Responsible investment report
2009 calendar year

Contents
About Colonial First State Global Asset Management1

Principle 4

31

Letter from the Chief Executive Officer

2

Principle 5

37

Global Operations and Ownership

4

Principle 6

40

Governance, policy and strategy

6

Looking ahead

44

Principle 1

13

Glossary of terms and references

45

Principle 2

21

Further information46

Principle 3

27

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

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

About Colonial First State Global Asset Management

Colonial First State Global Asset Management (CFSGAM) is theconsolidated asset management division of the CommonwealthBank of Australia. We are committed to delivering quality investment
solutions which enhance the wealth of our investors. Entities within
CFSGAM provide asset and investment management services toinstitutional and wholesale investors, as well as retail investors.
References to CFSGAM in this report include references
to entities which manage or own assets of various types,
depending on circumstances.
CFSGAM is one of the largest Australian-based
investment managers, with a growing presence inselected international markets. Our specialist investment
teams manage portfolios across a diverse range of asset
classes, including Australian equities, global equities,
global emerging markets, global resources, global
property securities, global listed infrastructure securities,
global fixed interest and credit, short-term investments,
direct property and infrastructure investments.
Our approach to investment is driven by a commitment
to providing the best possible outcomes over the longterm for our investors. To achieve this, we ensure ourinterests are aligned with our investors and uphold aculture of always acting in our clients’ best interests.
CFSGAM became a signatory to the PRI on 1 March 2007,
and has embedded responsible investment processes
within each asset class and in investment teams where
investments are managed. CFSGAM defines responsible
investment as investment decision making which gives
full consideration to ESG issues.

CFSGAM key features–– Distribution capabilities throughout Australia, New
Zealand and Japan via CFSGAM and operating in Asia,
Europe, the UK and the Middle East as First State
Investments.
–– A$149 billion in funds under management as at
31 December 2009.
–– Guided by the expertise of more than 200 investment
professionals around the world.
–– Strong risk management and compliance framework,
designed to meet or exceed required standards ofgovernance as mandated by legislation.
–– Signatory to the UN Principles for Responsible
Investment since March 2007 with a dedicatedSustainability and Responsible Investment team.

1

Letter from the Chief Executive Officer

Welcome to CFSGAM’s third annual responsible investment report.
This report is for the 2009 calendar year, which was one of themost challenging and volatile periods for global financial markets
in recent times.
The unprecedented conditions we experienced werepartly the consequence of a long period of deteriorating
standards of corporate governance, an imprudent
approach to risk and conflicting priorities between
companies and their stakeholders. As some of the dust
settles it is clear that our industry needs to get back tobasics and refocus on its fiduciary role.
The United Nations Principles for Responsible
Investment (PRI) provide a framework for us to consider
environmental, social and governance (ESG) issues
across our own business and in companies in which
we invest. The proper consideration and integration of
ESG issues into our investment process will enable us tobe a fiduciary and make decisions in the best interestsof our investors.
There was a great deal of uncertainty during 2009 andwe had to rapidly adjust to unprecedented conditions.
With so many difficult and pressing issues to deal with,
it was a stern test of the industry’s commitment towards
sustainability and responsible investment.
To engage our people on this issue we held a staff
debate on whether sustainability and responsible
investment were relevant during the financial crisis,
or whether our energies should be focused elsewhere.
Issues such as the materiality of ESG issues, the ability
to quantify ESG measures and availability of evidence
to support ESG considerations were all discussed.
These are important issues for our industry and it
was valuable to openly discuss them.
It was a pleasing outcome that attendees were 100%
behind our ongoing commitment to sustainability andresponsible investment. I believe ESG issues are now more
relevant than ever for our industry and we are witnessinga renewed focus from investors on ESG performance.
With a long track record in responsible investment,
CFSGAM is well positioned to service and respond toclients’ needs in this new environment. CFSGAM is proudof its track record in the consideration of ESG issues andwas amongst the first Australian investment managers
to become a signatory to the PRI in early 2007. CFSGAM
was the first Australian investment manager to releasea detailed report on its progress of PRI implementation,
now in its third year.

2

Responsible investment report 2009

After having taken a back seat for many years, social
issues came to the fore in 2009. People lamented themoral bankruptcy in the financial services sector, while
investors’ patience ran out with executive largesse andpoor corporate behaviour at their expense.
More usually associated with polluting industries or large
infrastructure operations, a social licence to operatebecame a front-of-mind issue for all listed companies,
from childcare centres through to high street banks. As
reputations were shattered and investor trust was lost, asocial licence to operate was no longer a given. Rather,
it was something that had to be earned by assuring a
sceptical public that there was a genuine desire andcommitment to have a positive impact on society.
Despite the turmoil taking place in financial markets,environmental issues remained high on the agenda,
especially with the Copenhagen climate summit taking
place towards the end of 2009. While there was muchanticipation leading up to the summit, reactions to theoutcomes were mixed.
Some viewed the Copenhagen summit as a diplomatic
failure, while others viewed the incremental improvement
as a great step forward. Despite these stark differencesin opinion, there was a shared eagerness felt across thefinancial services industry for international agreement
to be reached swiftly. Even in the absence of a treaty,
governments representing 80% of global emissionscommitted to reducing emissions, giving a clear senseof direction towards a new, clean-energy economy. The
long-term nature of the investment management industry
requires certainty and commitment from policymakers
and government.
Consideration and integration of environmental issues
in the investment process remains a long-term focus
for CFSGAM and we are committed to demonstrating
leadership in this area. I attended the UN Investor
Summit, which came at an important time for ourindustry, following the international climate treaty
talks in Copenhagen and amid cautious optimism that
economic conditions were returning to normal. With
representatives of more than $9 trillion of investment,
the UN Investor Summit was a valuable opportunity toconsider climate risk as an investment issue. A key item

on the agenda was to consider the scale and urgency of climate change investment risks and to analyseemerging investment strategies and opportunities in the wake of the Copenhagen summit.
In many ways, addressing the climate change challenge is about making the most efficient use of resources,
which is something that is already part of good management practice and fiduciary responsibility. There is
still much work to be done and scepticism remains, but this is a real opportunity for the investment industry
to demonstrate leadership and make the most of the opportunities presented by a move towards a low
carbon economy.
As we reported last year, the limited availability of high-quality ESG research was a stumbling block toimplementing the PRI. With this in mind, we are pleased with the progress of ESG Research Australia, whose
membership comprises 42 institutions managing over $100 billion in Australian equities, including some ofAustralia’s largest fund managers and superannuation funds.
ESG Research Australia’s objective is to increase the quantity, quality and scope of ESG research on Australiancompanies. Brokers have responded to the demand for ESG research and it is an increasingly importantpart of the mainstream investment processes. The ESG Research Australia Awards are an important part ofencouraging ESG research through recognising excellence in ESG research and service, and CFSGAM waspleased to chair the judging panel and host the inaugural ESG Research Australia Awards presentation night.
CFSGAM’s leadership team is passionate about delivering global best practice in our whole-of-businessapproach to responsible investment. An important development to help realise this goal was thestrengthening of our PRI governance by embedding PRI performance into the business’s balanced scorecard.
This step means the PRI is now part of CFSGAM’s business strategy and is used to measure our own performanceand set key performance indicators throughout the business. Our balanced scorecard target is that we will be
top quartile across five of the six Principles for responsible investment by the 2011 reporting year.
It is encouraging to see that we are making good progress towards this goal. We achieved ranking
improvements in each of the six Principles in 2008 and currently sit in the top quartile in three of the six
Principles relative to global investment managers. This progress is especially pleasing considering we had no top
quartile rankings in the 2007 survey and the difficult operating conditions we experienced during the period.
Our progress in implementing the PRI across the business is driven by CFSGAM’s PRI Steering Committee.
I am chair of this committee and am pleased for the opportunity to help shape our responsible investment
policy and strategy. I succeeded Neil Cochrane in the role of chair during the year, and I would like to thank
Neil for his important contribution to our business’s approach to responsible investment and the PRI.
As a consequence of the financial crisis, many investors became disillusioned with the financial services
industry. There is much work to be done to repair our industry’s reputation and restore the trust of investors.
The financial services industry is built on trust and it is at the core of everything we do; without the trust ofinvestors our industry cannot function.
To restore investor confidence, nothing groundbreaking needs to be done. We simply need to focus on thefundamentals of our industry that have taken a back seat for the past decade. With the PRI providing theframework, rebuilding work in the industry has already begun. But it will be a long and challenging process
to regain investors’ trust while their scepticism is at an all-time high.
We are proud of our progress so far and look forward to working with others in the industry to ensure
continuous improvement. CFSGAM remains committed to fulfilling its fiduciary role by providing the best
possible outcome for investors through the successful implementation of the PRI.

Mark Lazberger
Chief Executive Officer

3

Global operations
At 31 December 2009

UK/Europe

As at 31 December 2009

FUM A$25.1 billion
Investment staff 49 (186 total)

A$ billion

Total funds under management
Australian Equities
Global Equities
Property Securities
Listed Infrastructure Securities
Total equities

149.0
23.0
42.3
4.7
0.4
70.4

Fixed Interest and Credit
Short term Investments
Total debt

24.6
34.5
59.1

Listed and Direct Property
Infrastructure
Total alternatives

17.1
2.2
19.3

Funds under management shown as source of funds.
Figures do not sum due to rounding.

USA

Nil FUM
Investment staff 3 (3 total)

Australia/NZ

Asia

FUM A$105.8 billion
Investment staff 159 (975 total)

FUM A$18.1 billion
Investment staff 20 (109 total)

Total global investment staff 231 (1,273 total, including 634 asset management staff listed and direct property).

4

Responsible investment report 2009

Ownership structure
At 31 December 2009

Commonwealth Bank of Australia
Market capitalisation A$84.2 billion

Business andPrivate Banking

Premium
Banking
WealthServicesManagement

Institutional Banking
and Markets

International
Financial Services

Colonial First State
Global Asset Management
FUM A$149.0 billion

CommInsure

RetailBanking Services

Colonial First State

Australia

Ex-Australia

Colonial First State
Global Asset Management
FUM A$105.8 billion

First State Investments
FUM A$43.2 billion

Source: Colonial First State Global Asset Management.

5

Governance, policy and strategy

Since signing the PRI in March 2007, a governance framework has
been established to ensure there is responsibility across CFSGAM
for the relevant aspects of the PRI.
A PRI Steering Committee, which is comprised of senior
representatives from across the business and chairedby the Chief Executive Officer, is responsible for setting
the organisation-wide responsible investment policy
and strategy.
Supporting the PRI Steering Committee are subcommittees and working groups that deal with assetclass-specific ESG issues. These sub-committees ensure

the tangible work is undertaken to implement the PRI
into the different investment strategies across theorganisation. Every investment team has a staff member
allocated to ESG considerations who spends a notional
10% of their time on responsible investment-related
activities. There are also asset-class-specific policies
and reporting is undertaken against these policies.

Governance structure
PRI Steering Committee

Climate Change Position Statement

Responsible Investment Policy

Annual Responsible Investment Report

Listed equities and credit and fixed interest
implementation committee

Property working groups

Infrastructure working groups

Voting and engagement policy

Direct property sustainability policy

Infrastructure ESG policy

Corporate governance andengagement report

Direct property
responsible investment report

Client reporting

Listed funds reportingKey

Committee nnPolicyReporting n

6

Responsible investment report 2009

Our approach towards best practice

CFSGAM is working towards global best practice in our approach toresponsible investment. We believe the best way to measure this isthrough feedback we receive during the PRI survey process.
In 2009, we strengthened our PRI governance byembedding our objectives into the balanced scorecard
for CFSGAM. Our balanced scorecard target is that wewill be top quartile across five of the six Principles forresponsible investment by the 2011 reporting year.
This effectively means that successful implementationof the PRI is used to measure our own performance andset employee key performance indicators. Relevant areasof the business have specific targets that help the wholebusiness achieve the business-wide target. For example,
the Chief Investment Officer has the most influence overPrinciples 1, 2 and 3 and so is responsible for those, while
the distribution and sales functions of the business are
responsible for aspects of Principles 4, 5 and 6.

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

The chart below shows how we are tracking on our objective to date.
100%

75%

50%

25%

0%
2009
GPS

2007

2008
P1

2009

2007

2008
P2

2009

2007

2008

2009

P3

2007

2008
P4

2009

2007

2008
P5

2009

2007

2008

2009

P6

Key
■ First quartile ■ Second quartile ■ Third quartile ■ Fourth quartile7

Supporting policies

There are a number of entities within CFSGAM and these
entities may have their own responsible investment policies.
The responsible investment policies outlined below are publicly
available on CFSGAM’s website.
Responsible investment policy statement
CFSGAM has had a standalone responsible investment
policy statement since 2007. This policy outlines theapproach to responsible investment across CFSGAM
funds offered globally.

Colonial First State Asset Management (Australia)
Limited guidelines and principles for corporate
engagement on governance, environment andsocial issues
This document outlines the guidelines and principles
for engagement on governance, environment andsocial issues as they apply to the funds managed by
Colonial First State Asset Management (Australia) Limited(CFSAMAL) ABN 89 114 194 311.

CFS Managed Property Limited and its corporate
governance practices – Unlisted funds
CFS Managed Property Limited (CFSMPL) ABN
20 085 313 926 is the Responsible Entity of a numberof registered and unregistered managed investment
schemes for our property and infrastructure capabilities.
From 30 June 2008, CFSMPL adopted corporate
governance disclosures for its unlisted managed
investment schemes equivalent to those applicable toAustralian Securities Exchange (ASX) listed schemes.
Where applicable, we will adhere to the same standards
as those outlined in the ASX Corporate GovernanceCouncil’s Corporate Governance Principles andRecommendations released in August 2007 (2nd Edition).

Climate change position statement
Climate change is an environmental issue that is likely toaffect our investments over the long term and is also of ahigh level of interest to our stakeholders. As an investor,
we recognise the need to approach climate change ina rigorous manner, based on a thorough understandingof the risks and opportunities created for the companies
we manage and invest in globally. Our Climate change
position statement outlines how we will integrate ESG
considerations, including climate change, into ourinvestment processes.

8

Responsible investment report 2009

Commonwealth Managed Investments Limited
and its corporate governance practices– Listed funds
Commonwealth Managed Investments Limited (CMIL)
ABN 33 084 098 180 is the Responsible Entity of thelisted property funds CFS Retail Property Trust (CFX)ARSN 090 150 280 and the Commonwealth Property
Office Fund (CPA) ARSN 086 029 736. CMIL is a wholly
owned subsidiary of Commonwealth Bank of Australia
ABN 48 123 123 124.
The corporate governance practices of CMIL are in placethroughout the reporting period for its listed funds
and are fully compliant with the Australian Securities
Exchange (ASX) Corporate Governance Council’s
Principles and Recommendations. CMIL has opted forearly adoption of the Revised Corporate GovernancePrinciples. The information available on the CFX andCPA websites is provided in accordance with the second
edition of the Principles, released in August 2007.

CMIL corporate governance report, June 2008
– Unlisted funds
From 30 June 2008, CMIL adopted corporate governancedisclosures for its unlisted managed investment schemes
equivalent to those applicable to Australian Securities
Exchange (ASX) listed schemes. Where applicable, wewill adhere to the same standards as those outlinedin the ASX Corporate Governance Council’s Corporate
Governance Principles and Recommendations released inAugust 2007 (2nd Edition).

Direct property sustainability policy
CFSGAM has enhanced its treatment of ESG issues in
the management of its direct property portfolio byincorporating ESG considerations into its property
sustainability policy statement. This policy recognises thephysical impacts that direct property assets can have on
the environment and society, and offers direction for the
management of these assets by making commitments
to manage and minimise the effects of these impacts.
Through setting benchmarks and targets, thepolicy seeks to further align sustainability and ESG
considerations for the long-term benefit of our clientsand investors.

Implementation strategies

In our approach to sustainability and responsible investment in ourinvestment process, we do not look to build socially responsible or
ethical strategies that screen out particular companies or sectors.
ESG issues are considered in the same way that we
consider traditional financial issues. We highlight thisbecause there is still considerable misunderstanding
across the industry around the definitions ofmainstreaming ESG versus socially responsibleor ethical investing.
In our approach to sustainability and responsible
investment in our investment process, we do not look tobuild socially responsible or ethical strategies that screenout particular companies or sectors. ESG issues are
considered in the same way that we consider traditional
financial issues. We highlight this because there is still
considerable misunderstanding across the industry
around the definitions of mainstreaming ESG versus
socially responsible or ethical investing.
Our strategy for Principles 1 and 2 is focused on
information and education. Investment teams can only
effectively integrate ESG issues into processes when they
have quality information and they understand the issues.

Our strategy for Principle 3 is based on collaboration.
By working with other large investors we believe we canmost effectively communicate our information needs
to companies. We look forward to working further
with IFSA and Australian Council of Superannuation
Investors during 2010 on encouraging better reportingby companies.
Our strategy for Principles 4, 5 and 6 is driven byclient and industry engagement and collaboration.
To effectively mainstream ESG we need to workthroughout the investment supply chain to makesure the right incentives are in place. This means
working with:–– our clients to ensure they understand our approachand to provide them with high quality reporting–– our service providers to ensure they understand ourrequirements, and–– our peers to ensure we are communicating consistentmessages to investee companies.

We will continue to source ESG information from
specialist ESG research providers, but we also look to
our traditional financial research providers, namely thesell side, to also provide some analysis. We also look
to continually educate our investment teams throughmonthly briefings from ESG specialists, which support
learning through the practical application of ESG
considerations in day-to-day business.

9

The scope of ESG considerations

The following definitions explain the scope and context of ESG
as we refer to it in this document and consider it in our business.

Environmental
These considerations include the immediate
environment in which companies operate, as wellas the wider community and region. We take abroad consideration of environmental issues, such as
considering the track record of how companies havedealt with past environmental issues, how companies
have acted in environmentally-sensitive areas and publicleadership on environmental issues. We do not seek out‘environmentally friendly’ companies, but rather look forevidence that companies have effective management,
processes and behaviours in place to mitigate any
environmental impacts.

SocialSocial considerations cover the human aspect ofa business’s operations, whether it be employees,
suppliers, customers, the local community or wider
society. It is important that companies are supportedby the people they affect, in order to be able tooperate without undue interference or hindrance.
This concept is referred to as a ‘social licence to operate’and is especially important in large organisations andinfrastructure operations.

10

Responsible investment report 2009

As a shareholder in many large organisations and directowners of large property and infrastructure assets, asocial licence to operate is an important part of our
ESG considerations. In addition to companies being
good corporate citizens, we may look for strength ofcommunity relationships, employee safety records,
sensitivity when dealing with vulnerable communities
and public leadership on social issues.

Governance
The scope of governance, in relation to ESG
considerations, covers the impact that management,
processes and behaviours have on the long-term
interests of the business, its investors and the community
in which it operates. It complements the required
standards of governance as mandated by regulationand legislation.

11

Principle 1

12

Responsible investment report 2009

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

PRI action points*							Reference

Advocate ESG training for investment professionals 			1, 2

Encourage academic and other research on this theme 		3

Address ESG issues in investment policy statements			

4, 5, 6, 7, 8

Assess the capabilities of internal investment managers to incorporate ESG issues

5, 6, 7, 8

Support development of ESG-related tools, metrics and analyses

8, 9

Ask investment service providers to integrate ESG factors into evolving research and analysis

20

Assess the capabilities of external investment managers to incorporate ESG issues

N/A* The PRI action points at the start of each Principle chapter are taken from guidance provided by the PRI to help signatories fulfil
their fiduciary obligations under the PRI. Where action points have been addressed, they are referenced by number.

Principle 1 is a key area of focus for CFSGAM. By successfully
implementing it throughout our business, we aim toultimately realise the full investment proposition of
responsible investment, which is to make the best possible
investment decisions on behalf of our investors and so
fulfil our fiduciary role. We are committed to integrating
ESG considerations into every asset class and investment
product. Each listed investment team is responsible for
implementing PRI into their investment process and every
team takes a slightly different approach. This is importantas it empowers each portfolio manager with responsibility
for integrating ESG into their investment process.
To support the investment teams, the business provides
a number of resources, including responsible investment
education sessions, dedicated internal resources, policies,and external research providers. The governance process
we have in place ensures continuous improvements in our
activities under Principle 1.
We also expect our service providers to support our ESG
initiatives. Good progress has been made to integratea consideration of ESG issues across all asset classes;
however, some challenges remain. By fostering a cultureof continuous improvements and innovation we seek
to improve our expertise and effectiveness of ESG
consideration and integration.

Implementation
1. Engaging staff with the great debate
One of the most frequent questions asked in early2009 was whether responsible investment was still
relevant despite the global financial crisis. To address
the issue, the question was put forward to staff and apanel debate was held. With half the panel ‘for’ andhalf ‘against’, investment professionals debated therelevance of responsible investment in light of the
global financial crisis.
Before the debate, we took an online poll of staff and
93% said that responsible investment was still relevant
despite the financial crisis. Following the debate, 100%of attendees believed that responsible investment
remained relevant. The debate was recorded and a
webcast of the event was made available to all staff
globally via the company intranet and highlights wereshown at CFSGAM’s all staff briefing to raise awarenessand understanding of the issues.

2. Education forums
Responsible investment sessions are part of an education
and awareness-raising program which helps to provide
staff with a better understanding of the opportunities
and challenges presented by responsible investment.
These sessions equip staff with the knowledge toengage on ESG issues with clients and the wider funds
management industry. The following table summarises
some of the guest speakers who were invited to present
at the investment sessions during 2009 and the topics
they covered.

13Principle 1
continued

Presenter

TopicCharles Berger
Director of Strategic Ideas
Australian Conservation Foundation

While carbon and climate change issues are potentially the most material near-term
investment issues, Mr Berger spoke of other pertinent environmental issues for investors,
such as:–– the transition to sustainable economies and green industries–– increasing consumer interest in sustainability–– the challenges of unsustainable patterns of consumption–– emerging changes in how we assess economic growth and development, and–– water scarcity, biodiversity and other environmental issues.

Elaine Prior
Industry Thematics and SRI Analyst
Citi Investment Research

In support of the pioneering research work Ms Prior has undertaken in this area, Ms Prior
spoke about water challenges for listed companies and how they will adapt to increasingwater-related risks, including:–– security of supply–– exposure to water pricing–– how companies use water, and–– how companies are adapting to growing water challenges.

Julie Hudson
Managing Director
UBS

To effectively integrate ESG considerations into the investment process, ESG data needs
to be expressed in a way that allows key issues to be incorporated into stock analysis andcompany valuations.
Ms Hudson outlined her views on how to more effectively integrate ESG considerations
into equity valuations and spoke of the research on ESG issues that UBS had
undertaken globally.

Ann Byrne
CEO
Australian Council of Superannuation
Investors (ACSI)

Ms Byrne outlined a number of important ESG issues as they relate to the superannuationindustry, including:–– the outcomes of the second round of research that ACSI has done on the reporting
practices of ASX companies–– general observations that ACSI makes on companies’ approach to ESG, and–– the outcomes of the joint research done with Investment and Financial Services
Association on how Australian fund managers are addressing ESG issues.

Terence Jeyaretnam
Managing Director
Net Balance

Net Balance is one of largest providers of sustainability advice, assurance and researchin Australia. Mr Jeyaretnam shared his insights with staff about:–– Net Balance’s corporate governance research report on reporting practices of the
ASX top 50 companies–– ‘the good, the bad and the ugly’; general company sustainability reporting
practices, and–– Net Balance’s insights and experiences from working with companies on sustainability
practices, and performance reporting.

3. Responsible investment library

4. Third-party research providers

A library is maintained on the CFSGAM intranet, where
all staff can gain access to research papers, reports,
presentations and articles relating to a range of current
ESG topics.

As part of our commitment to fully integrate ESG risk
assessment into our investment processes, we engage
third-party research providers for industry analysis andhigh-quality ESG research, to help CFSGAM understandfactors which may place business value at risk.

The responsible investment library includes items
that have been prepared by external companies
and organisations as well as material that has been
prepared internally.
The purpose of the library is to stimulate interest
amongst employees and enable them to keep abreastof the latest ESG thinking and developments. The libraryseeks to educate employees about the scope of ESG
issues and provide a deeper understanding of how theseissues may affect our investments.

14

Responsible investment report 2009

The enlisting of third-party research providers
underscores our commitment to sustainability andgovernance issues, and helps to ensure that we continue
to offer our clients outstanding products and services.
In addition to third-party research, we engage withcompanies directly and encourage brokers to produce
quality ESG research.

Stock analysis – six key criteria
1. Management

2. Industry/company position

3. Valuation

Relevant experience
Ability to execute
Shareholder focus

Industry structure/changes
Pricing power/margins
Competitive advantage

Triangulation
Relevance to sector and peers
Consistency

4. Market factors

5. Financials

6. Sustainability

Index movements
Market themes
Corporate activity

Balance sheet
Cash flow generation
Earnings transparency

Social policies
Environmental policies
Management commitment and disclosure

Examples of our approach
Each investment team in CFSGAM takes its own,
autonomous approach to considering ESG issues in its
investment process. Given the differing nature of asset
classes and investment strategies, we believe this is themost effective way to realise the value of ESG analysis.
Examples of how we approach Principle 1 across ourbusiness are outlined below.

5. Australian Equities, Core team
The Australian Equities, Core team is committed toincorporating ESG issues into its investment philosophy
and process. ‘Sustainability’ has recently been madeexplicit in the investment process and specified as one of
the six criteria which the team uses to analyse companies
listed on the Australian Securities Exchange.
Stock analysis – six key criteria
Analysts’ assessment of listed companies now includes
criteria related to practice, commitment and disclosureof social and environmental issues by management
and performance relative to peers. For example, social
assessment incorporates measures of employee andstakeholder policies, environment considers issues ofclimate change, company efficiency and practices
relative to industry and acceptable standards, andmanagement commitment is measured in terms of
disclosure policies and practices and the integration ofsustainability into employee key performance indicators.
This is in addition to our analysis of companies’ corporate
governance policies, which are assessed under theManagement criteria.
The Australian Equities, Core team has a commitment toengage with companies on sustainability issues as partof the day-to-day investment practice and also actively
encourages brokers to incorporate ESG issues in theircoverage and analysis of listed companies.

A good example of our commitment to engagement
on ESG issues in the Australian investment community
was in our dialogue over the past year with AGL Energy.
The Australian Equities, Core team has a long history asa shareholder and has an established relationship withcompany management.
At a meeting with AGL Energy senior management in
mid-2009, two members of the Australian Equities,
Core team felt that while the company was effective
in highlighting its renewable energy projects, its
communication around safety issues could be improved.
As a result, the Head of Australian Equities, Core
challenged AGL Energy to reconsider the way thecompany reports ESG issues in order to satisfy thedemands of institutional shareholders, including CFSGAM.
This piece of engagement encouraged AGL Energy toreview the way its approach to sustainability is reported
to the investor community.
AGL Energy has since effectively communicated how
the company has incorporated and embedded anawareness of ESG and sustainability issues throughout
its business. During subsequent presentations by thecompany, a full range of ESG considerations have beenthoroughly covered, suggesting a genuine commitment
to ESG issues exists within the company. Indeed, we
believe the company is committed to promoting bestpractice regarding ESG and sustainability issues within
the Utilities sector.
Following our initial dialogue with the company, a Senior
Portfolio Manager in the Australian Equities, Core team
was asked to present to a leadership forum at AGL
Energy to present on a range of issues including the way
CFSGAM considers ESG issues in its company analysis
and why we believe a consideration of ESG factors isimportant for Australian companies in the 21st century.

15

Principle 1
continued

This type of ongoing engagement with company
management demonstrates how active investors canhelp change corporate behaviour by encouraging
companies to focus on areas and improve on key issues.
As well as improving the company’s commitment
to sustainability issues, the process has undoubtedly
strengthened the existing relationship between
senior executives of AGL Energy and CFSGAM. This isimportant, as we believe forging and maintaining strong
relationships with the companies in which we invest will
benefit all our investors over the long term.

6. Direct property
ESG is incorporated into every aspect of managing thebuildings within CFSGAM’s direct property asset class, inaccordance with the CFSGAM Property’s sustainability
policy. The investment process for property can be
explained through the following three steps as it relates
to ESG.
Step 1 – Acquisition
ESG considerations are incorporated in the due diligenceprocess when acquiring new buildings through astandard checklist and sign-off process. This process
investigates the environmental and physical impacts
relating to the property and the land with regard to its
construction and ongoing use and operation.
Social aspects are investigated with regard to thecommunity and how the building interacts with its
local environment. Regarding governance, the asset
is reviewed for compliance with regulatory controls
and economic performance. These ESG aspects are an
integral part of our due diligence process.

16

Responsible investment report 2009

Step 2 – Performance
The day-to-day management of buildings is closely
guided by responsible investment principles, throughour operational performance strategy. This strategy
is focused on setting performance targets for theoperation of the building based on an appropriate
benchmark for the class of the building.
Monitoring, managing, analysing and reporting on
the achievement of these targets allows for continual
improvement. These factors are not taken into accountalone, however, as the occupant use of the building is an
integral part in achieving set targets. The improvement
process involves physical and mechanical intervention
and recommissioning of plant and equipment in
the building.
Step 3 – Valuation
The valuation of buildings takes into account the income
from the occupants and the costs incurred in runningand maintaining the building, and ESG factors areintegral to both of these aspects.
In regard to the income from occupants, we havegreen lease clauses in place for certain buildings andare developing these as a standard. Green leases assist
in managing the occupant use of the building to help
achieve sustainability, water efficiency, energy, resources
and indoor environment quality goals.
With regard to the costs incurred in running andmaintaining the building, life cycle costing of plant andequipment is used and takes into account ESG factors.
Other aspects of valuation consider the amenity thatthe building provides and is reflective of the building’s
ability to attract and retain tenants to secure a reliable
income stream.

7. Direct infrastructure
A consideration of sustainability issues is embedded in the life cycle of the direct infrastructure investment process.
ESG issues are considered at the following four steps.

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

Step 2We undertake ongoing active asset management post-acquisition as partof a continuous improvement process to value-add to asset performanceand effectively manage risk. This is done through our active asset
management strategy.

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

Step 4
Thematic ESG issues are considered as part of our overall investment
strategy. Through participation in industry dialogue we ensure weare across emerging sustainability issues for different infrastructure
asset classes.

Direct infrastructure corporate engagement guidelines
CFSGAM has introduced new guidelines for corporate engagement to ensure that an adequate management
framework is in place that identifies ESG issues within each asset under management.
The guidelines were developed to identify potential and existing risks for infrastructure assets and to set benchmark
performance objectives that focus on key principles associated with ESG issues.
The guidelines were developed in close consultation with CFSGAM’s Responsible Investment team and have been
noted by the Responsible Entity and Trustee boards for the relevant CFSGAM infrastructure funds.
These guidelines help ensure that the long-term value of CFSGAM’s infrastructure assets is enhanced and thereputation of CFSGAM’s clients is protected.

17

Principle 1
continued

8. Credit investments
ESG risks that have been proven to apply to equity
performance are not necessarily relevant to credit.
To provide value to credit investors, the considerationof ESG risk must add material value to the investment
process rather than simply be a box to be ticked. The
relevance of ESG risk to credit products, therefore, mustfirst be established and then be effectively integrated
into the investment process.
A major hurdle to integrating ESG into any investment
process is the quality of research that is available.
Current research on ESG factors is already severely
limited compared to more traditional financial measures,and generally only covers listed companies. This
presents a challenge for credit products, where listedcompanies may comprise only half the assets in a typicalcredit portfolio.
There is also a disparity in investment fundamentals.
The main consideration for a credit product is simply
a company’s ability to repay its debt at the end of theterm. The risk is not falling investment returns or adeclining share price.
Furthermore, credit products have only potential
downside: that is, that a company defaults on
its loan. With zero upside potential, can ESG
considerations enhance long-established andproven investment processes?
While there are challenges to integrating ESG into
credit products, many ESG considerations are alreadyentrenched in the credit investment process, withgovernance being the main focus. Governance is a
key area of interest given its potential to contribute todefault risk. Corporate collapses can seriously impact acredit manager’s performance and often they occur asa result of poor governance. If environmental and social
factors can provide pointers to effective governance,then ESG considerations are vital.
There is no assigned weight for any of the credit researchparameters, including ESG. It is the analyst’s role toconsider all the different factors that could impact
credit worthiness. Examples of an analyst’s approach are
given below.
–– In a review of Fortis, a European bank and insurancecompany, the Innovest rating was incorporated into
the overall rating. The company is not a leader in termsof ESG initiatives, and although the social welfare
sponsorship aspects of the bank were fairly good, they
were not outstanding. As a result, Fortis was given an
overall internal rating of ‘a’, not ‘a+’, which might havebeen the case if the company’s Innovest rating, and its
demonstration of ESG initiatives, had been higher.

18

Responsible investment report 2009–– A decision was made to not purchase bonds issued bya mining and refining company operating in India andAustralia, despite strong financial performance, due toserious governance and management concerns. In ourdue diligence, it was discovered that the company’s
hydrant system in its aluminium business was notreliable or adequately equipped. The company also haslarge potential contingent liabilities for asbestos andenvironment claims due to its acquisition of a troubled
copper producer in the US.
The company is also facing court proceedings by
the Stock Exchange of India (SEI) over one of its key
operating subsidiaries. The SEI has alleged that thecompany violated regulations prohibiting fraudulent
and unfair trading practices and passed an orderprohibiting the subsidiary from accessing the capital
markets for two years. This ruling was eventually
overruled by the Securities Appellate Tribunal but
the SEI has appealed to the High Court of Bombay.
In addition to the issues mentioned above, thecompany still faces a number of further litigation
matters, both civil and criminal, with civil financial
claims totalling US$240 million.
The credit team has access to ESG research on over
2,500 companies, provided by Innovest, Glass Lewis and
RiskMetrics, to help us understand and consider ESG
issues that have the potential to contribute to default
risk. Innovest ratings and research are captured in our
proprietary credit research analytical system, ‘Cred.net’.
We also work closely with the internal Sustainability andResponsible Investment team to ensure we understandwhat ESG issues could impact our investments and there
is a process in place to ensure continuous improvement.
There is still work to be done before ESG considerations
in credit are on a par with equities. However, as
happened with equities, there is increasing awarenessthat ESG can be effectively integrated to add real value
to the investment process. As the integration of ESG
risks in the investment process develops over time andbecomes more refined, it will become an increasingly
valuable consideration in credit investment decisions.

Cross business collaboration
9. Incorporating ESG issues into investment
analysis and decision-making processes
As highlighted in our Responsible Investment Report
2008, the lack of comparable ESG reporting bycompanies presents challenges when trying toeffectively incorporate ESG issues into investment
analysis and decision-making processes.

This is particularly true for fixed interest and credit
investments as there are very few ESG research providers
who cover debt products as highlighted under 8
Credit investments.
To address these challenges, we developed a numberof sector-specific tools which enable us to more easily
and effectively integrate ESG considerations into theinvestment process. These tools were then rolled
out across the investment teams at CFSGAM to help
investment teams identify the material ESG issues foreach asset class and capture metrics which best quantify
these issues. Key issues are also captured for investment
teams to address when we engage with companies.
Sector research tools were built for the following sectors:–– materials and industrials–– consumer discretionary and consumer staples, and–– Real Estate Investment Trusts.
These sectors were selected as ESG risks are particularlymaterial and they coincide with the concentration of
corporate names that are currently covered by the
Fixed Interest and Credit team, but are unlisted andtherefore have no existing ESG research. Although
the sector research tools cannot provide coverage forunlisted issuers, they can supplement the coverage ofcorporate issuers who are not covered by third-party
research providers.
Metrics used to assess companies on their environmental
performance include:–– potential carbon liability and impact on net profit–– water intensity and potential risks to future securityof water supply, and–– ownership of environmental issues.
Metrics used to assess companies’ social
performance include:–– employee safety performance over time andmanagement oversight into contractor safety–– human capital management, including employee
turnover and productivity, and–– staff accountability and alignment withshareholder interests.
Key governance metrics include:–– board structure and independence–– presence of substantial shareholders and protectionof minority interests–– independence of auditors–– CEO remuneration and entrenchment within thecompany, and–– exposure to political risk and political donations madeby a company.

To help populate these metrics, data was obtained
from Trucost and RiskMetrics. Trucost is an external
data provider of company carbon emissions andenvironmental footprint analyses. Where companies do
not currently measure or publicly disclose their carbon
emissions, Trucost uses a proprietary model to estimate
a company’s carbon footprint. The Trucost data wasused by analysts to assess companies’ potential carbon
liabilities and associated regulatory risks. The Global
Emerging Markets team have since subscribed to the
Trucost data for emerging markets companies wherereporting on ESG is particularly low.
RiskMetrics Group is the recognised standard-setterin financial risk management. Its view of financial
risk includes consideration of corporate governance,compliance, accounting, legal, transactional andsustainability risks.
These sector research tools and frameworks, together
with ESG data from external research providers, allows us
to more effectively integrate ESG issues into investment
processes and decisions, particularly where there is a lackof readily available information.

Challenges to implementation
As highlighted in our Responsible Investment Report
2008, the lack of comparable ESG reporting bycompanies presents challenges when trying to effectively
incorporate ESG issues into investment analysis anddecision-making processes. This is particularly true for
fixed interest and credit investments as there are very
few ESG research providers who cover debt products.
Also, nearly half of the issuers under our Fixed Interest
and Credit team’s coverage are unlisted, including
private companies, sovereigns, trusts, special purpose
vehicles and government agencies. These entities makeup a material proportion of funds under management
where no ESG data or research is produced. This lack ofquality research, combined with a lack of comparable
reporting by companies, was the biggest obstacle we
encountered when implementing Principle 1.
We like to be challenged in our views and provided
with rigorous detailed analysis that can be used tosupplement our own in-house thinking on ESG issues.
For the mainstream research market to deliver the
research we require they need to get consistent signals
from their investment manager and superannuation
fund clients. Collaboration with our asset owner clients,
within the investment management industry and withthe broker community to facilitate the developmentof quality ESG research, will assist us to fulfil ourcommitments under Principle 1.

19

Principle 2

20

Responsible investment report 2009

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

With more than A$70 billion invested in Australian and global
equities, CFSGAM is a significant shareholder on behalf of investors
in many listed companies around the world. Our size and standing
in the industry puts our investment managers in a strong position
to engage with individual companies on ESG issues.
PRI action points						Reference

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

10

File shareholder resolutions consistent with long-term ESG considerations

10

Develop an engagement capability (either directly or through outsourcing) 		

11

Engage with companies on ESG issues 							

12Participate in collaborative engagement initiatives 					

12Participate in the development of policy, regulation, and standard setting 		

13

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

N/A

Active ownership and engagement are amongst our
top priorities as a fiduciary, because we firmly believethat there is a correlation between companies withgood governance practices and strong, sustainable
shareholder returns. Through our discussions, we seek
to raise issues for potential improvement and encourage
disclosure on ESG issues. Consequently, we seek topositively influence companies towards ESG best practice
to ultimately benefit our investors.
Given the varying nature of the different asset classes
we manage in relation to engagement, we take adifferent approach given the level of influence we have.
For example, in engagement with listed equities where
we do not have management control, we will use our
influence as shareholders to encourage best practice ESG
issue management.
Due to the autonomy of our funds, one investment
team may have ESG concerns about a particular stockthat is a major position in a different fund. Over the past
12 months we have looked to improve collaboration
between investment teams on engagement on
controversial issues.
Engagement with unlisted investments takes a slightly
different approach. For direct infrastructure we engage
through the board seats that we hold. During 2009, weformalised our commitment to engagement through thedevelopment of a detailed ESG policy for infrastructure.
This ESG policy outlines how we engage the assets,
and also how those assets should engage relevant
stakeholders such as surrounding communities.
For direct property investments we are typically the
manager of the assets, so engagement with the tenantsof the property is the main area of focus. We also seek todevelop and implement sustainability policies and ensurethat reporting against these policies takes place. For
more information on our approach to ESG considerations
in direct property investments, please refer to 6 Direct
property under Principle 1.

Listed investments
CFSGAM is an active manager and we undertake proxyvoting and direct company engagement for our listed
investments. As the active representative of major
shareholders in many listed companies in Australia
and overseas, we use our influence to encourage bestpractice management of ESG issues in the companies
in which we invest.
During 2009, we undertook private collaborative
engagement, primarily on corporate governance, andwe supported engagement undertaken as part of thecorporate governance research process by RiskMetrics
for Australian companies.

21

Principle 2
continued

The chart below shows the proportion of resolutions that we voted on during the recent proxy voting season.
There has been a focus on executive remuneration and board composition in recent times to ensure that they areappropriate and in the best interests of the company and its shareholders.
Categories of voting resolutions 2009 (%)
31.1

Directors’ election
24.2

Non-voting
12.0

Remuneration reports
10.6

Issue of new shares/securities
6.7

Executive remuneration
Consitution/articles of association changes

4.2

Financial scheme/reconstruction of capital

3.9

Non-executive remuneration

3.8

Appointment/re-appointment of auditors

1.3

Financial statements

1.2

Takeover or merger acquisition approvals

1.1

Source: CFSGAM.

The chart below shows a category breakdown of where we voted against resolutions. A significant number of ‘against’votes were recorded during 2009, with election/re-election of directors and remuneration being the main areasof contention.
Breakdown of CFSGAM ‘against’ votes 2009 (%)
Directors’ election

35.2

Remuneration reports

26.1

Executive remuneration

13.6

Non-executive remuneration
Issue of new shares/securities

3.4

Financial scheme/reconstruction of capital

3.4

Consitution/articles of association changes

2.8

Takeover or merger acquisition approvals

1.7

Appointment/reappointment of auditors

1.1

Source: CFSGAM.

22

12.5

Responsible investment report 2009

10. Proxy voting

12. Engagement examples

Proxy voting rights are an important componentof shareholder responsibility, and so we vote on all
possible resolutions at company meetings. The relevant
investment manager and company equity analyst
carefully consider each resolution, with guidance
provided by our Guidelines and principles for corporate
engagement on governance, environment and social
issues and recommendations from a selection of
independent corporate governance research houses.

Stockland
Stockland invited CFSGAM to provide feedback on its
sustainability report from an investor perspective. We
believe it is a positive step by Stockland to seek direct
feedback on its ESG management and a CFSGAM analyst
was pleased to provide the following key points where it
was felt there could be improvements in the Stockland
sustainability report.
–– The report effectively captures ESG initiatives that
Stockland has undertaken during the year to address
sustainability issues; however, the outcomes of these
initiatives could be provided in more detail.
–– Summary data at the beginning of the report and adownloadable spreadsheet of metrics would be usefulfor investors.
–– More transparency is needed on quantifying thecost of raising properties’ National Australian Built
Environment Rating System (NABERS) energy ratings,
and the cost savings that would be realised by
improving asset efficiency. Stockland will seek toprovide discussions and case studies on these points
in future reports.
–– It would be useful for Green Star ratings to be disclosed
for new properties and developments.

We believe that voting against resolutions is not the
only way to encourage change. By voting in favour ofappropriate, well-structured appropriate resolutions
we send a clear signal to the company and the broader
market about practices we will support.

11. General engagement
CFSGAM actively engages with company managementand directors on a range of ESG issues. CFSGAM’s scaleand reputation in the investment management industry
provides our investment managers with the valuable
opportunity to engage in dialogue with individualcompanies. We seek to highlight areas for potential
improvement, encourage disclosure on ESG issues
and recognise companies that are making progressin addressing ESG considerations.
At CFSGAM we engage with companies in which weinvest on a variety of ESG issues. The following list does
not necessarily apply to all asset classes or investment
management processes, but examples of the type of ESG
issues we engaged in included:–– activities in conflict zones–– benefits and compensation–– bribery and corruption–– climate change–– distribution of fair trade products–– human rights–– labour issues–– management quality–– occupational health and safety, and–– social licences to operate.
We believe that engagement with companies is key toachieving ESG improvements and we have collaborative
initiatives with third-party engagement providers to help
gather necessary information to help us get maximum
value from engagement.

We also provided feedback to Boral and James Hardie
during the period on their sustainability reporting.
This dialogue should help companies understandwhat CFSGAM, as an investor, would like to see in
ESG reporting. Over time, this will enhance thetransparency and usefulness of ESG reporting more
broadly so investors can better consider companies’ ESG
credentials when making an investment decision.
Esprit
The consumer analyst in CFSGAM’s Global Equities team
met with Esprit’s Chief Operating Officer and Investor
Relations Manager at its offices in Germany. During
the course of the meeting, the analyst noted that thebusiness was predominantly European but that thecompany maintained its Hong Kong listing. The analyst
observed that Esprit shares had higher relative volatility
compared to its closest peers, H&M and Inditex. The
analyst noted that a consequence of this higher volatility
was a higher cost of equity and therefore a potentiallylower share price. The analyst urged Esprit management
to consider this issue of share volatility as it washampering a more positive view on the stock.

23Principle 2
continued

At a follow-up meeting, CFSGAM analysts presented
data showing Esprit’s higher beta compared to thatof H&M and Inditex, which Esprit management foundinteresting. Our analysts suggested that more frequent
communication with the market might help reducesome of the volatility, as Esprit reports results only semiannually whilst some peers report quarterly earnings andmonthly sales. Esprit management expressed its desire
to improve the overall level of communication withmarket participants and the idea of more frequent sales
disclosure was well received. Esprit is now considering
providing these results on a quarterly basis.
Platinum production company
A small platinum producing company with its assets
located in South Africa was raising money to repay a
US$40 million facility that had very high interest costs
from a local South African bank. CFSGAM’s Global
Resources team liked the quality of the resource, theprojects and operational management.
The team had reservations, however, with the company’s
corporate governance and treatment of minority
shareholders. The controlling shareholder was a private
equity firm that owned 52% of the company and had
two seats on the board. This company has additional
interests in a number of tenements that could potentiallybe sold into the company at a later date. Whilst thisshould be beneficial for the long-term valuation, we wereconcerned that the terms of these future deals might
not be deemed fair for minority shareholders.
The Global Resources team held several discussions withvarious levels of management, including the Chairman
and Managing Director, who pointed out that they
are also minority shareholders, each with a significant
holding in their own right. Consequently, it transpiredthat their interests are completely aligned with our own.
They advised us that any future transactions between
their company and associated companies of the major
shareholder will be done at arm’s length, based upon
independent valuations and using industry standard
metrics such as $/oz per category of resources. All suchtransactions will be put to the board for approval andrelated parties will not be eligible to vote. Although
corporate governance risks remain, we now have more
comfort and the stock’s position in the Global Resources
portfolios reflects this risk/reward balance.

24

Responsible investment report 2009

Vedanta Resources
CFSGAM received correspondence from Amnesty
International in relation to concerns about Vedanta’s
approach to ESG issues. While we only have very minor
holdings in Vedanta and subsidiaries, we contacted thecompany and requested clarity on the concerns that had
been raised.
The Global Equities Team also attended a workshop
sponsored by BankTrust and Amnesty Internationalin London. Various stakeholders attended, including
around 14 non-government organisations and several
representatives of financial institutions that are either
investors or have provided financial advice or loans to
Vedanta. The sector specialist attended along with an
external consultant. Although Vedanta was apparently
invited to attend too, they were only aware of theworkshop when we mentioned it to them. In responseto the Global Equity team’s query and those of otherinvestors, Vedanta drafted a response to some of
the claims and allegations of the non-governmentorganisation community. We have had several
interactions with Vedanta’s investor relations personnel
on these claims and their responses. We continue tomonitor the company and its approach to ESG issues.
Kingboard Chemical
The Global Emerging Markets team undertook a lengthy
engagement process with Kingboard Chemical. This
company is not held within our Global Emerging Markets
Sustainability Fund, although it is held in other CFSGAM
funds. The company manufactures printed circuitboards, a key component of computers. Following the
publication of a Greenpeace report which accused
the company of polluting the Pearl River, our team in
China embarked on a lengthy set of meetings with
the Chairman, CEO, CFO, key independent directors
and Greenpeace.
It transpired that Greenpeace did not contact thecompany ahead of publishing its contested report,
which led to a more confrontational and less productive
relationship between Greenpeace and Kingboard
Chemical than we would have liked. Nonetheless, we are
optimistic that Kingboard Chemical will be focusing onsustainability over the coming months and years and wewill continue to monitor the company accordingly.

Spotless GroupEngagement often takes a different form in the credit
and fixed interest asset class than it does in listed
equities. An example of engagement undertaken by ourFixed Interest and Credit team is when we were invited
to participate in a structured deal by ABN AMRO and theservice provider in the transaction was Spotless Group.
Due to public concerns about governance issues at
Spotless Group, we asked ABN AMRO to provide more
information. We did not proceed with the investment
for several reasons, one was the ongoing governanceissue at Spotless, and the pricing appeared slim given
the rating.

Unlisted investments
Principle 2 is also relevant to unlisted asset classes.
However, the implementation of this Principle
is somewhat different from listed investments,
given the different nature of the shareholding andownership relationship.
The relative lack of liquidity in unlisted investments
makes ESG issues potentially more material if not
managed proactively. As investors in unlisted assets,
we are generally able to take a longer-term view than
may be the case with publicly traded equities.
Our investment process for unlisted investments
seeks to:–– price ESG risk as part of the consideration during
the initial transaction process–– incorporate ESG considerations into the due
diligence process–– incorporate ESG management through the governanceprocess, primarily through Board representation, and–– continually monitor all aspects of the investments,
including consideration of ESG risks.
For our unlisted infrastructure investments, CFSGAM
generally seeks representation at the board levelor equivalent. We are active on ESG issues via thisrepresentation or through company engagement.
We also seek to ensure that there are adequate
sustainability policies in place and reporting against
these policies takes place.

Case study: direct infrastructure engagement
13. Electricity North West Corporate
Social Responsibility Policy
CFSGAM, through its infrastructure funds and mandates,
owns 50% of Electricity North West (ENW). CFSGAM is anactive owner in ENW and holds three board positions.

ENW owns and, through United Utilities, operates andmaintains the electricity distribution network throughout
north-west England. This incorporates 58,000km
of cables, 96 bulk supply substations, 363 primary
substations and 33,000 transforming points, deliveringover 24 terawatt hours of electricity annually to some
2.3 million domestic and industrial customers.
CFSGAM worked closely with the ENW corporate team todevelop the ENW Corporate Social Responsibility (CSR)
Policy. Since the introduction of the policy in September
2009, ENW has had dedicated resources working on theimplementation of CSR initiatives.
The implementation of the ENW CSR Policy is a criticalstep to ensure that an appropriate management
culture is established in the ENW management team to
fully assess and address ESG risks and opportunities inthe business.
The policy provides a framework to establish:–– appropriate business ethics and operational values–– a strong workplace culture relating to employment
practices, employee behaviour, company approach tobusiness and community commitment–– appropriate health and safety policies in the business–– a commitment to the company sustainable
development policy, and–– a series of key performance indicators to ensure thepolicy is being implemented effectively.
As an active investor, we will continue to support
initiatives that deliver sustainable investment returns forthe ultimate benefit of our funds and clients. Throughinfluencing the quality of the company’s policy, we canhave better oversight at the board level and be more
confident in the effective management of long-term
ESG issues.

Challenges to implementation
As we reported last year, the large scale, complex
structure and global reach of our business continues
to provide challenges when looking to monitor andreport our activities under Principle 2. Given theautonomy of the investment teams and the different
investment styles, it is difficult to effectively capture
the engagement that occurs. As a result, tracking our
success is challenging. This, combined with the factthat the actual outcomes of engagement are difficult
to measure, means it is difficult to accurately quantify
our achievements.

25

Principle 3

26

Responsible investment report 2009

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

PRI action points							Reference

Ask for ESG disclosure to be integrated within annual financial reports		

14

Ask for information from companies regarding adoption of/adherence to relevant norms,
standards, codes of conduct or international initiatives		

14

Support shareholder initiatives and resolutions promoting ESG disclosure

15, 16, 17

Ask for standardised reporting on ESG issues 						It is important for us to seek adequate and appropriate
disclosure on the entities in which we invest in orderto provide our investment analysts with practicalinformation that they can effectively incorporate
into their investment decision-making processes. To
encourage companies to provide useful information,
a common industry view needs to be formed on theimpact that ESG issues could have on listed companies.
It is still a challenge that most investment managers are
not asking for the necessary information as there needs
to be a critical mass of investors to drive companies to
produce the information we require.
We undertook a number of initiatives during the year
to encourage transparency and disclosure on ESG issues
from companies, examples of which are outlined below.

14. Company reporting
Company reporting on sustainability and responsible
investment and their participation in ESG initiatives was a
key feature of engagement during 2009. We participatedin the following collaboration initiatives to encourage
better reporting by companies on ESG issues during 2009.

15. Carbon Disclosure Project
CFSGAM is a signatory to the Carbon Disclosure Project(CDP) which was launched in 2000 to collect anddistribute high quality information that motivates
investors, corporations and governments to take action
to prevent climate change. The CDP harnesses thecollective power of corporations, investors and politicalleaders to accelerate unified action on climate change.
More than 2,500 organisations in 60 countries now
measure and disclose their greenhouse gas emissions
and climate change strategies through CDP, in order thatthey can set reduction targets and make performance
improvements. CFSGAM’s listed property trusts, CFS
Retail Property Trust and the Commonwealth Property
Office Fund, disclose to the CDP.

16. Forest Footprint Disclosure Project
The Forest Footprint Disclosure Project (FFDP) is a new UK
Government-supported initiative, created to help investors
such as CFSGAM identify how an organisation’s activities

18

and supply chains contribute to deforestation, and link thisforest footprint to their value. Modelled on the Carbon
Disclosure Project, it aims to create transparency and shedlight on a key challenge within investor portfolios, where
currently there is little quality information.
By engaging with the financial and corporate
communities, the FFDP aims to reduce the size of the
global forest footprint and ensure that forest footprint
evaluation is embedded into the working practices of thetarget sectors. CFSGAM became a signatory to the FFDP
in early 2009.

17. Extractive Industries Transparency Initiative
The Extractive Industries Transparency Initiative (EITI) wasestablished in 2003 to support improved governancein resource-rich countries through the full publicationand verification of company payments and government
revenues from oil, gas, and mining. The EITI arose
following public concerns about how much companies
are paying, and what countries are doing with the funds.
About 30 countries are currently participating to help
protect their social licence to operate, including Yemen,
Peru, Albania and Nigeria. The EITI helps companies
improve stakeholder and community relations,mitigates reputation risk and helps provide transparency
to investors.
CFSGAM supports the EITI because it contributes towards
improvements in governance and transparency inemerging markets. Country reporting is expected toprovide a better understanding of sovereign and politicalrisk which may be particularly useful for our Credit and
Fixed Interest investment team.

18. Direct infrastructure ESG reporting
CFSGAM’s active investment management typicallyinvolves taking a seat on the board of directors of thecompany, participating in the planning and budgeting
process, selecting management and maintaining ESG
and reporting standards. By taking active roles on theboards of our invested companies, we ensure that weare fully informed of the current asset condition andapplicable risks.

27

Principle 3
continued

Through regular and ad hoc reporting we ensure thatinvestors are kept appraised of policies and proceduresthat are implemented to mitigate and manage ESG
risks and which help to protect the assets’ social licenceto operate. Following are examples of ESG reporting
undertaken by our direct infrastructure investments.
Airports
The direct infrastructure team has investments and/or
board representation at Brisbane Airport, Sydney Airport,
Adelaide Airport, Perth Airport and Bankstown Airport.
CFSGAM takes an active, hands-on approach tosustainability and ESG considerations in its airport
investments and works to support and protect the social
licence to operate for these environmentally and sociallysensitive pieces of infrastructure.
The airports in which CFSGAM invests undertake a rangeof ESG reporting. This includes producing a Master
Plan, which is developed under the Commonwealth
Government’s planning regime. The airports’ masterplans are designed to provide a comprehensive overview
of the future developments, direction and growth of
our airports. The airports also produce environmental
reports, strategy papers and annual reports.
Bankstown Airport also publishes an Operational
Environmental Management Plan which identifies theenvironmental risks and legal obligations associatedwith the day-to-day operations of a tenant business.
It specifies the management measures the tenant
will implement in order to prevent or minimise theenvironmental impacts associated with these operations.
Utilities
Loy Yang Power (International Power)
Privatised in May 1997, Loy Yang Power owns and operates
the 2,200 megawatt Loy Yang power station and theadjacent Loy Yang coal mine. The company supplies
approximately one third of the state of Victoria’s power
requirements. The Loy Yang power station is the largest in
Victoria and the open cut is the largest producing brown
coal mine in the southern hemisphere.
In 2009, Loy Yang Power released ESG reporting which
included:–– a report to the community–– an externally verified sustainability report, and–– an annual report.

Image on next page is courtesy of Electricity North West (ENW).

28

Responsible investment report 2009

Hazelwood Power Station (International Power)
Hazelwood Power Station, situated in Victoria, is a brown
coal fuelled power station. The power station is of 1,600
megawatt capacity, and supplies up to 25% of Victoria’s
base load electricity. Hazelwood Power released a 2009
annual report which covered in detail the environmental
and governance issues associated with the operating
activities of the Hazelwood Power Station and theassociated coal mine. It also released:–– an annual environmental performance report–– an annual environment and resource efficiency
plan, and–– quarterly environmental reports to ourEnvironmental Review Committee.
Electricity North WestDuring the period, Electricity North West (ENW) released
a number of ESG communications including a Strategic
Direction Statement which covers at high level the maindevelopments ENW foresees for its business, network, andthe services it provides to customers.
ENW also commissioned an independent Low Carbon
Energy Market survey to understand how the low carbon
energy market may develop in north-west England, andhow ENW can assist in its development.

Challenges to implementation
The limited engagement with companies on ESG
reporting from the investment community means that the
information companies provide is still not written in a formand style consistent with what we need to integrate theinformation into our investment processes. Furthermore,
what companies are currently reporting is still not always
the most material information.
In 2009, we saw an improvement in the coordinationof the investment industry’s approach to providing ESG
information, with Bloomberg increasing coordination in
the ESG information it now provides. Given the numberof analysts that use Bloomberg for standard market data,
we believe this is an important step in the right direction.
We raised Bloomberg’s ESG information in a number ofcompany meetings and encouraged companies to review
the fields and make sure they are providing as many data
points as possible. Similarly, Thompson Reuters is anotherleading market data provider. Its acquisition of Asset4
should also lead to a greater ‘mainstreaming’ of ESG.

29

Principle 430

Responsible investment report 2009

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

PRI action points							Reference

Support the development of tools for benchmarking ESG integration

19

Include Principles-related requirements in requests for proposals

20

Communicate ESG expectations to investment service providers

20, 24

Support regulatory or policy developments that enable implementation of the Principles

21, 22

Revisit relationships with service providers that fail to meet ESG expectations

23

Align investment mandates, monitoring procedures, performanceindicators and incentive structures accordingly					

25CFSGAM actively engaged in dialogue, lobbying andinitiatives pertaining to government policy and industry
regulations, primarily through the Investor Group on
Climate Change, the Investment and Financial Services
Association, the Property Council of Australia and theGreen Building Council of Australia.

Members of these committees, representing direct
property asset owners, published an industry guideto disclosure under the NGERS Act. This is available on
the PCA website, and assists property owners satisfy
their ESG legislative obligations through reportingof emissions.

We consider ESG issues when selecting proxy voting
specialists, investment research and internal operations.
Service providers, clients and peer organisations
are encouraged to become PRI signatories and we
encourage the wider asset management industry toconsider ESG issues. CFSGAM participated in a numberof engagement initiatives to promote acceptance of the
Principles within the investment industry during the year,
most notably the participation in ESG Research Australia.

CFSGAM is also an active member of the Green Building
Council of Australia through its representation on theboard and as a member of the board sub-committee
on Advocacy.

Specific examples of our activities under Principle 4
include:19. Direct property: the Property Councilof Australia and the Green Building Councilof Australia
CFSGAM is an active member of the Property Councilof Australia (PCA), with both the Head of Sustainability(Property), and the Sustainability Manager (Property),
being members of the National Sustainability Roundtable
and the Sustainable Development Committee. CFSGAM
actively promotes and encourages other investment
organisations to implement ESG principles in theirownership models.
Through the National Sustainability Roundtable and theSustainable Development Committee we have actively
lobbied government on proposed policy formationand on practical aspects of policies. Such policies andregulations include the Carbon Pollution Reduction
Scheme (CPRS), the National Greenhouse Energy
Reporting (NGERS) Act as well as mandatory disclosureof energy efficiency in office buildings.

20. Direct infrastructure: working with suppliers
When appointing our panel of independent valuers
for our direct infrastructure assets, we requested
information and data on their capabilities of taking
into account ESG considerations relating to valuations.
This information was used in the short-listing process
for our valuation panel. Similarly, in the appointment
and review of all service providers for our direct
infrastructure investments, ESG capabilities are
an important consideration.

21. ESG Research Australia: engaging
service providers
There is a need to send a clear signal to the researchcommunity regarding the lack of quality ESG researchand CFSGAM has been an active participant in thediscussions leading to the formation of the ESG Research
Australia Initiative.
To encourage brokers to provide ESG research,superannuation funds HESTA, UniSuper and VicSuperestablished ESG Research Australia in 2009. A numberof superannuation funds and fund managers havesubsequently joined ESG Research Australia to work
towards the common objective of increasing thequantity, quality and scope of ESG research produced on
Australian companies. CFSGAM has representation on theboard of ESG Research Australia and chairs the Research
Evaluation Committee.

31Principle 4
continued

ESG Research Australia’s objective is to increase thequality and quantity of research by Australian brokers
that includes longer term environmental, social andgovernance factors. Further information about ESG
Research Australia can be found on its website.
When ESG Research Australia was founded in early 2009
there were only two researchers consistently producing
high quality ESG research in Australia. Now, despite
the challenges presented by the global financial crisis,
most of the major Australian brokers have establishedsome form of capacity in this area. While the key topics
covered by these brokers remain largely focused oncarbon trading and environmental issues, we expect
the market will deepen its understanding of social andgovernance issues over time. Topics we would like to see
covered in more depth include:–– consumer and public health–– supply chain stewardship issues–– related party transactions and the independenceof the board–– consumer debts for the financial services andretail sector–– executive remuneration–– board quality, and–– geo-political and security risk.
Although ESG Research Australia is focused on researchon Australian companies, it represents part of aninternational effort to improve investment practices bytaking into account ESG factors.
ESG Research Australia’s progress is consistent with thehigh uptake of the PRI in Australia, and supports theview that fund managers and superannuation funds inAustralia are cognisant of the investment implicationsof long-term ESG factors.

22. Government engagement
The impact of an emissions trading scheme is clearly
one of the environmental issues most likely to affectinvestments across a range of asset classes. It is therefore
in investors’ best interests to ensure there is a schemethat is fiscally responsible and environmentally credible.
Only then can investors accurately price potential risks
and opportunities presented by the schemes.
While most of our policy engagement on emissions
trading and broader climate change issues is done
through the Investor Group on Climate Change, in 2009
CFSGAM engaged directly in the policy process. This
involved presenting to the Senate Economics Committee

32

Responsible investment report 2009inquiry into the draft of the legislation to implement the
Carbon Pollution Reduction Scheme in March 2009. The
transcript of the presentation and the resulting report isavailable on the Australian Government’s website.
On global policy, we were pleased to support the ‘2009
Investor Statement on the Urgent Need for a Global
Agreement on Climate Change’ that was signed by our
Chief Executive Officer.
In 2009, Senator Nick Sherry, Minister for Superannuation,
announced that he had written to the Australian Prudential
Regulation Authority (APRA) to request it ‘review its
investment guidance with the aim of clarifying thefiduciary responsibility of trustees in regard to balancing
short and long-term investment goals and to make it clearthat trustees can incorporate ESG issues in the formulationof their investment and other operational strategies’.
We strongly supported this guidance and we wrote
to APRA in encouragement. We also emphasised
the importance of distinguishing between socially
responsible or ethical investing and the ‘mainstreaming’of ESG in any guidance that is provided.
Contribution to policy that supports responsible
investment is also made through our membershipof various initiatives, including the:–– Asian Corporate Governance Association–– Australian Green Infrastructure Council–– Green Building Council of Australia–– Investor Group on Climate Change, and–– Property Council of Australia.

23. Emerging markets
The standard of disclosure in emerging markets can present
a challenge when integrating ESG. To encourage improved
disclosure we emphasised the importance of guidance
to companies on ESG reporting when we met with theexchanges in various emerging market jurisdictions.
We also looked to provide input to the discussion arisingfrom the publication of the Walker Report on corporate
governance of UK banks and financial institutions in
the UK. David Gait, Senior Portfolio Manager from ouremerging markets business, wrote the opinion pieceat the end of this section that was published in various
media outlets. The article emphasises the importance ofimproved stewardship in Asia and examines the uniquechallenges for establishing and encouraging the rights
and responsibilities that go with owning part of a businessin Asia.

24. External presentations

25. Sustainability rating tools

Employees from across CFSGAM have presented at anumber of key industry forums on various aspects of ESG
integration, examples of which are given below.

The Australian Green Infrastructure Council (AGIC)
was established in 2007 to develop and implementa sustainability rating tool within the infrastructureindustry. CFSGAM joined AGIC in August 2009 and was
appointed to the board at that time. CFSGAM has beenvery active via its government contacts in canvassing
Federal and State governments for funding for AGIC.

Green Cities 09 Australasian Conference
The Head of Sustainability and Responsible Investment
spoke at the Green Cities conference in March 2009.
This was a joint initiative of the Property Council and theGreen Building Council of Australia and sought to deliver
leading edge thinking on sustainability.
Australian Super Investment Conference 2009
Representatives from CFSGAM participated in a
discussion about protecting shareholder value throughactive engagement with companies. The discussion
explored the potential benefits from engaging
companies on their approach to safety performance andgetting them to improve and be more transparent intheir approach.
2009 International Corporate Governance Network
Annual Conference
CFSGAM’s representative was the Moderator in a joint
IGCN and PRI conference session titled ‘Sustainability:
Managing in a world of extra financial risk’. This session
examined the potential impacts of climate change forlong-term investors and looked at the biggest challenges
to achieving long-term sustainability. CFSGAM’s Co-headof Infrastructure also presented on ESG issues in direct
infrastructure investing.
Clean Energy Expo Asia 2009
Clean Energy Expo Asia is a trading and knowledgesharing platform which brings together leaders in theTechnology, Services, Finance and Government sector
to address key issues in the areas of renewable energy,
energy efficiency and sustainable development in the
Asia Pacific region. CFSGAM participated in a conference
session titled ‘Clean Energy – Energy Efficiency
Panel Discussion on Energy Efficiency as a Clean
Energy Resource’.
Professional development on climate changeThis program, titled ‘Learning to Adapt: The Climate of
the Future’ looked to heighten the awareness of businessand environmental leaders dealing with climate change
by identifying gaps in understanding and providing tools
and techniques to help business adapt to the climateof the future. A CFSGAM representative participatedin an expert panel discussion on the need for climatechange adaptation.

AGIC’s sustainability rating tool will help to deliver moresustainable infrastructure in Australia and we consider
it to be an important value protection mechanism.
The tool will also be used for benchmarking industry
performance where comparable data is available in theunlisted investment space.
AGIC has been working with both Federal and State
governments to secure necessary funding to complete
the development of the sustainability rating tool and theboard believes this funding will be secured in the firsthalf of 2010, with the development of the tool finalisedby the end of 2010.
A senior CFSGAM representative from Infrastructure
Investments gave a presentation to the annual
AGIC conference on the benefits of the AGIC rating
scheme to infrastructure asset owners and managers.
The presentation focused on the need for thedevelopment of ESG key performance indicators
within the infrastructure sector to allow performancebenchmarking to be undertaken on a sector-bysector basis.

Challenges to implementation
There remains a persistent misunderstanding by thebroader market that ESG issues are socially responsibleor ethical issues that are only of interest to a niche groupof investors that want to invest in accordance with theirmoral or ethical beliefs. These investors believe that theirinvestments may be compromised through a reductionin their investment universe or a preference towards
environmentally friendly companies, rather than ones
that will provide the best possible investment outcome.
This isn’t the case for the mainstream investment
managers that have signed the PRI, yet the scope of
ESG considerations is still not yet fully understood by
the market.

33

Principle 4
continued

Encouraging company stewardship in Asia
by David Gait, Senior Analyst, Global Emerging Markets
An offer document of 450 pages recently landed on the desk of
Asian investors from an Asian company hoping to list. A cursory
glance revealed a number of worrying corporate governance issues.
The owners had previously been banned by the regulator fromaccessing the stock market for two years because of stock pricemanipulation. The company had 172 outstanding litigation cases
covering 31 pages. There were significant conflicts of interest. There
had been three different auditors in the past three years and, to cap
it all, there were several serious environmental issues outstanding.
In terms of corporate governance, it would have been hard to give it
more than one out of ten. Yet far from scaring off investors, the issue
was oversubscribed 39 times. For now at least, corporate governanceis firmly off the radar screen of many Asian investors.
The contrast between East and West is noticeable. In the UK, thedebate over corporate governance, the ownerless corporation andengagement has recently reached a crescendo. All institutional
investors are to be subject to a ‘Stewardship Code’, which aims to
improve the quality of engagement between shareholders andthe companies they own. Unlike their Western counterparts, Asianmarkets are not dominated by ownerless corporations. Nonetheless,better stewardship is desperately needed in Asia too.
Good stewardship requires three simple guidelines. Most importantly,
investors need to open their eyes. Too many still hide behind theexcuse that information on governance, environmental or social
performance is not available. This is not true. The information is there,
albeit not always in the places one might expect to find it. As a usefulrule of thumb, the greater the number of pictures of smiling children
in the sustainability report, the greater the problems lurking beneath.
Yet by far the best source remains the companies themselves.
The ability of management teams to articulate convincingly theirapproach to corporate governance or environmental management
is very revealing. They can also be a rich source of both positive andnegative information on their peers. Reputation checks on owners,
independent directors and auditors are usually easily done, while local
NGOs provide invaluable insights. Elsewhere, there are often plentyof clues in the notes to the accounts, while flotation documents
offer a once-in-a-corporate-lifetime glimpse at what are usuallywell-hidden skeletons.
A second useful guideline is to recognise that there is no such thing
as the perfect company. Having started to look, it is easy to get
overwhelmed by the number of issues that appear, particularly wherecompanies have multiple business divisions. India’s largest solar panel
company still depends for most of its profits on coal-fired power
generation. It also happens to manufacture the Pinaka multi-barrel
rocket launcher system and the Akash medium range surface to air
missile launcher.

34

Responsible investment report 2009

Another Indian company recently released an annual report thatstretched to over 1,200 pages. The company employs 75,000 people
across 98 different business divisions. Even the CEO could be forgiven
for not being able to name them all. In such cases, investors will neverknow the environmental performance of each division. They can,however, make a decent stab at assessing the corporate culture andsenior management’s willingness and ability to address the mostimportant sustainability challenges across the group. Stewardshipcomes in shades of grey. There needs to be tangible evidence of an
improving trend, even if it is of the ‘two steps forward, one step back’
variety. Corporate culture matters. Management teams must be
willing to admit their weaknesses and mistakes, and learn from them.
Incentivisation schemes need to encourage a long-term mindset
and focus on risks as well as rewards. Above all, when investors comeacross issues, they must engage with management.
The third important guideline is to ensure this engagement isconstructive, not destructive. Aggressive letters rarely, if ever, work.
Nor do demands or ultimatums. Fortunately, Asian companies are
remarkably open to suggestions. In the past month, the CEOs of
two different Asian banks have approached investors directly forsuggestions on how corporate governance can be improved. Work
hard to build rapport. This can be as simple as writing thank you
letters after meetings. The longer the time spent on the shareholder
register the more productive the engagement becomes. Investors
need to lean much more on independent directors for support.
If confidence is lost in management’s ability to address the problem,
agitate behind the scenes for a change in personnel. This is usuallymuch more effective than waiting for a confrontational showdown
at the next AGM.
Would an Asian stewardship code encourage investors to follow these
simple guidelines? It seems unlikely. Over the past few years, investors
have been asked to sign up to a proliferation of stewardship initiatives
and their accompanying acronyms; ACGA, ASRIA, CDP, EITI, EMDP, FDI,
ICGA, IGCA, WDP, UNPRI and so on. Their impact has been limited todate. Signing up is usually a fairly painless process and requires little
follow through. For example, the Carbon Disclosure Project has 475
investors as signatories representing a combined $55 trillion of assets.
Yet many responding Asian companies complain that they have yet toreceive one question from investors on their carbon positioning.
Some investors have wondered if the introduction of policies suchas delayed dividends, deferred voting rights and short-term capitalgains taxes might not be more effective? A financial version of
the Hippocratic Oath has even been suggested. Above all, goodstewardship requires the right mindset. Buying a share means buying
not only a piece of paper or electronic ticker, but part of a real businesswith all the rights and responsibilities that go with this. Get this rightand everything else follows. Get this wrong and investment becomeslittle more than an elaborate game of speculation. And speculationand stewardship are not natural bedfellows.

35

Principle 5

36

Responsible investment report 2009

“We will work together to enhance our effectivenessin implementing the Principles”

PRI action points							Reference

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

26, 27, 28, 29, 30, 31

Collectively address relevant emerging issues				33

Develop or support appropriate collaborative initiatives 			32, 34In our approach to Principle 5 during 2009 we focusedon communicating the business case for the PRI andpromoted a deeper understanding of ESG issues througheducation in the industry. To this end, we participatedin a number of engagement initiatives and associations
during the period and contributed to the developmentof education programs to enhance the industry’s
effectiveness in implementing the PRI.
CFSGAM held several client briefings and worked closelywith educational institutions to develop educationmaterials and course content. We also participated in
global collaborations, most notably through being amember of the Award Panel for the PRI Academic Network
Research Awards. We believe this project was particularly
important given the need to see rigorous academic
research produced to support the investment industry
in its approach towards responsible investment.
In 2009, our parent company, the Commonwealth Bank ofAustralia, joined the United Nations Environment Program
Finance Initiative. This allowed us to become more
involved in the relevant working groups and also gave us
the opportunity to take a leadership role in Asia Pacific.

26. Asia outreachResponsible investment in Asia was a focus for CFSGAM
during the period. While we have been a member of the
Asian Corporate Governance Association (ASGA) for sometime, more investment professionals are now across thework of ASGA.
We worked closely with Responsible Research, based in
Singapore, and jointly hosted a roundtable in Singapore inlate 2009 on ESG integration. Speakers from RiskMetrics,
Trucost, RepRisk, Responsible Research and Asia
Sustainability Rating discussed options for integrating
ESG screening and research into portfolio management.
A representative from the PRI also discussed the PRI’s plans
to expand its reach into Asia.
We were also pleased to work with the PRI in some of the
PRI briefings held across Asia in January 2009.

27. PRI Academic Network
During 2009, we participated as a member of the
PRI Academic Network Steering Committee. The PRI
Academic Network provides a link between responsible
investment practitioners and the academic community.
It aims to stimulate responsible investment research andprovide multiple avenues for greater interaction between
academia and practitioners. We participated in thisinitiative because we believe it is critical that the academic
community contribute to the discussion and evolution of
responsible investment. We are particularly interested in
the finance faculty’s role in facilitating the development ofrigorous frameworks for the inclusion of ESG into modern
portfolio theory and other financial frameworks.

28. The National Australian Built Environment
Rating System
The National Australian Built Environment Rating System(NABERS) tool was developed by the NSW Government
Department of Energy, Climate Change and Water(DECCW). CFSGAM has trialled and piloted the new tools
developed by DECCW for Indoor Environment and Waste.
In the case of NABERS Indoor Environment, we were able
to assist in providing feedback and examples which helped
DECCW to improve the tool for the property industry
to adopt.
The NABERS Indoor Environment (IE) tool provides
building managers, owners and occupants with a tangible
understanding of the indoor environment quality of theiroffice buildings in an operational sense, while providing theimpetus and platform for improvements to be made.
As a leading asset manager that puts sustainability at
the core of its practice, and with NABERS integral to theongoing strategy for its properties, CFSGAM played a keyrole in the development of the NABERS IE tool from agrassroots level.
Our involvement with the new tool was a natural fit,with sustainability a critical component of our asset
management strategy. Already, NABERS Energy and Water
tools are used to monitor operational performance andset targets that ensure our entire portfolio minimises its
operational impact on the environment. The group is also
preparing to adopt the NABERS Shopping Centre tool.

37

Principle 5
continued

NABERS IE is the only method by which CFSGAM caneffectively measure its indoor environment performance,
and its involvement in its development ensures the tool
is relevant to the needs of building and portfolio owners.
CFSGAM has already achieved three impressive ratings
using NABERS IE.
In regard to the NABERS Waste tool, we have provided
direct feedback and assistance from our consultants to
DECCW to assist it in its understanding of the practicalcomplications of the current tool and have offered further
assistance to change the protocol to be a more practicaland easily adopted tool for the property industry.

29. Every drop counts
CFSGAM participates in ‘Every drop counts’, which is a
Sydney Water initiative to help businesses understandwhere and how water is used in their businesses, assess
the true costs of water, improve their managementof water and implement practical projects to savewater. The program involves water management
diagnostics, implementation of improvement plans,
water efficiency audits and regular reviews to ensureongoing improvement.

30. 1200 Buildings Partnership
The 1200 Buildings Partnership is a City of Melbourne
initiative to achieve carbon neutrality by 2020 throughthe implementation of the Zero Net Emissions by 2020
strategy. The goal of the 1200 Buildings Partnership isto realise this vision by encouraging building owners totake part in environmental retrofits, as the commercial
building sector is currently responsible for the majority ofgreenhouse gas emissions in the municipality, accounting
for nearly half of total greenhouse gas emissions acrossthe city of Melbourne. CFSGAM’s buildings at 385 Bourke
Street and 367 Collins Street are participating in the 1200
Buildings Partnership.

31. Sustainable Sydney 2030
‘Sustainable Sydney 2030’ is the City of Sydney’s vision
for the sustainable development of Sydney for the next
20 years and beyond. This sustainable development
is not just about the physical environment, but also
about the economy, society and cultures, and how
addressing each will result in better outcomes now
and for future communities.
As a major land and building owner in Sydney, CFSGAM has
assisted in the development and implementation of the
Sustainable Sydney 2030 plan. CFSGAM has been involved
in discussions on green transformers and distributed
renewable energy concepts.

38

Responsible investment report 200932. 385 Bourke Street sustainability upgrade
The Commonwealth Property Office Fund’s (CPA’s)
landmark building at 385 Bourke Street, Melbourne isundergoing a life cycle transformation to strategicallyfuture-proof the building through a comprehensive
sustainability upgrade. The first stage of the upgradein 2009 focused on a tune-up of maintenance andoperational systems through the reduction of energy use,heating and cooling loads and water savings.
CPA has developed a memorandum of understanding
with Sustainability Victoria and collaborated closely withthe environmentally sustainable design consultant toproduce a detailed scope and process for improving
the sustainability of the building. The project team
identified a number of works that would deliver improved
efficiency and were able to utilise their financial, property
management and technical skills to define a roadmap
which could be utilised as a benchmark for the future
redevelopment of other existing towers.

33. 2009 Investor Statement on the Urgent Needfor a Global Agreement on Climate Change
CFSGAM supported the 2009 Investor Statement on
the Urgent Need for a Global Agreement on Climate
Change along with 190 other investment institutions, whotogether represent assets of more than $15 trillion.
The document sets out the perspective of institutional
investors on climate change and the key elements ofa global agreement that will drive the financial flows
necessary to address climate change.
The Statement was produced by the Institutional Investors
Group on Climate Change (IIGCC), the Investor Network on
Climate Risk (INCR), the Investor Group on Climate Change/
Australia and New Zealand (IGCC Australia/New Zealand)
and the UNEP Finance Initiative (UNEP FI).

34. Collaborative initiatives
To support our implementation of the PRI, we
participated in a number of collaborative initiatives.
This collaboration helps us to stay abreast of developmentsin the sustainability and responsible investment arena
more broadly, and also helps us to work with likeminded investors to facilitate ongoing improvementsin the industry’s approach to sustainability andresponsible investment.

CFSGAM’s Sustainability and Responsible Investment teammembers are well-regarded and active participants in theirfield and contribute their expertise to a number of thirdparty organisations, including:
ESG Research Australia
Board member
Chair of Evaluation Committee
Green Building Council of Australia
Board member
Investor Group on Climate ChangeManagement Committee Member, Deputy Chair, Memberof the Property Working Group and Acting Chair
Property Council of Australia
Member of the National Sustainability Roundtable andSustainable Development Committee Member
United Nations Environment Programme
Finance Initiative
Co-Chair, Property Working Group
Chair, Asia Pacific Taskforce
Member of the Investment Commission
Board member
Member of the Asset Management Working Group

Other collaborative initiatives CFSGAM participatedin include:–– Asian Corporate Governance Association–– Association for Sustainable & Responsible Investment
in Asia–– Australian Council of Superannuation Investors–– Carbon Disclosure Project–– Extractive Industries Transparency Initiative
International Corporate Governance Network–– Investment and Financial Services Association Carbon
Markets and Climate Change Committee–– Regional social investment organisation – Associationfor Sustainable and Responsible Investment in Asia–– The Sydney Conference Advisory Committee of theInternational Corporate Governance Network, and–– UN Global Compact’s ‘Who Cares Wins’ initiative.

Challenges to implementation
Definitional issues around the difference between
mainstreaming ESG and ethical investing continue to makecollaboration difficult at times because of the potential for
misunderstanding or misalignment of desired outcomes.
We actively emphasise the importance of distinguishing
between socially responsible, or ethical, investing and the‘mainstreaming’ of ESG considerations in our engagement
and communications with stakeholders.

39Principle 640

Responsible investment report 2009

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

PRI action points						Seek to determine the impact of the Principles

Reference
Governance, policy and strategy

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

35

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

35

Report on progress and/or achievements relating to the
Principles using a ‘Comply or Explain’ approach 			35, 36, 37, 38

Disclose active share ownership policy 			39Communicate with beneficiaries about ESG issues and the Principles 		40

Disclose how ESG issues are integrated within investment practices 		41

We seek to be fully transparent in our approach to
implementing the PRI. It is important to keep our
stakeholders informed on our progress and we haveundertaken a number of steps to raise awareness of our
ESG initiatives. All current policies and reports are publicly
available on our website, and mainstream communications
now feature our approach to sustainability and responsible
investments.

In keeping with the move towards integrating ESG
disclosure within annual financial reports, for the first timein 2009 CPA and CFX incorporated their ESG reporting
into the annual report, rather than producing a standalone
sustainability report. This is an important step towards themainstreaming of ESG issues as they should not be viewed
by investors in isolation from more traditional financial
measures and reporting.

35. Responsible investment report

37. Direct Property Investment Fundsustainability report

In 2009, we were pleased to announce the release of oursecond responsible investment report for the calendar
year 1 January to 31 December 2008. In 2007 and 2008,
CFSGAM was the only Australian fund manager to releasea comprehensive PRI implementation report. We produce
this report to encourage discussion with our stakeholders,increase awareness of challenges and opportunities
and to provide transparency on our processes towards
implementing the PRI.

36. Property sustainability reports
The Commonwealth Property Office Fund (CPA) and
CFS Retail Property Trust (CFX) annual reports cover thesustainability initiatives taking place across CPA’s and
CFX’s property portfolio. Both CPA and CFX report on
how they have performed and the benefits to investors
in undertaking sustainability and environmental initiatives.
The reports outline how the funds’ daily operations andapproach to business help drive long-term sustainablevalue. The key philosophies underpinning the engagementin sustainability practices are consistent with CFSGAM’smembership of the PRI. The sustainability component of
the report demonstrates how the funds have upheld the
PRI and monitored its impacts on the environment anddeveloped relationships with stakeholders.

The Direct Property Investment Fund (DPIF) released
its second sustainability report to investors on thesustainability initiatives undertaken in the 2008-09
financial year and its plans for the future.
While this is only the second official report to investors
on these activities, DPIF has been actively focused on
managing ESG issues for many years.
DPIF is committed to promoting change within theindustry and to facilitating further advances in sustainability
initiatives not just within the fund’s portfolio, but by thebroader property industry and its stakeholders. DPIF willcontinue to drive operating efficiencies within its properties,
while increasing the focus on improving tenant engagement
and fostering improved tenant/landlord partnerships.

38. Other property reporting
CFS Retail Property Trust (CFX) is a retail sector AustralianReal Estate Investment Trust (A-REIT) which invests in highquality regional and sub-regional shopping centres acrossAustralia. The trust listed on the Australian Securities
Exchange in April 1994.

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Principle 6
continued

Commonwealth Property Office Fund (CPA) is an A-REIT
which invests in prime quality office property located incentral business districts and major suburban markets
across Australia. The fund listed on the Australian Securities
Exchange in April 1999.
Both CFX and CPA respond to the following initiatives.
Australian SAM Sustainability Index
Australian SAM Sustainability Index (AuSSI) tracks theperformance of Australian companies that lead theirindustry in terms of corporate sustainability. Based on athorough assessment of economic, environmental andsocial criteria, the AuSSI comprises the top sustainability
driven companies from each of 21 industry clusters
covering the entire Australian economy. CPA wasrecognised as the leader for the Real Estate Investment
Trusts Cluster by AuSSI. CPA and CFX are both listed on
the AuSSI.
Carbon Disclosure Project (CDP)
In 2009, CPA was recognised as a ‘Climate Leader’ by
the CDP.
Dow Jones Sustainability Index
The Dow Jones Sustainability Index (DJSI) tracks thefinancial performance of the leading sustainability-driven
companies worldwide. Currently, 70 DJSI licences are heldby asset managers in 16 countries to manage a variety
of financial products including active and passive funds,
certificates and segregated accounts. CPA and CFX arelisted on the DJSI.
Environmental Real Estate Index
CPA and CFX are listed on the Environmental Real Estate
Index (EREI). This index measures the environmental
performance of the commercial real estate sector globally.
The EREI produced its inaugural report in 2009.

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Responsible investment report 2009

FTSE4Good Index
The FTSE4Good Index measures the performance ofcompanies that meet globally recognised corporate
responsibility standards and facilitates investment inthose companies. Both CPA and CFX are listed on the
FTSE4Good Index.

39. Corporate governance reporting updates
As one of Australia’s largest asset managers, CFSGAM isan active representative of major shareholders in many
Australian listed companies. We use our influence toencourage best practice corporate governance in thecompanies in which we invest and produce a regular
report to provide an update on our corporate governancepractices and activity. The corporate governance update
outlines how we voted on key issues such as director
elections/re-elections, executive remuneration andnon-executive remuneration and provides case studies
of engagement.

40. Investor communications
In 2009, there was a marked increase in focus on ESG
issues and considerations in investor communications
which reflects the importance that funds and investors
now place on sustainability and responsible investment.
A number of Requests for Information were completed
specifically in relation to ESG practices and the PRI survey.

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

43

Looking ahead

We are committed to integrating ESG issues into ourinvestment and asset management processes andhave a long-term vision to be regarded as the leader in
responsible investment and sustainability.

Priorities for 2010
Increase the level of sophistication with which theinvestment teams integrate ESG issues into researchand portfolio construction.
During the past three years, there has been much progressin the quality of information produced for investors on
ESG issues. In light of this, during 2009 we undertook a
global review of the ESG research providers in the market
and subsequently appointed Asset4, Responsible Research(Asian equities), RepRisk and Trucost (for emerging marketsonly). All these ESG research providers will help ourinvestment teams further develop their ESG integration in
a way that suits their investment process.
We will also continue to educate our investment teams
about ESG issues. The most significant investment willbe training all our investment teams how to effectively
use Asset4. We will also undertake training of the Direct
Infrastructure team in the application of the International
Finance Corporation Environment, Health and Safety
Guidelines along with broader ESG training. The Direct
Infrastructure team have undertaken significant work overthe last two years to ensure ESG issues are an integral partof their investment process and the training of the teamwill help deepen their understanding of these issues.
Increase the level of engagement with companies that
represent a ‘house view’ on ESG issues, especially forthe more controversial issues.
We are pleased to have appointed Nicholas Edgerton
to the role of Manager ESG Research and Engagement.
Nicholas will help our investment teams enhance theirapproach to engagement with listed companies.

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Responsible investment report 2009

We are also looking to increase the amount ofcollaborative engagement between our investment teams
and better utilise our capacity as major shareholders
to positively influence companies in their approach to
ESG considerations.
To date our investment teams have each taken an
autonomous approach to company engagement
and this will continue to be the primary form ofengagement. However, in future we will seek to be
more collaborative in our approach to some of the more
controversial issues across our markets and engage withcompanies accordingly.
Encourage service providers to produce more
integrated ESG research that helps to demonstrate
the materiality of ESG issues.
We will continue to work with our sell-side research
providers to support them in their objective to increase
the quality and usability of ESG research for our teams.
We have experienced a positive response from theAustralian sell-side brokers with the development of ESG
Research Australia; however, we believe these efforts need
to be sustained to achieve the best outcomes. Emerging
markets is an area where we would like to see more ESG
research and would particularly like to see the sell-side
scrutinise ESG risks and opportunities of companies
coming to market.
We also believe our approach to the PRI is supported by
the pension fund industry. We were particularly pleased
to see a greater level of detailed questions from pension
funds on our approach to ESG and a greater level of
support from this industry. While there is the ongoingchallenge around the definitional issues of responsible
investment, we believe the pension funds are getting
more sophisticated in their support of mainstreaming aconsideration of ESG issues into the investment process.

Glossary of terms and references

Association of Superannuation Funds of Australia (ASFA)
Australasian Investor Relations Association (AIRA)
Australian Council of Superannuation Investors (ACSI)
Australian Institute of Superannuation Trustees (AIST)
Australian Real Estate Investment Trust (A-REIT)
Australian SAM Sustainability Index (AuSSI)
Carbon Disclosure Project (CDP)
Carbon Pollution Reduction Scheme (CPRS)CFS Retail Property Trust (CFX)
Commonwealth Property Office Fund (CPA)
Direct Property Investment Fund (DPIF)
Dow Jones Sustainability Index (DJSI)
Environmental, social and governance (ESG)
Financial Services Institute of Australasia (FINSIA)
FTSE4Good Index Series (FTSE4Good)
Global Reporting Initiative (GRI)
Green Building Council of Australia (GBCA)
Investment and Financial Services Association (IFSA)
Investor Group on Climate Change (IGCC)
National Australian Built Environment Rating System (NABERS)
Responsible Investment Association (RIA)
United Nations Principles for Responsible Investment (PRI)

Carbon Disclosure Project
cdproject.net

CFSGAM responsible investment website
cfsgam.com.au/RI.aspx

Investor Group on Climate Change
igcc.org.au

UNEP Finance Initiative
http://www.unepfi.org/

UN Principles for Responsible Investment
www.unpri.org

45

Further information

For further information about CFSGAM’s commitment to the PRI and ESG activities, please visit cfsgam.com.au/RI .aspx
or contact one of the regional representatives below.

Amanda McCluskey
Head of Sustainability and Responsible Investment
Telephone: +61 2 9303 7971
Email: amccluskey@colonialfirststate.com.au

Australia and New Zealand
Joanna Davison
Regional Managing Director Australia and New Zealand
Telephone: +61 2 9303 7007
Email: jdavison@colonialfirststate.com.au

Asia (ex Japan)
Michael Stapleton
Regional Managing Director Asia and Japan
Telephone: +852 2846 7538
Email: michael.stapleton@firststate.com.hk

JapanHajime Kobayashi
General Manager, Japan Business Development
Telephone +61 2 9303 7304
Email: hajime.kobayashi@colonialfirststate.com.au

United Kingdom, Europe, Middle East and Africa
Gary Withers
Regional Managing Director EMEA
Telephone: +44 20 7332 6560
Email: gary.withers@firststate.co.uk

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