electricutilities over natural gas utilities given the former has
a rapidly declining carbon footprint.
In October 2022, we met with the Xcel’s CEO and
Chief Sustainability Officer in Denver, Colorado
to discuss the decarbonisation of its electric andnatural gas utilities. Xcel re-emphasised its ongoingcommitment to reducing its carbon footprint –investing in renewable energy, closing coal-fired
power generation and reducing its greenhouse gas(GHG) emissions from natural gas via renewable
natural gas and hydrogen. It reinforced the message
that sustainability efforts should go hand in handwith service reliability and customer affordability.
Management are clearly aligned with carbon
reduction goals.

Executive remuneration is linked to three key targets:
1) 80% carbon emission reduction by 2030, 		
100% by 2050
2) Customer bills need to increase by less than 		
inflation
3) Long term EPS (Earnings per share) and DPS(Dividend per share) growth of 5-7%
Xcel is evaluating the impact of the IRA on its
renewable energy investments and subsequentcoal plant closures. It agrees that the economics ofrenewables has improved post the IRA. However,the company cautioned that its very cold service
territories meant energy storage technology (battery
lengths need to improve from 4-6hrs to 10-12hrs) area real impediment to accelerate coal plant closures.
Despite this challenge, there is little doubt that while
coal closures may not be brought forward, capacity
factors and emissions would be materially reduced.
We continue to engage with Xcel, encouraging themto accelerate the closure of their existing coal plants
and strengthen their decarbonisation targets.
We would like to see them implement interim targets
for Scope 3 emissions to increase accountability andensure a more accurate assessment of their carbon
footprint.

30. Corporate profile

20

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability ReportXcel coal plant closures (MW)

8,000

6,000

4,000

80%
High Bridge
Riverside
Cameo
Cherokee
ArapahoeBlack DogBay Front
Valmont

60%

Comanche
ShercoHarrington
Craig

40%

ShercoPawneeHaydenCraig
King
Comanche
Tolk*

2,000

20%

0

0
2006

2021

2025f

2030f

Source: Xcel Energy, First Sentier Investors31““

Xcel Energy is an example of a US Utility sector that we think can improve andaccelerate their decarbonisation story. This is likely to come through the early
retirement of coal-fired generation assets and increased investment in renewables
such as wind and solar, leading to an earnings and multiple re-rating.

31. *Tolk coal plant closure in 2028 pending approval by TX and NM commissions, currently 2032

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability Report21

Case study

Constructive conversations
with PPL Corp’s management
Engaging with management helped to deepen insights about PPL Corporation’schallenges regarding ESG metrics, uncovering opportunities to provide
guidance on issues.
After selling its UK assets in 2021, PPL
Corporation (PPL) became a US-only fully
regulated utility. Headquartered in Pennsylvania,
its main assets include two integrated regulated
electric and gas utilities in Kentucky, a regulated
electric transmission and distribution utility in
Pennsylvania and a recently acquired regulated
electric and gas transmission and distribution
utility in Rhode Island.
PPL’s energy transition has lagged industry
peers. It has long time horizons for retiring its coalassets, with coal plants running well into 2030.
For example, its Trimble County Plant in Kentucky
is not scheduled for retirement until 2060.
Similarly, it has not provided clarity on how ESG
metrics are integrated into its long-term incentive(LTIP) remuneration plans.
We raised these issues in a meeting with PPL’s
independent Chairman, Chief Executive Officer,
Chief Sustainability Officer, General Counsel
and Investor Relations Director, encouraging
management to bring forward the closure datefor its coal assets and boost investment incleaner energy.

of how the board thought about incorporating
ESG metrics to the management team’s longterm incentives, asking questions that helped
broaden their thinking about components to befactored in, like vehicle emissions and electricity
consumption at facilities.
Encouragingly, in December 2022, PPL
announced a plan outlining its intent to replace
1,500MW of aging coal-fired generation, or nearly
one-third of Kentucky’s coal fleet by 202832.
The plan includes adding two new combinedcycle natural gas plants, nearly 1,000MW of solar
generation, 125MW of battery storage and morethan a dozen new energy efficiency programs.
We feel we were part of a broader push for actionin this area.
The conversation is by no means over and wecontinue to engage with PPL on accelerating
the closure of their existing coal plants andstrengthen their decarbonisation targets in linewith the evolving climate science, technology,
policy and community needs.

In this engagement, PPL acknowledged that
improvements could be made in reducing carbon
intensity in its coal portfolio and were open to
our suggestion that there were opportunities toincorporate broader reductions in carbon intensity
measures in its LTIP plans. We wereable to provide guidance on an approach that PPL
could consider, suggesting that management
could implement a rolling 3-year carbon intensity
approach. We also deepened our understanding

32. PPL Corporation’s Kentucky utilities file plan to replace 1,500 megawatts of aging generation by 2028

Case study

Room for improvement for
an industry leader: Transurban
Transurban is making progress in reducing emissions but we felt they could go
further by signing renewable power purchase agreements across their entire
network.
Transurban (TCL) is one of the world’s largest tollroad operators, building and managing urban
motorways in Australia and North America.
We believe it is one of the best businessesof its kind, with a strong management team,independent board and attractive tolling
agreements. TCL’s Sustainability Strategy isaligned with the UN Sustainable Development
Goals and they are targeting a 50% reduction
in absolute emissions by 203033. Despite thegood progress in reducing emissions we felt TCL
could go further.
We identified 3 opportunities where TCL could
make improvements:• Extending renewable power purchaseagreements (PPA) to all regions• Contributing to reducing customer emissions
by supporting electric vehicle (EV) adoption• Encouraging greater transparency anddisclosure of scope 3 emissions
We engaged with TCL’s Chairman andmanagement, including its CEO, CFO and Headof Sustainability to discuss what could be done
to refresh existing initiatives and what might beintroduced.
Scope 1 & 2 emissions
95% of TCL’s emissions are derived from thepurchase of electricity. The company has recently
extended PPAs from Sydney to Melbourneand Brisbane, which is expected to contributeto -65% reduction in GHG emissions when
operational in FY23. Renewable PPAs have only
been signed for 80% of electricity demand as
TCL expects a 10% improvement in their own
33. Towards net-zero emissions
34. Westconnex is a 33km predominantly underground motorway in Sydney, Australiaenergy efficiency and 10% improvement incarbon intensity power from the grid.
We encouraged management to extend PPAs
across their entire portfolio including North
America.
Scope 3 emissions
TCL is targeting a 55% reduction in emissions
intensity for major projects and 22% forpurchased goods and services. Lowering thecontent of portfolio cement in the WestConnex34
tunnels reduced embodied emissions by around50%. It was also able to divert 90% of major
project waste and 60% of operational wastefrom landfill.
EV charging
TCL is investigating the installation of EV charging
infrastructure along its toll roads in Australia.
These are likely to be off-motorway as entryexit ramps are complicated. We encouraged
TCL to increase the development of charging
infrastructure and sent them best-practice
examples from Europe including Eiffage andFastned.
Sustainable driving initiatives
TCL is introducing sustainable driving initiatives
including awareness campaigns to highlightthe environmental benefits of using toll roads.
TCL estimates 27-30% reduction in emissions
vs alternative routes which are more likely toexperience impacts from traffic lights, congestion
and accidents. Other initiatives include driver
education programs with an estimated 5-6%
reduction in fuel emissions from smootherdriving styles.

Climate risk
Climate change and global warming are increasing
the frequency and unpredictability of extreme weather
events like droughts, fires and floods, which posesystemic risks to society and the global economy. It
impacts the availability of resources, the price andstructure of the energy market, the vulnerability of
infrastructure assets and the valuation of companies.
As investors in infrastructure assets, we understandthat climate change poses a complex problem, which
has already impacted, and will continue to impact,
different assets in different ways. We believe it is our
responsibility to understand and mitigate these risks
within our investment portfolios.
Examples of climate risk for infrastructure assets
include:• Extreme weather events including hurricanes, storm
surges, floods and high wind events• Droughts and the impact this has on water resources• Increased risk of wildfires causing damage to utility
electricity transmission networks• Rising sea levels causing damage to coastal
infrastructure assets.
Climate change-related criteria are incorporated
into the quality scores that are assigned to eachcompany that we research and analyse. Our quality
scores consider factors including operational risks
and the impact extreme weather events may haveon a company’s cash flows or licence to operate. We
conduct regular meetings with senior management andother stakeholders including suppliers, competitors,

24

regulators and industry bodies. Given the investment
experience across the team, we understand companies
and markets intimately and believe we are best
positioned to form a view on the companies’ approach
to climate change and the materiality of climatechange-related risks and opportunities.
Our engagements on climate risk align with the fourpillars of the TCFD disclosures: governance, strategy,
risk management, and metrics and targets.
Challenges
We recognise that climate change is a long-term
challenge and that its impacts unfold over extended
periods. This requires a shift in mindset and theadoption of new tools and methodologies tounderstand its impact over time. Climate change isalso characterised by significant uncertainty, making
it challenging to quantify and model risks accurately.
Data reliability and availability are an ongoing challenge;
however company disclosure is improving with theintroduction of mandatory climate disclosure across
many of the jurisdictions we invest in.
Future steps
Whilst TCFD reporting is still not mandatory in many
countries, we actively encourage companies to take thisissue seriously and to report high quality data in line with
TCFD recommendations. We believe better data willallow for the implementation of more consistent climate
metrics and targets, and allow for greater transparency
on investors climate performance.

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability ReportCase study

The race towards resilience inthe face of severe weather events:
Entergy Corporation
Despite its 2050 net zero target and the intent to replace its coal capacity withrenewables by 2030, Entergy Corporation is racing to ensure resilience of its assetsthat are most vulnerable to unpredictable and severe weather events.
Entergy Corporation (Entergy) is a US-regulated
electric and gas utility serving 3 million customers
across Arkansas, Louisiana, Mississippi andTexas. The majority of its assets are located insouthern US states that have been subject tosevere hurricanes, thunderstorms and tornadoes.
Climate change can make these events more
intense and frequent, destroying infrastructure,
disrupting services, and requiring costly repairs
and reconstruction.

In 2021, extreme weather events resulted inover US$2.7bn in damage to Entergy assets.
Concerned with the resilience of their assets, we
had in-person and virtual meetings with Entergy
throughout 2022 to better understand how they
were safeguarding their assets, their expectations
for regulatory cost recovery and the extent towhich climate change modelling could assist
them with system hardening plans.

Adaptation, Hardening and Resilience (AHR) as drivers of US utility T&D investment
DISTRIBUTION CAPEX

26%

12%

27%

30%

6%

34%

4%

TRANSMISSION CAPEX

27%

7%

AHR: Hardening & Resilience
AHR: Advanced Technology

29%

Expansion
Replacement

Other

Individual numbers may not total 100% due to rounding.
AHR: Adaptation, Hardening & Resilience. T&D: Transmission & Distribution.
Source: EEI Financial Analysis and Business Analytics, EEI member company survey, First Sentier Investors. Data based on EEI Business Analytics 2022 surveys.

Case study continued...

To mitigate climate change risks, Entergy isinvesting US$15 billion in resilience initiatives.
These initiatives include investments toward
generation portfolio upgrades and renewablegeneration, undergrounding of the grid network,and robust emergency and incident response
planning to prevent and mitigate system damage
from climate events, laying the foundation for
newer technologies such as energy storage.
Ultimately, these investments will support Entergy
in providing customers with improved reliability,
efficiency and resilience.
Complementing these initiatives is investment
in restoration projects to enhance biodiversity
and local ecosystems in the communities
surrounding its operations. For example, wetlands
play a crucial role in storm protection for Entergy’s

26

assets while also contributing to economic
prosperity for many of its communities.
Entergy’s proactive approach to rebuilding its grid
system to recover costs following the weather
events of 2021 have been highly supported by
the regulators, highlighting the company’s good
governance and a genuine commitment to fair
service delivery for communities.
The business sets a high bar for balancing
its net zero targets with mitigating climate
risks, making it a leader among US utilities inthe transition to a net zero future. We see anincrease in the company’s investment in lessvulnerable underground grid networks and further
investment in climate change modelling asimportant future steps.

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability ReportCase study

Considering the impact of
renewables development on
nature and biodiversity: SSE
In the push for developing renewable energy sources, businesses will also needto consider broader environmental impacts.
SSE is a regulated electric and gas utility based in
the UK with a growing book of renewable assets.
It is one of the largest developers of offshore windin the world, including the development of theworld’s largest offshore wind energy project, the
3.6GW Dogger Bank Wind Farm off the east coastof Yorkshire, England.
Given SSE’s extensive development program,
both terrestrial (land-based) and marine, we
wanted to better understand how the company
is minimising the environmental impact of its
construction work and, where possible, seeking toleave these areas enhanced. We also discussed
ways in which we, as investors, can monitor these
impacts.
What became clear is that quantifying biodiversity
net gain at the corporate level (in effect –aggregating unique, local projects with a rangeof different environmental considerations into asingle overall figure) is challenging. For example,
in one zone the key consideration was gannets (alarge seabird); in another, it was a golden eagle.

to reduce the noise impact of laying thefoundations for offshore wind farms, or changing
configurations to minimise disruption to the flowof fish.
Given this complexity, SSE’s response has tobe tailored to the demands presented by eachspecific terrestrial or marine zone. Some changes
that have been made include adjusting the tipheight of a wind farm’s turbines to below theheight of avian flight paths; creating “no fishing”
zones for fishermen; and finding ways to increase
certain types of habitat.
We were encouraged by the release of SSE’s
latest biodiversity report in November 2022,
which seeks to assess its impact on nature andbiodiversity, and will continue to have two-way
dialogue with company management about waysthat SSE can further reduce its impact on theenvironment, and improve its disclosure on this
topic.

Projects further out to sea are even more
complicated. Companies including SSE arefinding innovative ways to minimise disturbanceto marine life, for example by finding ways

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability Report27Modern slavery
At FSI, we understand we must do all that we can toensure our investment decisions, operations and supply
chains do not contribute to the risk of modern slavery.
The GLI team is dedicated to enhancing our systems
and processes to combat various forms of slavery
and human trafficking, including forced labour, childlabour, domestic servitude, and workplace abuse. We
acknowledge that suppliers employing lower wage staff
may pose higher risks, and we encourage companies
to thoroughly map out both their direct and indirect
suppliers.
In 2020, FSI formed a modern slavery working group,
led by the FSI Responsible Investment team. The
group aimed to enhance our efforts in human rights byintegrating risk identification and governance into ourprocesses. As part of their work, they developed andpublished the Modern Slavery Toolkit.
The toolkit sets out the steps that investment teams
take at both pre- and post-investment stages:
1. Risk identification: Utilising various data sources andconsidering factors like complex supply chains to
identify potential risks.
2. Risk mitigation: Providing guidelines and sample
questions for engaging with companies at risk ofmodern slavery. It also highlights other forms ofleverage, such as policy advocacy and partnerships.
3. Escalation: Outlining actions for escalating,remediation, and ongoing monitoring of any
identified instances of modern slavery.

28

4. Internal governance: Describing the internal
governance framework in place to monitor modern
slavery risks and the effectiveness of our approach.
5. Reporting: provides a reporting template forinvestment teams to be completed each year.
The GLI team assessed the risk of modern slavery
in our focus list, considering sectors, geographies,
and companies. External data sources, including theTransparency International Corruption Perceptions
Index, helped identify countries associated with modern
slavery risks. Each company in our focus list was ranked
based on the vulnerability index of the countries where
they operate. Our engagement efforts are prioritised
towards companies with higher exposure in countries
ranked higher on the index. Two company engagement
examples on this important ESG issue are described
below.
Challenges
Infrastructure companies have complex supply
chains that involve procuring materials, equipment,
and services from various suppliers. Companies
may not be fully transparent about their supply chain
practises, making it challenging to obtain reliable andcomprehensive information. These risks tend to behigher in developing markets such as parts of Asia andLatin America, hence our focus on companies operatingin these markets.

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability ReportModern slavery laws and regulations vary acrossjurisdictions, creating a lack of consistent global
framework for assessing these risks. The UK andAustralia have existing modern slavery legislation,
Canada is in the process of enacting a Modern Slavery
Act, and Japan is developing guidelines on Human
Rights Due Diligence. To improve data quality, it will be
crucial to translate qualitative social objectives, such as
modern slavery, into quantitative indicators.
Future steps
We will continue to engage with our focus list
companies to promote the mapping of their complete
supply chain, including direct and indirect suppliers.
In our discussions, we intend to focus on remedies
and preventive measures to address the challenges
mentioned earlier. As we gather more data, casestudies, and best practices, we will contribute to
updating FSI’s Modern Slavery Toolkit, ensuringcontinuous improvement in our investment approach.
Addressing the sheer scale of modern slavery

The International Labour Organization35 has estimatedthat there are nearly 50 million victims of modern slavery,
including crimes such as forced labour, debt bondage,
human trafficking, child labour and forced marriage.
It means there are 5 victims of modern slavery for every
1,000 people in the world today. And sadly, one in four
victims of modern slavery are children.
Modern slavery is a complex and multi-faceted issue.
There is no gold standard for identifying and addressing
the risks associated with modern slavery and how it isaddressed varies between markets and industries.
Generally, we expect leaders to have mapped out their
supply chains and to work on building relationships with
their suppliers, to have a sense of where the key risks lie
and to have robust training and remediation measuresin place. We see red flags in instances where companies
assert that there is no issue, that the issue has been
resolved, no remediation processes are in place and
if no examples or case studies of issues identified andaddressed can be provided.

35. International Labour Organization, “Forced Labour, modern slavery and human trafficking”

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability Report29Case study

Vinci: Heightened modern slavery
risks in construction sector
Vinci supports workers in the face of armed conflict and starts tackling modern
slavery risks with a move to partner with a union federation.
Vinci is one of the world’s largest investors intransport infrastructure. Significant concession
assets include 4,400km of toll roads in France
and 45 airports across 12 countries. With aworkforce of over 220,000 people, it operates
in 120 countries, including France, the UK,
Germany, and the Middle East. While its
concession businesses contribute most of theoperating profit, Vinci also operates a substantial
contracting business, providing engineering andconstruction services, particularly in emerging
markets.
Following the escalation of the conflict between
Russia and Ukraine in February 2022, Vincineeded to assess its position concerning
construction activities and toll road assets in
the region. To understand Vinci’s exposure to
the Russia-Ukraine conflict and to inquire about
its modern slavery policy and procedures, we
promptly arranged a call with the company’s
corporate social responsibility (CSR) team.
Russia Ukraine
Vinci’s priority was ensuring the safety of its
workers in Russia and Ukraine. Despite theconflict, around 1,000 employees chose toremain, primarily Russian nationals. Additionally,
numerous Ukrainian employees in Poland left
their jobs to return to Ukraine and join the war
effort. Vinci promptly helped employees affectedby the unfolding refugee crisis in neighbouring
countries.
Vinci confirmed that its direct exposure to Russia
in its construction and concession business
was limited. In 2021, the company generated
approximately €30 million from this market,
accounting for around 0.2% of total revenue.
Vinci also holds an equity stake in the Moscow
St Petersburg motorway, which does not

significantly contribute to its net income. As of
December 2022, Vinci had not decided whether
to divest this asset and continues to own it.
Modern slavery
In recent years, we have extensively engaged
with Vinci regarding the issue of modern slavery,
considering the company’s construction businessand its exposure to emerging markets, which
increase the risks associated with this problem.
The scrutiny was particularly focused on Qatar
due to infrastructure development for the 2022
Football World Cup, where Vinci and its Qatar
subsidiary QDVC faced investigations for alleged“forced labour, servitude, and concealment.” Vinci
employs around 6,000 migrant workers throughits Qatar subsidiary and various subcontractors.
The company denied the accusations, assertingthat it provides migrant workers with suitableworking conditions.
After several years of constructive dialogue, Vinci
signed a framework on worker’s rights, including
fair recruitment, making it the first agreement of
its kind in Qatar between a union federation and a
Qatari company.
Vinci is also taking steps to prevent workers’
rights abuses among its labour suppliers andsubcontractors by conducting labour rights
audits. These audits involve anonymous
worker interviews, examination of employment
processes (such as recruitment fees, passports,
contracts, wages, health insurance, and grievancemechanisms), and the implementation of
improvement plans. COVID-19 restrictions initiallyaffected Vinci’s ability to conduct these internal
audits, but as travel rules eased, they resumed
the assessments.

Case study

Bringing modern slavery risks
to the fore with Rubis
Companies with large global footprints like Rubis are inherently more exposed
to modern slavery risks given their large contract workforce and complex supply
chains.
Rubis is a French international company
specialising in the storage, distribution and saleof petroleum, liquefied petroleum gas (LPG), foodand chemical products. In 2022, Rubis acquired
an 80% stake in Photosol SA, a French solar
project developer and power producer. This
investment aimed to expedite Rubis’ transition
to renewable energies and decarbonisation.
Considering Rubis’ presence in 40 countries
across Europe, Africa, and the Caribbean, weemphasised the importance of addressing
potential modern slavery risks in its operations.
In 2022, we had a number of engagement
meetings with Rubis, including one focusedon modern slavery and supply chain risks.
Following this session, we sent a formal letter tomanagement, outlining our inquiries regarding thecompany’s identification of modern slavery risks,existing policies, and processes for addressing
instances of modern slavery.
We sought clarification on specific issues suchas:
• Recruitment practices, particularly if workers
are hired through agents, and the measures inplace to ensure labour outsourcing companies
do not retain workers’ passports or charge
them recruitment fees or related costs.
• The concentration of migrant workers or
minorities in Rubis’ supply chain.
• Accountability for supplier audits within theorganisation, including the frequency of theseaudits. We also inquired about the steps taken
to ensure auditor independence and coverageof key risks in their assessments.

Rubis conducted risk analysis to identify andaddress potential areas of concern, including
modern slavery risks. However, no major risks
or instances of modern slavery were identified,particularly in the employment of migrant workers
within its supply chain.
The company is committed to respecting
human rights, as stated in its Code of Ethics.
Training and compliance with the Code of
Ethics are mandatory for all employees, andreporting instances of potential noncomplianceis encouraged through the confidential Rubis
Integrity Line, available 24/7. Contracts in lessdeveloped markets, such as the Caribbean
and Africa, are progressively including specificclauses related to modern slavery, reinforcing
compliance with local regulations, International
Labour Organization (ILO) core conventions, andRubis’ Code of Ethics.
Recruitment agencies used by Rubis are strictly
monitored and limited to shipping activities.
Seafarers operating Rubis-owned vessels are
required to sign declarations confirming they
have not paid any fees to recruitment agencies.
For time-chartered vessels, Rubis ensures thatshipowners take actions to prevent modern
slavery, including staff training, enhanced scrutiny
on manning services, and adherence to ILO
Maritime Labour Convention vetting standards.
Given the potential higher modern slavery risks
in less developed markets, ongoing engagementwith Rubis on this issue and monitoring for policy
breaches or identified risks remains important.

Corporate governance
Effective governance and board oversight is critical fortranslating sustainable targets to outcomes. We lookat factors including director independence, board size,
gender diversity and relevant skills and experience whenassessing governance standards.
We also look to ensure that the board of directors meetsregularly, retains control over the business and is clear in
the division of its responsibilities, as well as maintaininga system of risk management. Alignment of interest
is important because it ensures that decision making
processes are focussed on maximising shareholder
value whilst also promoting accountability, risk
management and long term sustainability.

32

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability ReportWhat makes a good board?

A board that truly adds value is one with a balanced teamof high-performing individuals that have complementaryskill sets and a culture that allows them to work together
to make the most effective decisions for the organisation.
Whilst leadership from the chair is crucial, it is theparticipation of every board member that contributes tothe overall effectiveness of a board.
We believe a good listed infrastructure company board
has the following characteristics:• Board size of between 8-10 directors, with the significant
majority independent• Diversity by gender (at least 30% female
representation), age and race
• Separation of Chairman and CEO duties, with the Chair
being independent*• Balance of skills and relevant experience, such asindustry, finance, regulation, technology, customer, andlocal knowledge. Sustainability and climate change isa skillset of increased importance• Regular board refreshment and clear succession
planning.
Good boards set the strategy, appoint the Executive andoversee the execution of that strategy. They delegate
effectively, have honest conversations with management
and are committed to the organisation particularly when it
comes to problem solving. We also observe the growing
importance and pressure for Boards to also focus onsustainable, socially responsible and environmentallyaware business practises.
*We acknowledge that a joint Chairman/CEO can also
bring alignment if there is a clear strategy and direction
with ‘skin in the game’. We have seen some successful
founder-led examples.

In 2022, we focused on two key corporate governance areas: board independence and gender diversity.
Board independenceOver the past five years, we believe that board independence has consistently remained robust across ourportfolios. This reflects the emphasis on developed markets within our portfolio. Notably, infrastructure companies
in the United States, Canada, and Australia have set a benchmark for best practices, with typically 80-90% of
directors being independent. Japan remains a laggard but there has been a noticeable improvement in recent
years, driven by reforms aimed at enhancing corporate governance and attracting foreign investment. We arecommitted to fostering further progress in this area and will actively encourage companies to prioritise board
independence.
Board independence

Portfolio holdings as at 30 June 2023

Board independence

Focus list ~140 listed infrastructure companies

100% Independent Directors
100

80

90
80

60

70
40

60
50

20

40
0

30
20
10
0
2017

2018

Source: First Sentier Investors

2019

2020

2021

2022

2017

2018

CanadaUnited Kingdom
Asia xJP

2019
Australia NZEurope xUK
Japan

2020

2021

2022

United States
Latin America

Source: First Sentier Investors

Gender diversity
For several years, we have been diligently evaluating companies based on their board gender diversity. Thisis due to the fact that gender balance is typically disclosed publicly and forms an integral part of a company’s
assessment of its social and governance performance. We firmly believe that a diverse board and leadershipteam, encompassing a wide range of thoughts, experiences, and perspectives, fosters more comprehensive
and informed decision-making processes. Furthermore, diverse companies tend to be more adept at effectively
managing risks. We believe by having a diverse workplace and leadership team, potential risks that might beoverlooked in a less diverse environment can be identified and addressed proactively.
In recent years, there has been a steady improvement in the percentage of women on boards at the portfolio
level, with the figure reaching 31% by the end of the year in 2022. Notably, the United Kingdom has emerged as aleader in gender diversity, achieving a 50% representation for utilities companies SSE, Pennon, and Severn Trent.
The UK Financial Conduct Authority (FCA) took a significant step forward in April 2022 by introducing new rulesthat mandate listed companies to report information and disclose their progress towards targets in terms of therepresentation of women and ethnic minorities on their boards and executive management teams. This movesignifies a commitment towards promoting diversity and inclusivity in corporate leadership.

34

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability ReportDiversity

Portfolio holdings as at 30 June 2023

% women on board

Diversity

Focus list ~140 listed infrastructure companies

50

40

40

35
30

30
25

20

20

10

15
0

10
5
0
2017

2018

Source: First Sentier Investors

2019

2020

2021

2022

2017

2018

CanadaUnited Kingdom
Asia xJP

2019
Australia NZEurope xUK
Japan

2020

2021

2022

United States
Latin America

Source: First Sentier Investors

At a firm level, we continue to be involved in industry collaborations designed to boost gender diversity on boards(Australian Institute of Company Director’s 30% Club) and senior management (40:40 Vision). We are also
committed to bringing more women into our own investment teams and continue to work towards our commitment
to have women comprise at least 40% of investment management staff by 2033 (currently 30% for the GLI team).
Challenges
We tend to be cautious when investing in emerging markets, where poorer corporate governance can impact
investor confidence. Many infrastructure companies in emerging markets are controlled bya single or group of dominant shareholders, often family-owned or connected to the government.
This concentration of power can lead to conflicts of interest, abuse of power, and inadequate checks and balances,resulting in poor governance outcomes. Emerging markets often have less stable political environments andweaker regulatory frameworks compared to developed countries. Frequent changes in government policies,
regulations, and laws can create uncertainty and increase the risk of investing in infrastructure projects.
Future steps
We continue to actively engage with companies to promote good governance practices. Active ownershipencourages companies to be more accountable, transparent, and responsive to shareholder concerns. By voting
on important governance matters, such as board composition, executive remuneration and shareholder rights, we
can support changes that enhance governance standards and align company practices with shareholder interests.

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability Report35

Case study

Challenging the board
composition at JR WestJapanese companies have a poor history
when it comes to best practice board
compositions especially when it comesto gender diversity, which will see greater
shareholder scrutiny.
West Japan Railway (JR West) is a major railway
company in Japan with a passenger rail network
covering the Kansai region, including Osaka and Kyoto.
It is the owner and operator of the Shinkansen or‘bullet train’ service. Despite owning a technologicallyadvanced rail network, JR West’s board composition
does not align with global best practices.
In 2022, JR West’s board encompassed 17 directors,
with 47% independent members and only 12%
female representation. This does not align with thecharacteristics that we feel comprise a good listed
infrastructure board.
We have raised corporate governance concerns with
the Japanese railway companies for many years. In
2022, we cast proxy votes against JR West on theissues of board size, board independence and lack ofgender diversity at senior management and board level.
JR West also lacked regular board refreshment andclear succession planning.
There are several areas we have been concerned with:• Although Chairman and CEO duties are separated,the majority of directors are also executives of thecompany, raising questions for us around how
shareholder interests are represented at the board
level• There appears to us to be little diversity of skills andexperience on the board with the majority of board
members having largely similar skill sets.
We would have liked to see the company expand
its skillset into adjacent areas such as technology,
innovation, digital and customer.

In 2022, we sold our position in JR Westfollowing a period of outperformance.
At the same time, the stock was moving
towards the bottom of our value andquality process, with low scores for anumber of quality measures including
board, governance and alignment ofinterests. This made it harder to own
the stock as it moved closer to our pricetarget. Typically, as soon as value isrealised in a lower quality stock, wesell out.
We may have been a longer-term holder
if JR West were able to address someof these key ESG issues. We continue
to engage with Japanese companies
to encourage them to increase board
independence, improve diversity
and provide more transparency andcomprehensive reporting on theirgovernance practices.

Japanese companies have apoor history when it comes togender diversity at both the senior
management and board level.
It is not uncommon for us to meetwith companies in Japan andfind them with little to no female
representation in leadership roles.
The World Economic Forum’s Global
Gender Gap Report 202336 ranked
Japan 125th out of 146 countries
in terms of gender parity, down
45 places compared to its 2006
ranking. The result is that men still
dominate business and politicalleadership in Japan.

36. World Economic Forum Global Gender Gap Report 2023

Case study

Opportunities to alignwith shareholders: Aena
Since becoming a listed company, Aena’s
new minority shareholders have an
opportunity to seek alignment on key issues.
In 2015, Spanish airport operator, Aena, transitioned froma government entity to a listed company with majority
51% government ownership. This evolution has provided
opportunities to engage with Aena to seek improvements in thealignment of the company with new minority shareholders.
After identifying three capital management and alignment
concerns, we sent a letter to Aena addressing the following
areas: dividend policy, real estate investment, and capitaldiscipline in international expansion. In July 2022, we engaged
with Aena’s management in a call to discuss these issues. The
outcomes of this discussion are summarised below.
Dividend policy
The COVID-19 pandemic affected the Spanish aviation sector
in 2020 and 2021, reducing flight activity. Aena, the airport
operator, faced additional challenges due to government
legislation providing rent relief to tenants, resulting in lower
rent for Aena than what was originally agreed. The accounting
treatment of this rent relief had an adverse impact on thecompany’s net profit for 2022 without affecting the free cash
flow generation in the period.
We communicated to Aena that the government’s intervention
should not harm shareholder dividends and urged the company
to adjust dividend calculations accordingly. Aena responded
positively and announced in November 2022 that it would
adjust the dividend to account for the impact of the rent relief.
This unexpected increase in dividend pleased the market andresulted in a positive response from investors, highlighting thebenefits of engagement in improving investment outcomes forour clients.

Real estate investment
We believe the market significantly undervalues thepotential of Aena’s over 300 hectares in developableland. We recommended accelerating development
and forming joint ventures with real estate partners.
Additionally, we emphasised the importance of improved
disclosure to inform the market about the value of theseassets.
During the company’s strategy day in November 2022,
Aena showcased a more detailed and comprehensive
plan for these investments. This increased transparency
allowed the market to better understand the untappedvalue of the real estate land bank.
International expansion
As a highly cash flow generative business with extensive
expertise in the development and operation of airports,
Aena has sought to expand their footprint to othermarkets via acquisitions in both the UK and Brazil. While
we see potential in these activities, we caution thatthese auctions have become highly competitive, with asignificant influx of capital into the sector. We advised
Aena to maintain investment discipline to protect
shareholder capital.
In August 2022, Aena acquired airports in Brazil througha public tender. We believe the purchase price was high,and there are significant challenges in executing therequired capital investments included in the concession.
We remain cautious about Aena’s overseas investments.
In our future engagements, we will concentrate on
executive remuneration at Aena. We will seek torecommend aligning executive pay and structureswith industry standards, including the introduction ofshare-based incentives. This change would enhance
management-shareholder alignment and mitigate therisk of value-detracting foreign acquisitions.

Proxy voting
The GLI team exercises voting rights on all issues
where it has the authority to do so. Voting rights are
crucial for upholding corporate governance, risk
management and protecting investor interests.
We believe voting rights are a valuable asset,
which should be managed with the same care anddiligence as any other asset.
Engaging with a company provides an opportunity
to gather information and insights directly fromcompany management. Through meetings with thecompany we are able to understand the company’s
strategy and gain a deeper understanding of its
governance practises. It enables us to evaluate
shareholder proposals, board nominations,executive compensation plans and other matters
put to a vote.
While we seek recommendations from independent
research providers, we maintain full control over
our voting decisions. If we plan to vote against
a proposal, we may engage with the company
beforehand for consultation, with a view to achieving
a satisfactory solution. If concerns persist, we
escalate the issue to the board. Ultimately,divestment is considered if there is no willingness
to change or address the issue.
Our team maintains records when we vote against
management or against the recommendations ofour proxy voting advisor, Glass Lewis. Our proxyvoting record, at a strategy level, is available on theFirst Sentier Investors website.

Proxy voting over 2022
During the 2022 calendar year, we invested in 74 infrastructure companies across 7 subsectors and in 16 countries
around the world. We voted on 1,067 proposals, of which we voted against management on 131 occasions on
issues including lack of board independence, poor alignment of interests and inadequate climate-related targets.

Breakdown of votes against management

46%

Board related

25%

Audit/Financials
Compensation

11%

Capital management

11%
7%

Other

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Source: Glass Lewis for the 12 months to 31 December 2022

First Sentier Investors | Global Listed Infrastructure 2022 Sustainability Report41This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situationor needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio
management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should consider, with theassistance of a financial advisor, your individual investment needs, objectives and financial situation. We have taken reasonable care to ensure that this material is accurate, current, and complete
and fit for its intended purpose and audience as at the date of publication. To the extent this material contains any measurements or data related to environmental, social and governance (ESG)
factors, these measurements or data are estimates based on information sourced by the relevant investment team from third parties including portfolio companies and such information may
ultimately prove to be inaccurate. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material and we do not undertake to update it in future if
circumstances change. To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters andsources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may
not reflect the views of everyone at First Sentier Investors. To the extent this material contains any ESG related commitments or targets, such commitments or targets are current as at the date of
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First Sentier Investors | Global Listed Infrastructure 2022 Sustainability Report