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Colonial First State Global Asset Management (including First State Investments)

PRI reporting framework 2016

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Pre-investment (selection)

INF 08. Incorporating ESG issues when selecting investments

08.1. Indicate if your organisation typically incorporates ESG issues when selecting infrastructure investments.

08.2. Describe your organisation's approach to incorporating ESG issues in infrastructure investment selection.

Our pre-investment ESG assessment approach incorporates the following elements:

  1. All new investment opportunities are subject to an initial filtering process. This process determines the potential suitability of an investment according to our investment strategy. Part of this initial filtering process will be to screen for high level risks and opportunities. This risk assessment will include ESG issues. For example, we performed an initial 'filter out' of an investment opportunity in a particular sea port that had a large exposure to coal trading, and we have performed initial 'filter in' of certain investment opportunities in the renewable energy sub-sector, noting the industry's strong prospects in the energy market's future generation fleet.
  2. Costs and benefits are attributed to ESG issues over the life cycle of an investment (value attribution). This enables the net benefit (either quantitatively or qualitatively) to be monitored over the life of the investment. This information will assist in maximising portfolio returns over time by capturing a full spectrum of risks and opportunities in the investment. A broad risk assessment framework is used to identify the potential issues and opportunities for each infrastructure investment.
  3. To have the risk and opportunity assessment based approach embedded in the responsibilities of a number of individuals across the internal infrastructure investment team to ensure a broad and continuous focus on the ESG issues. This also facilitates a sharing of knowledge and ideas across the broader group and across asset responsibilities.
  4. To be aware of potential regulatory or industry requirements with ESG implications (e.g. the introduction of a carbon tax/market scheme in a particular jurisdiction) via industry contacts and industry participation. Having our investment professionals up-to-speed on a broad range of industry-specific issues, including ESG issues, helps to perform initial investment opportunity selection on an industry level.
  5. To incorporate learnings from existing investments on ESG issues into new investment assessments (experience is the best education). These include learnings from the impact of issues such as global warming (rising sea levels, drought, etc.), changes in social behaviour (consumption patterns, population growth, ageing demographics, technological change, etc), and also provides opportunity to add value by identifying opportunities and taking steps to mitigate potential risks at the portfolio and infrastructure business level.

08.3. Additional information. [Optional]


INF 09. ESG advice and research when selecting investments

09.1. Indicate whether your organisation typically uses ESG advice and research sourced internally and/or externally when incorporating ESG issues into the infrastructure investment selection process.

          Asset Managers - accredited ISCA IS
        
          Global Head of Responsible Investment
        
          Head of Responsible Investment Asia
        

09.2. Additional information.

Internal staff have the ultimate responsibility to make the final recommendation to the relevant investment committee on investments but will take a range of advice in forming that recommendation including external advice on environmental and social issues associated with an investment opportunity.

Our commitment to Responsible Investment means maintaining internal capability with the highest quality investment professionals across asset classes and across other specialisations. Our internal staff are trained in ESG issue identification to ensure appropriate ownership of ESG issues is embedded in the internal investment teams.

A risk-and-opportunity based approach is part of the responsibilities of the investment team to ensure a broad and continuous focus on ESG issues. While the Unlisted Infrastructure team is responsible for providing robust ESG assessment of investment opportunities and existing businesses, the team also draws on the specialist Responsible Investment team within the broader organisation.

We maintain a dedicated Responsible Investment team, with global and local leadership. The resources from the Responsible Investment team are drawn on to enhance the inherent capability of the Unlisted Infrastructure investment team. The business also maintains an ESG Committee, with members drawn from both the Responsible Investment team as well as various investment teams including Unlisted Infrastructure.

The ESG Committee has established working groups on: remuneration; human rights; and the physical impacts of climate change. Our internal team members also draw on external resources and publications. For example, for the evaluation of ESG issues we also frequently refer to guidelines and recommendations given by the IFC/ World Bank with respect to the relevant sectors.

External resources are also used to supplement the skill base of the Unlisted Infrastructure team and the dedicated Responsible Investment team. These external resources are employed on a project-by-project basis as required. The typical due diligence process associated with a large infrastructure investment will involve environmental and technical advisors on environment impacts and asset condition.

Additional advice may be sought on legal liability issues or on social licence to operate issues should they be relevant to the particular asset. Also corporate governance will be reviewed and compliance with good corporate governance codes assessed. For example, we employed specialist external environmental advisors for our detailed due diligence and bidding for a sea port where environmental risk and contamination was a significant factor. More recently, we engaged specific regulatory advisors as part of our successful bid for and acquisition of a regulated gas network business. The specific advice supplemented the knowledge of the investment team and ensured that we submitted a fully considered bid, which ultimately drove value for investors.

Our investment strategy is to manage a large, in many cases 100%, interest in each individual business to enable value added contribution via board and board committee representations. Our team members have a variety of backgrounds and expertise. Some members have a financial or legal background, while others have first-hand operational experience. The background and experience of the team members is reflected in the allocation of board membership and support tasks, thus allowing for active involvement and support of the management teams where ESG is concerned.


INF 10. Examples of ESG issues in investment selection process

10.1. Indicate which E, S and/or G issues are typically considered by your organisation in the investment selection process and list up to three typical examples per issue.

ESG issues

List up to three typical examples of environmental issues

          Emissions, pollution and contamination issues (air, noise and water typically)
        
          Physical impacts of climate change
        
          Resource use (particularly energy and water)
        

List up to three typical examples of social issues

          Social licence to operate
        
          Labour relations
        
          Stakeholder management and political oversight
        

List up to three typical examples of governance issues

          Board composition and the ability to influence
        
          Regulation and compliance
        
          Remuneration and incentives
        

10.2. Additional information. [Optional]

Environmental

  • Contamination and pollution risks are considered in terms of both existing and future potential contamination. This will include a physical assessment where possible, as well as appropriately robust mechanism (legal and otherwise) to deal with the potential impacts of contamination.
  • Another example is the European regulation on emissions for shipping companies in the North- and Baltic Sea which came into force in January 2015 and limits sulphur oxide / dioxide and nitrogen oxide emissions. This issue became relevant during the assessment of the potential investment into a ferry business operating in the Baltic Sea.
  • Environmental impacts of building and construction works (new build and maintenance capex) including lifecycle carbon cost. This is a vital part of any investment consideration in "real assets" such as infrastructure, whether it be a new greenfield development, or maintenance capital works on existing assets.
  • The physical impacts of climate change are also vitally important to investment in real assets. For example, for a new runway project at one of our airports that is located next to a bay, we considered the likelihood and impact of severe events like storm surges, combined with sea level rises in order the determine the parameters of the project (e.g. runway height, seawall construction etc.).

Social

  • The consideration of labour relations is another important part of our investment process. This is particularly true for infrastructure businesses, many of which were previously under government/public ownership.
  • The Social License to Operate is invaluable for an infrastructure business owner. As we like to say, 'infrastructure businesses are owned by us but belong to the community'. For example, at one of our airport businesses, we opened an 'experience centre' for members of the community to experience the impacts of aircraft noise projected under a new project.

Governance

  • Optimal board composition, including independence (for example, we have a preference for an independent chair) is important for good governance.
  • As part of our strategy to acquire significant or controlling stakes in portfolio companies we also review the existing corporate governance and either seek relevant influence through the shareholders' agreement, which will give us rights with respect to board composition or even full control over corporate governance.
  • We review compensation packages using independent specialised advisors and we implement governance rules and codes according to good corporate governance guidelines.
  • We also seek to maintain good quality interactions with the relevant regulators and public bodies, compliance with all laws and regulations and adoption of voluntary best practice standards.

INF 11. Types of ESG information considered in investment selection

11.1. Indicate what type of ESG information your organisation typically considers during your infrastructure investment selection process.

11.2. Additional information.

We have a relatively significant amount of stored information from many and varied due diligence undertakings as an investor in unlisted infrastructure since 1996. Whilst much of this information dates (due to the long term nature of investments) benchmarking over time is a very useful component of judging investment performance and ultimately success.

We also incorporates what current information is available into the investment process sourced from internal team efforts and via external consultants engaged on the due diligence process.

As part of our selection process we will also commission work (regulatory assessments, environmental and asset condition assessments etc.) to gain a better understanding of particular risks associated with the infrastructure business we are looking to acquire.


INF 12. ESG issues impact in selection process

12.1. Indicate if ESG issues impacted your infrastructure investment selection processes during the reporting year.

12.2. Indicate how ESG issues impacted your infrastructure investment deal structuring processes during the reporting year.

12.3. Additional information.

As a long term investor it is imperative that we invest into infrastructure businesses that have regard to their environmental impact, improve health& safety, engage with community and follow best practise governance.

These are the key principles followed when we invest into a new infrastructure businesses. In the last twelve months we participated in various transactional processes where ESG issues played an important role in our decision whether to invest or not.

Generally, investments with a particularly large carbon impact or near end of life infrastructure with minimal opportunity for improvement (including ESG standards) have not been pursued in the past reporting year.

On the other hand, investment opportunities which feature opportunities to reduce the carbon footprint through change in operations, for example use of alternative fuel, investments with renewable energy generation, or programs to reduce embedded carbon within capex projects are of particular interest to us.

During the assessment of investment opportunities we have reviewed customer satisfaction data, service level statistics etc. and that information has contributed to our investment case and assessment of value. Similarly, in another case, the identification of refurbishment requirements for an investment led to an adjustment in purchase price.

Review of required industry standards and codes of conduct is common practise during our due diligence process. We aim for our portfolio companies to be leaders and encourage the implementation of best practice procedures and standards.


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