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

PRI reporting framework 2016

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Engagement

Overview

LEA 01. Description of approach to engagement

01.1. Indicate whether your organisation has a formal engagement policy.

01.2. Indicate what your engagement policy covers:

          We have an engagement and proxy voting policy and Global Stewardship Principles. In addition they  cover the escalation of engagements and proxy voting.
        

01.4. Provide a brief overview of your organization’s approach to engagement

Engagement with company management is a fundamental part of our teams’ investment processes. Through company engagement, we seek to highlight areas for potential improvement and risk reduction, encourage improved disclosure on ESG issues, and commend companies that are making progress in this area. We have guidelines and principles for corporate engagement, which are publicly available on our website.

On occasions where our engagement activities with company management are unsuccessful, we may escalate the issue, for example by writing to, or meeting with, the chairperson or lead independent director, voting against directors who we believe are not providing appropriate oversight, or collaborating on further engagement with other like-minded investors. Ultimately we may choose to sell down holdings in companies where we lose confidence in the management of the business following unsuccessful attempts to engage. 

01.5. Additional information [optional]


LEA 02. Reasoning for interaction on ESG issues

02.1. Indicate your reasons for interacting with companies on ESG issues and indicate who carries these interactions out.

Type of engagement

Reason for interaction

Individual/Internal staff engagements

          To increase confidence in the company’s management
        

Collaborative engagements

Service provider engagements

02.2. Additional information. [Optional]

Collaborative engagement opportunities are normally identified by the responsible investment team where either a firm-wide approach is taken (i.e. for engagement with regulators and corporate industry bodies) or the opportunity is directed at individual investment teams. 


Process

Process for engagements run internally

LEA 03. Process for identifying and prioritising engagement activities

03.1. Indicate whether your organisation has a formal process for identifying and prioritising engagement activities carried out by internal staff.

03.2. Describe the criteria used to identify and prioritise engagement activities carried out by internal staff.

03.3. Additional information. [Optional]

We asked teams to rank which of the criteria is most used to prioritise engagements, the three items not selected received the lowest ranks but were selected as relevant by some teams. 


LEA 04. Objectives for engagement activities

04.1. Indicate if you define specific objectives for your engagement activities.

04.2. Indicate if you monitor the actions that companies take following your engagements.

04.3. Indicate whether your organisation defines milestones and goals for engagement activities carried out by internal staff.

04.4. Indicate if you do any of the following to monitor and evaluate the progress of your engagement activities.

04.5. Additional information. [Optional]

Engagement is governed by our engagement and proxy voting guidelines and global stewardship principles. Each team has its own process for setting objectives and monitoring engagements with all teams either doing one or more of the following:

  • Maintaining a company meeting database
  • Incorporating engagement outcomes in stock notes
  • Discussing engagements in regular team meetings (teams meet between two and five times a week)

When surveyed:

4.1 - One team set objectives for all engagements, three teams set objectives for the majority of engagements, three teams set the objectives for the minority of cases and one team does not set objectives.

4.2 - Four teams monitor company action in all cases, three do so in the majority of cases and one does in the minority of cases.

4.4 - Two teams define and set timelines milestones and goals, two track progress, two revise and revisit goals on a continuous basis, and one establishes a process for when goals are not met. 


Process for engagements conducted via collaborations

LEA 05. Process for identifying and prioritising collaborative engagement

05.1. Indicate whether your organisation has a formal process for identifying and prioritising collaborative engagements

05.3. Additional information [Optional]


LEA 06. Objectives for engagement activities

06.1. Indicate if the collaborative engagements in which you are involved have defined objectives.

06.2. Indicate if you monitor the actions companies take following your collaborative engagements.

06.3. Indicate whether your organisation defines milestones and goals related to engagement activities carried out via collaborations.

06.4. Indicate if you do any of the following to monitor and evaluate the progress of your engagement activities.

06.5. Additional information. [Optional]

When evaluating engagements we consider whether the company has changed the behaviour in question or whether it provided sufficient information to reassure us that the issue is being adequately managed. We also consider whether the process has added to our understanding of the industry, companies or issues in question.

When agreeing to participate in a collaborative engagement the relevant investment team undertakes to follow up with the company in individual meetings and to monitor progress. We have been concerned that letter writing campaigns without individual investor follow up may ultimately undermine the effectiveness of collaborative engagements.


General processes for all three groups of engagers

LEA 09. Share insights from engagements with internal/external managers

09.1. Indicate if insights gained from your engagements are shared with your internal or external investment managers as input for consideration in investment decisions.

Type of engagement

Insights shared

Individual/Internal staff engagements

Collaborative engagements

09.2. Additional information. [Optional]

ESG engagement and proxy voting is performed by the relevant analysts and portfolio managers not by a separate team. As a result analysis of ESG issues which can influence an investment decision can also influence engagement and proxy voting activities or visa-versa. We strongly believe this integrated approach to company analysis and stewardship is critical to the full and consistent application of responsible investment principles. 

For collaborative engagements, progress is incorporated by the team(s) involved, however we only share the information with other teams where we believe the engagement is relevant to them. 


LEA 10. Tracking number of engagements

10.1. Indicate if you track the number of engagements your organisation participates in.

Type of engagement
Tracking engagements

Individual / Internal staff engagements

Collaborative engagements

10.2. Additional information. [OPTIONAL]

In terms of tracking individual engagements, four teams track the number of engagements in full, one team partly tracks the number of engagement, one indicated that they don’t track engagements but could provide a reasonable estimate and two did not track engagements.

In many cases engagement occurs as part of the ongoing relationship with companies that can take years to develop. For the most part ESG meetings are not held separately to meetings discussing the financial performance of the company and so for some teams narrowing engagements to ESG related interactions is not possible.

Each team has its own process for monitoring engagements with all teams either doing one or more of the following:

  • Maintaining a company meeting database
  • Incorporating engagement outcomes in stock notes
  • Discussing engagements in regular team meetings (teams meet between two and five times a week)

Outputs and outcomes

LEA 11. Number of companies engaged with, intensity of engagement and effort

11.1. Indicate the number of companies with which your organisation engaged during the reporting year.

Number of companies engaged

(avoid double counting, see explanatory notes)

Proportion (to the nearest 5%)
Specify the basis on which this percentage is calculated

Individual / Internal staff engagements

845 Number of companies engaged
30 Proportion (to the nearest 5%)

Specify the basis on which this percentage is calculated

Collaborative engagements

2
0 Proportion (to the nearest 5%)

Specify the basis on which this percentage is calculated

11.2. Indicate the proportion of engagements that involved multiple, substantive and detailed discussions or interactions with a company during the reporting year relating to ESG issue.

Type of engagement

% Comprehensive engagements

 

 

Individual / Internal staff engagements

 

 

Collaborative engagements

11.3. Indicate the percentage of your collaborative engagements for which you were a leading organisation during the reporting year.

Type of engagement

% Leading role

 

 

Collaborative engagements

11.5. Additional information. [Optional]

There is some variability in how different investment teams define and capture engagements which makes it difficult to track from a whole of organisation level. The investment team with the largest number of reported engagements also estimated that <10% of them were comprehensive which influenced the answer to 11.2. The number of comprehensive engagements was estimated by two teams to be greater than 50%, by two teams as between 10-50% and by two teams as less than 10%, two teams could not estimate. 


LEA 12. Engagement methods

12.1. Indicate if your engagement involved:

12.2. Additional information. [Optional]


LEA 13. Engagements on E, S and/or G issues

13.1. Indicate if your engagements in the reporting year covered E, S and/or G issues.

Type of engagement

Coverage

 

 

Individual / Internal staff engagements

 

 

Collaborative engagements

13.2. Provide an estimated breakdown by E, S and/or G issues.

Individual / Internal staff engagements

30 % Environmental only
20 % Social only
40 % Corporate Governance only
10 % Overlapping ESG issues
100%

Collaborative engagements

% Environmental only
% Social only
100 % Corporate Governance only
% Overlapping ESG issues
100%

13.3. Additional information. [optional]

We can confirm that engagements covered all three areas however we do not track the number of engagements in this way consequently the breakdowns are estimates.


LEA 14. Companies changing practices / behaviour following engagement

14.1. Indicate whether you have a reliable estimate of the number of cases during the reporting year where a company changed its practices, or made a formal commitment to do so, following your organisation’s and/or your service provider's engagement activities.

14.3. Additional information [Optional].


LEA 15. Examples of ESG engagements

15.1. Provide examples of the engagements that your organisation carried out during the reporting year.

Topic or ESG issue
          Samarco which is a 50/50 JV between BHP Billiton and Vale. Failure of the tailings dam.
        
Conducted by
Objectives

Understand the impacts of the incident, assess management's response and make clear our expectations for good faith remediation. 

Scope and Process

Immediately following the dam failure a team member undertook a video conference call with representatives from Vale and subsequently BHP’s CEO conducted a group conference call with investors and analysts in which we participated.

The team put together a summary of facts regarding the dam failure and the impact on the local environment.

In November 2015 we met with Vale’s CFO in Brazil and were assured that the Company is fully committed to its remediation responsibilities. We also undertook a visit to their Carajas mining operation.

Outcomes

We continue to monitor the developments at the Samarco operation which we expect to remain closed for an extended period of time.

Topic or ESG issue
          Related-party transaction: in Oct-15, RSP Permian, Inc. (RSPP) announced a material (USD130mn) deal which involved the purchase of assets from RSPP’s two largest shareholders.
        
Conducted by
Objectives

Express concerns at related party transaction. Seek comfort that it would be conducted at arms length. 

Scope and Process

Engaged the Chief Financial Officer (CFO) via conference call. We voiced our concerns about the nature of the deal. Whilst he was able to provide seemingly plausible explanations to the related-party transaction we remained unsatisfied as to the true arms-length nature of the deal.

Subsequently, a meeting was arranged with the CEO in Midland in Nov-15. According to both the CEO and CFO, the founders had insufficient capital to drill on this property . We note that the value of their holding in RSPP at the time was over USD800mn (versus the value of the deal at USD130mn and a capex figure likely much lower than that).

Outcomes

After careful consideration we decided to exit our holding in RSPP. Without sufficient and convincing clarity on the motivations of the sellers we cannot get comfortable that the deal was struck in the best interests of RSPP shareholders. The two largest shareholders will continue to own circa 30% of the company and declined to participate in the capital raising to fund the deal.

Topic or ESG issue
          Eldorado Gold - Executive remuneration
        
Conducted by
Objectives

Regular review of the position ahead of the AGM raised concerns regarding compensation, specifically the increase in the CEO’s total compensation over the previous year despite poor share price performance. 

Scope and Process

In April 2015 we notified the company’s shareholder services representative that we would vote in favour of re-appointing the chair of the executive compensation committee but that we would be engaging with the company directly to raise our concerns over the structure of the executive compensation plans.  We also flagged at the time our view that that to improve governance the company should allow shareholders the opportunity to vote on remuneration.

In May 2015 we met with the CEO and expressed our concerns around compensation.  

Outcomes

During our direct engagement the company undertook to address the concerns raised around compensation.  In October 2015 it was announced that executive compensation would be reduced by 20% for the CEO and 10% for the executive team. 

Topic or ESG issue
          Sealink - director equity grant
        
Conducted by
Objectives

Have the company drop performance based pay for directors.

Scope and Process

We discussed with senior management our intention to vote against several proxy voting resolutions, most notably an equity grant suggested for a non-executive director which was dependent on company performance.  We clearly are of the view that non-executive directors should be on standard, fixed remuneration to maintain the highest possible degree of independence. 

Outcomes

We discussed the resolution with senior management and the Chairman. They listened to our concerns and the contested resolution was subsequently removed. Sealink remains one of our favoured positions in the small caps portfolio.

Topic or ESG issue
          Harvey Norman - Board tenure and independance
        
Conducted by
Objectives

To see board renewal and new skills added to the board that will improve our confidence that any acquisitions made by the company are independent and financially sound. We firmly believe a strong, independent board will be in the best long-term interests of the company and its shareholders.

Scope and Process

We held discussions with senior management around renewal of the board. The majority of the current board has been in place for more than a decade, and four of the ten positions on the board currently hold executive positions in the company.

Several discussions have been held with senior management, including the Chairman and CEO. 

Outcomes

Discussions are ongoing

Topic or ESG issue
          Newcrest - safety. The worker deaths occurred at Newcrest's Telfer Mine,
        
Conducted by
Objectives

Understand what measures will be taken on safety, encourage improvements.

Scope and Process

Letter to company and meeting with company.
 

Outcomes

Much more work is being done on safety – DuPont have been brought in and they have been looking at larger companies’ best practices. We continue to monitor. 

Topic or ESG issue
          Show of hands voting in Australia
        
Conducted by
Objectives

The investor initiative called for 38 companies to adopt poll voting instead, where the one-share one-vote principle applies.  Led by TIAACREF
with engagement support from the Australian Council of Superannuation Investors (ACSI).

Scope and Process

Engaged via joint letters and meetings with the company.

Outcomes

Almost two-thirds have improved practices in their 2015 shareholder meetings, compared to 2014, with most moving to poll voting for all resolutions. 

Topic or ESG issue
          Federation Centres - sudden removal of CEO
        
Conducted by
Objectives

Understand reasoning and assess if justifiable

Scope and Process

Understand reasoning and assess if justifiable

Outcomes

Meeting with Chairman and independent board members. Took us through the history and reasoning for decision. Found that the board acted with proper due care. Maintained our ownership of stock

Topic or ESG issue
          Vonovia - Dilutive Equity raising
        
Conducted by
Objectives

Understand reasoning and assess if justifiable

Scope and Process

Meetings with company and conference calls. 

Outcomes

No suitable explanation was given. Undertook to zero weight position

Topic or ESG issue
          Pacific Textile - Dangerous working conditions at factories, including extremely high temperatures and exposure to dust, chemicals, and dirty sewage highlighted by Uniqlo.
        
Conducted by
Objectives

Raise the concerns and discuss how the company will be addressing these issues. 

Scope and Process

Discussed at team meeting and meeting with company.

Outcomes

Response from company:

  • cut weekly working hours
  • No more penalties being levied on workers’ scrappage rates; it’s been replaced by a tiered bonus system
  • hire another 800 in Panyu to offset working hours cut
  • SGS inspection visit paid by Uniqlo to the Guangzhou factory

15.2. Additional information. [Optional]

It is important to note that we do not claim to be the sole reason companies have made changes to their practices in relation to the issues described above. In many instances there are multiple investors and other stakeholders who express similar concerns. We believe our engagement with companies on ESG issues makes a positive contribution to the sustainability of the company and consequently shareholder returns over the long-term. 


Communication

LEA 16. Disclosure of approach to ESG engagements

16.1. Indicate whether your organisation proactively discloses information on its engagements.

16.2. Indicate if the information disclosed to the public is the same as that disclosed to clients/beneficiaries.

16.3. Indicate what engagement information your organisation proactively discloses to clients/beneficiaries and/or the public.

Engagement information disclosed

          Approach to engagement by team
Engagement examples including information above
        

16.4. Indicate how frequently you typically report engagements information.

16.8. Additional information. [Optional]


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