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VicSuper (Delisted)

PRI reporting framework 2017

You are in Direct - Listed Equity Active Ownership » Engagement

Engagement

Overview

LEA 01. Description of approach to engagement

New selection options have been added to this indicator. Please review your prefilled responses carefully.

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

01.2. Indicate what your engagement policy covers:

          Engagement services providers and services are listed in the Shareholder Litigation policy statement.
        

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

VicSuper has appointed a number of local and global specialists to help us to engage with the companies we invest in on their environment, social and governance performance. The overall aim of this engagement is to protect the long-term value of our members' retirement savings. We believe that engagement also works to positively change and influence corporate strategies and behaviour. We post regular reports on the outcomes of these activities on our website.

The advantages of utilising specialist engagement provider services include:

  • specialised skills both in ESG aspects and in the practice of engagement for change.
  • increased access to and influence with relevant decision makers in corporations and elsewhere.
  • efficiency in the achievement of shared objectives - a benefit for investee companies also given they face increasing requests from shareholders for dialogue. Engagement providers can reach a large proportion of shareholders and prioritise ESG issues through a single interface.

Regnan Governance Research and Engagement Pty Ltd (Regnan) and the Australian Council of Superannuation Investors (ACSI) undertake engagement with our Australian-listed companies. UK-based Hermes Equity Ownership Services (Hermes EOS) undertakes engagement with listed international companies in which we invest, as well as regulatory bodies and other intermediaries.

01.5. Additional information [optional]

As a shareholder in thousands of Australian and global organisations we take our ownership responsibilities seriously. We actively engage with the companies we invest in to influence improvements in their corporate governance practices and how they generate social and environmental outcomes.

While we made a decision to divest from the tobacco industry a few years ago, our preference is to engage with the companies we invest in to help them transition towards more sustainable business models. This approach takes more time and effort, but we firmly believe that engagement drives real and tangible change on the issues that are important to us and our members. As companies get better at managing their risks, they’re better equipped to tackle future challenges. We also believe they become more valuable.

And so for these reasons we think it’s important for us to invest in these companies and influence their change journey. Because better preforming companies benefit our members, the economy, society and the environment.


LEA 02. Reasoning for interaction on ESG issues (Not Completed)


Process

Process for engagements conducted via collaborations

LEA 05. Process for identifying and prioritising collaborative engagement

New selection options have been added to this indicator. Please review your prefilled responses carefully.

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

05.3. Additional information [Optional]

While we don't have a formalised process for identifying and prioritising collaborative engagements, Vicsuper has a number of strategic priorities that helps inform our collaboration activities.

We collaborate with our industry and thought leaders through a number of investor organisations, working groups and roundtable initiatives. These include the Principles for Responsible Investment (PRI), the Investor Group on Climate Change and the Natural Capital Declaration to name a few. A full list of the signatories and organisations we collaborate with is available on our website. During the year we also actively contributed to industry wide projects that help to drive positive change, including:

  • Investor Group on Climate Change’s climate adaptation working group: As an active member of this group we aim to help the superannuation industry better understand adaptation policy and risk exposures in the Australian context. It also aims to develop best practice guidance on how to measure and monitor adaptation risk across portfolios and identify opportunities for investment in adaptation opportunities.
  • Natural Capital Declaration disclosure and reporting working group: As chair of this working group with the Natural Capital Finance Alliance we aim to help the global finance industry collect data and report on the natural capital impacts that exist within their organisations and supply chains.
  • Pension Fund Integrated Reporting Network: Participating in this working group, which is led by the International Integrated Reporting Committee and Australian Institute of Superannuation Trustees, allows us to share our leadership approach to annual reporting with other funds within our industry. The network is also working to raise awareness of the value of integrated reporting for investor decision making.

LEA 06. Objectives for engagement activities (Not Completed)


Process for engagements conducted with/on your behalf by service providers

LEA 07. Role in engagement process

New selection options have been added to this indicator. Please review your prefilled responses carefully.

07.1. Indicate if you play a role in the engagement process that your service provider conducts on your behalf.

07.2. Indicate the role(s) you play in engagements that your service provider conducts on your behalf.

07.3. Additional information. [Optional]

Each year our service providers Regnan and Hermes EOS provide us with an engagement plan proposal. Throughout the year VicSuper is provided with engagement activity updates and a formal report of outcomes achieved at the end of each year. The outcomes of this engagement, supported by further research, are used to shape the following years' engagement activities.

ACSI members, together with ACSI management, identify issues for engagement on an annual basis. Monitoring and review are done semi-annually via progress reports and presentations. While ACSI members do not "specify" the particular objectives for the engagement or companies to be engaged with, they do review and endorse ACSI's choices. Members are also able to attend a number of engagements each year alongside ACSI staff. In many cases, several members attend a single meeting.

Regnan reports on engagement activity on a quarterly and yearly basis through a written engagement report. These reports outline the upcoming engagement activity, progress against objectives and outcomes over the longer timeframe. VicSuper takes part in an annual engagement planning process and attends reporting meetings as required.

We actively monitor and review the activities of our service provider Hermes EOS through quarterly calls, regular reports and use of their online information portal.


LEA 08. Monitor / discuss service provider information

08.1. Indicate whether you monitor and/or discuss the following information provided to you by your service provider

Please select all that apply

08.2. Additional information. [Optional]

See previous disclosure in LEA 07.3

Each of our service providers annually creates a list of engagement priority companies with specifically defined concerns and objectives for each company. Objectives are meaningful changes in company behavior. They also sets objectives for the proportion of all priority companies where objectives are met.

Monitoring and evaluation is done through semiannual progress reports, itemized company by company and in aggregate, which are delivered to member funds.


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.

Type of engagement

Insights shared

Collaborative engagements

Service provider engagements

09.2. Additional information. [Optional]

VicSuper reports on overall engagement activity and performance via our Annual Report and through emails responding directly to member queries or concerns.


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

Collaborative engagements

Service provider engagements

10.2. Additional information. [OPTIONAL]

Regnan, ACSI and Hermes EOS provide quarterly reports giving full disclosure on the number of engagements and themes of engagement conducted on our behalf, together with annual reports on progress. Each of our services providers undertake detailed tracking is undertaken on the number engagements, method of engagement, level within the organisation at which the engagement occurred, topics discussed, detailed summaries of discussions together with observations of progress, including publicly available materials/statements.High level engagement data is collated and disclosed in our Annual Report.


Outputs and outcomes

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

11.1. Indicate the amount of your listed equities portfolio 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

Collaborative engagements

4
0 Proportion (to the nearest 5%)

Specify the basis on which this percentage is calculated

Service provider engagements

692
35 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

 

 

Collaborative engagements

 

 

Service provider 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

11.4. Indicate the percentage of your service provider engagements that you were highly involved in during the reporting year.

Type of engagement

% High involvement

 

 

Service provider engagements

11.5. Additional information. [Optional]

The data provided in LEA 11.1 is as of 30 June 2016.

ACSI interacted with 136 Australian companies on our behalf, or 61% of the Australian companies in our portfolio. In addition, 42 Australian companies were engaged with by Regnan. (Regnan figures are not included in calculation due to overlap with ACSI engagement). Hermes EOS interacted with 556 international companies on our behalf, or 31% of the international companies held in our portfolio.

In total, our service providers interacted with 35% of the companies in our portfolio, on our behalf.


LEA 12. Engagement methods

12.1. Indicate which of the following your engagement involved.

12.2. Additional information. [Optional]

The engagement activity referred to above was undertaken by our special service providers: Regnan, ACSI and Hermes EOS. 


LEA 13. Engagements on E, S and/or G issues (Not Applicable)


LEA 14. Companies changing practices / behaviour following engagement

14.1. Indicate whether you track 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.

14.2. Indicate the number of companies that changed or committed to change in the reporting year following your organisation’s and/or your service provider's engagement activities.

Number of company changes or commitments to change

Collaborative engagements

0

Service provider engagements

196

14.3. Additional information [Optional].

Hermes reports that 144 companies changed or made a formal committment to change in the reporting year following engagement activity.

ACSI reports that 52 companies changed or made a formal committment to change in the reporting year following engagement activity.In February 2016, ACSI created a list of priority engagement companies with specifically defined concerns and objectives for each company identified through priority themes (eg: climate change), which is reviewed annually. The number reported represents the number of companies that changed or made a formal commitment to change from our priority engagement list.

Regnan reports that 28 of the 42 companies engaged, have demonstrated changed practices but these engagement numbers were not included in LEA 14.2 to avoid double counting.


LEA 15. Examples of ESG engagements

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

Topic or ESG issue
          Board independence and remuneration
        
Conducted by
Objectives

Regnan first initiated engagement with an ASX200 company in 2013 regarding governance and remuneration. Concerns included a lack of independent oversight on the audit committee and insufficient succession planning for expected director retirements. Change objectives were established with respect to these concerns as well as aspects of executive remuneration. These changes sought to encourage greater alignment between remuneration outcomes and those aspects of long-term company performance over which management has control, and encourage disclosures that allow shareholders to determine whether short-term incentive payments are made in the best interest of investors.

Scope and Process

Between 2013 and 2016 five meetings were held with board and management. Initially discussions focused on issues of board composition, most notably the lack of accounting skills amongst independent directors. The company was provided with examples where such practices had clearly led to value destruction and acknowledgement was won of our concerns. The appropriateness of the company's pay plan in reflecting and transparently disclosing the contribution of executives was also raised. These points were reiterated to the company in follow up letters.

Regnan was subsequently invited by the board to provide feedback on proposed changes to the company's remuneration structure. These changes were consistent with the feedback previously provided by Regnan. By playing a constructive role in reshaping the company's approach to CEO remuneration Regnan was able to influence the considerations prior to a review of the company's pay plan. This has led to enhanced transparency in pay decisions, linked to executive performance and was reflected in restraint with respect of quantum in its CEO pay in 2016. 

Outcomes

The constructive approach taken by Regnan also provided additional opportunities to raise concerns regarding board composition, diversity and succession planning. The company has since acknowledged the need to stagger the departures of long serving directors to allow for the successful onboarding of new directors. It has begun to address this with the appointment of new independent directors in 2014 and 2016. This move provides opportunity for the transfer of organisational knowledge and supports business continuity. In our discussions the company has demonstrated strong financial control expertise and close oversight of contracts, further strengthened with the appointment of an independent director in 2016 with extensive experience in this area. Following these developments we consider our change objectives substantially complete and governance sufficiently improved to allow for the closure of our engagement mandate.

Topic or ESG issue
          Carbon and climate in finance
        
Conducted by
Objectives

Notwithstanding local policy uncertainty, international climate policy is increasingly focused on global carbon budgets consistent with two degrees and capital allocation that fails to account for this is potentially exposed to shocks to future cash flows and asset values. Regnan engaged with financial services companies seeking evidence that this risk is being effectively mitigated by the lenders of capital and that exposures are disclosed to investors referencing appropriate reporting standards. Increasingly our engagement has become interested in the governance mechanisms and internal capacity in place to achieve this and that disclosures enable an assessment of decarbonisation rates relative the both peers and the economy as a whole.

Scope and Process

In 2013 Regnan initiated a program of regular and sustained engagement with the financial services sector, holding over 30 engagements with seven banking companies. Face to face meetings have been held with the boards and management of all companies. This has enabled Regnan to test information flows within the organisation, and to monitor both governance oversight and more technical aspects of carbon and climate risk management practices. Where appropriate climate risks and opportunities have been raised where feedback has been sought by individual banks on their public disclosure and as part of materiality assessments. Detailed, bespoke letters have been sent to company chairs outlining investor expectations on disclosure and risk management, highlighting areas where current practices could be further enhanced consistent with leading practice.

Outcomes

Over the past three years we have seen enhanced disclosures from all financial companies engaged with respect to carbon disclosure. This has included:

  • evidence of one chair changing the company’s public framing of the issue from one of reputation to one of material risk consistent with Regnan feedback;
  • public acknowledgement by all major banks of the need to limit emissions to two degrees (prior to the Paris climate meetings);
  • enhanced disclosure of sector based exposures, the integration of climate information into mainstream filings by two of the stocks engaged;
  • efforts within at least two companies engaged to develop internal capacity in order to critically assess information provided by prospective clients; and
  • evidence from one company of regular reporting of climate related portfolio risks to the board.

Less developed has been disclosures of exposures to the physical and more systemic risks of climate change via lending and investments – a continued area of focus for engagement under this thematic as it progresses.

Topic or ESG issue
          Climate change adaptation and disclosure
        
Conducted by
Objectives

Observed changes to global climate systems continue to pose risks to listed companies. Research conducted by Regnan into company-reported affects from extreme weather combined with scientific projections showed material impacts to exposed operations across multiple industry sectors. A number of companies were prioritised under a thematic program of engagement based on the value at risk, with change objectives tailored to the risks identified. 
This included a company with material assets located in high risk geographic regions. The company was also subject to market risk via its exposure to carbon intensive industries.

Regnan engagement sought evidence of processes in place to identify and mitigate climate-related risks. Specifically this included the use of forward looking climate projections in preference to historical weather data as well as the consideration of a range of scenarios on market demand for commodities to which the company was heavily exposed. Finally, Regnan sought enhanced, integrated investor disclosures of the analysis undertaken.

Scope and Process

Regnan commenced engagement following the appointment of a senior level sustainability professional to the company. Weather events impacting the company’s operations provided triggers for reflection and further engagement.

Six meetings were held between 2014 and 2016 providing an opportunity for detailed, technical discussions with decision makers within the company and to challenge current assumptions with respect to modelling and scenario analysis (from historical weather trends and mandatory engineering standards to climate projections and leading operational measures more comparable to peer organisations).

In addition to regular meetings Regnan was invited to participate in stakeholder surveys contributing to the company’s annual reporting process, providing additional avenues to provide specific commentary on investor useful disclosure.

Further influence was won via the provision of case studies and analysis evidencing clear examples of the types of analysis that could be undertaken and disclosed. Follow up correspondence made clear the changes sought and the expectations of investors. These were also suitable for promulgation to decision makers within the company, including the board, to build the case internally for further action and disclosure.

Outcomes

During the course of the engagement the company transitioned to more sophisticated climate based modelling in assessing and mitigating exposures to weather events, including temperature change. Scenario analysis was initiated as the basis for deep dives on the future of commodity markets to which the company is exposed. Over the past three years these have increasingly incorporated the company’s own market intelligence – directly gathered in customer end markets – supplementing IEA scenarios. The company also accepted the need to look through near term regulatory uncertainty and model global policy objectives (2 degrees).

The results of this analysis has been disclosed to investors in a way that demonstrated a specific and appropriate response and understanding of its risks.

Regnan engagement was been acknowledged by the company as playing an “instrumental role” in the changes made to date.

Topic or ESG issue
          Strategic human capital (SHC)
        
Conducted by
Objectives

In 2015 Regnan commenced a thematic engagement on the importance of human capital and culture to the achievement of strategic objective with specific focus on the role and nature of board oversight in this context.

Human capital plays a central role in shaping intangible assets such as organisational culture, organisational capabilities and strategic alignment. However, unlike the specific areas of executive compensation and CEO succession, the board does not typically have a clearly defined role around human capital, and may only have partial visibility of human capital strategy and execution. Progress on the mitigation of these risks was seen to lag other material ESG risks; despite the increased representation of service-based companies on the ASX.

Given this context, priority was placed on those sectors employing a significant number of knowledge workers as well as those experiencing significant transition. Initial engagement has sought to understand the current levels of oversight and seek improved market disclosure on the way strategic elements of human capital are considered and monitored by the board as it relates to organisational capacity and execution together with disclosure of board capability in this area.

Scope and Process

To date, meetings have been held with 19 companies and peer discussions promoted via a number of director events to provide opportunities for further conversation and information sharing as the topic emerges. 

To date meetings have been held with 19 companies and peer discussions promoted via a number of director events to provide opportunities for further conversation and information sharing as the topic emerges. This included input from leading academics in the evolving field of organisational resilience.
Regnan has met with one ASX200 stock four times following ongoing concerns that despite evidence of strong operational practices, the company had been unable to demonstrate effective board oversight of strategic human capital (SHC) matters.  

It took numerous meetings to gain a picture of how SHC issues are governed within the company. Through persistent engagement Regnan was able to obtain clarity over the company’s governance arrangements for strategic human capital and successfully advocate investor interest in this area. Feedback on disclosures has well received and ongoing engagement will seek confirmation of appropriate information flows from the relevant sub-committee to the board regarding SHC and on further advocating for enhanced investor disclosure on this issue.

Outcomes

We continue to receive feedback from directors that this is a topic not often discussed with the investor community despite its importance, noting that of the 19 companies engaged over a third have already demonstrated progress, identifiable within the companies public reporting.

This includes an ASX200 company that has significantly increased its disclosure of SHC performance, including publishing turnover for the first time, and has completed its first group-wide employee engagement survey. The overall strategic framing and narrative was consistent with feedback provided to the company, and the value of our input noted in subsequent discussions.
Further was the improved disclosure of SHC metrics from an energy company as well as changes to the company’s values to better align with a new strategy for the company and consistent with feedback provided related to the company’s management of human capital consistent with transition challenges within the sector.

Topic or ESG issue
          Governance – Remuneration
        
Conducted by
Objectives

Hermes EOS aims to improve corporate governance standards worldwide, as the right governance structure helps companies to manage the risks they are exposed to effectively and fully utilise opportunities they are presented with. Appropriate incentives and remuneration packages are part of ensuring that the right management is in place to lead a company and ensure its sustainability and long-term value creation for shareholders. 

Scope and Process

Remuneration played a large part in our corporate governance engagements in 2016, reflecting our concerns about the pay policies and reports of companies, particularly in the UK. Executive pay plans have become unnecessarily complex and difficult to understand. They are also often misaligned with the interests of long-term shareholders and the performance of companies, which has been reflected in questionable outcomes on pay. Hermes EOS therefore pushed for a simplification of the pay structures at companies. They also encouraged remuneration committees to take a more robust view on pay and make use of discretion, as well as take into account a wider set of metrics, beyond a mere focus on total shareholder return. 

Outcomes

In a number of cases, companies committed to reforming their executive remuneration policies with input from major institutional shareholders, which Hermes EOS had strongly pushed for. Hermes EOS also gave feedback on a number of draft remuneration policies intended to be proposed at the 2017 AGMs of companies. 

Topic or ESG issue
          Social and ethical – Human rights
        
Conducted by
Objectives

Hermes EOS seeks for companies to respect human and labour rights and adhere to related norms and conventions. They aim to improve the oversight companies have over their supply chains to avoid breaches of human and labour rights. This will protect and enhance their reputation and increase investor confidence in the companies. 

Scope and Process

Hermes EOS pressed companies to engage with the communities living in proximity to their operations and build good relationships with them, including in disputed territories. They also sought to encourage better relations between companies and labour unions. They engaged with companies to ensure that they are transparent and have measures in place to avoid human and labour rights abuses in their supply chains, including at their second and third tier suppliers. They pushed for oversight of sustainability risks in supply chains by companies and their boards through ambitious targets and tracking of progress at the group level. In this context, Hermes EOS also encouraged companies to adopt the UN Guiding Principles on Business and Human Rights Reporting Framework to effectively communicate how they manage their human rights impacts.

Outcomes

Hermes EOS were pleased by the application of human and labour rights policies and increasing transparency in reporting on these issues, including in the supply chain, by some companies, as well as commitments to improvements in these areas. Following the embroilments of a company in the engagement programme in several custodial and detention service controversies, Hermes EOS also visited two prisons run by the company, which were largely reassuring. In addition, they paid a visit to the operations of another company with a fully automated production line, where they saw evidence of improving working conditions. 

Topic or ESG issue
          Environmental – Disclosure on climate change
        
Conducted by
Objectives

Hermes EOS push companies to enhance their disclosure of climate-related risks and seek greater transparency on stress-testing and portfolio resilience in a range of carbon-constrained scenarios at companies where the issue is particularly material.  

Scope and Process

Hermes EOS urged companies to assess the resilience of their assets in a range of low-carbon scenarios to understand and be able to mitigate the risk of having stranded assets and disclose the results of their findings. As part of the Aiming for A coalition of investors, Hermes EOS presented resolutions at the AGMs of three diversified mining companies, seeking enhanced disclosure of their approach to climate change risks. They also co-filed a shareholder resolution at an oil company. In a similar context, we engaged with automotive companies globally on their adherence to emissions standards and their commitment towards sustainable drivetrain technologies. 

Outcomes

Overall, Hermes EOS gained commitments to better disclosure on climate change risks and saw evidence of improved reporting. The resolutions they filed at the mining companies received overwhelming support at their respective AGMs. Positively, all three companies committed to further action on climate change risks and they continued to engage with Hermes EOS throughout the year. The oil company responded to the proposal and the remarks we made at its AGM by taking the first steps in the right direction internally. 

Topic or ESG issue
          Board gender diversity
        
Conducted by
Objectives

Increase the representation of women on ASX200 company boards to 30% by 2017.

Scope and Process

ACSI wrote to all ASX200 companies with either no women or only one woman on the board. This written correspondence was followed up with a series of meetings with target company boards.

Outcomes

As at 1 February 2017:

  • Engaged with 23 companies on the issue.
  • 14 target companies appointed the first woman to their board during 2016.
  • A further 5 companies have made direct commitments to address the issue in the next 12 months.
Topic or ESG issue
          Carbon asset risk
        
Conducted by
Objectives

Understanding and disclosure of how large companies incorporate carbon asset risk.

Scope and Process

ACSI engaged with four large energy companies on disclosure of climate change and carbon asset risks. 

Outcomes

A topic of discussion with many company boards, the 4 specific target companies all improved or committed to improve following engagement with ACSI. One company improved its already leading reporting, another provided its very first climate scenario analysis as part of its 2016 annual report. 

Topic or ESG issue
          Sustainability Reporting
        
Conducted by
Objectives

Improved annual reporting of ESG risks.

Scope and Process

The performance of the full ASX200 in this area was identified through ACSI’s research. Letters were written to each company detailing areas that require improvement and providing guidance on disclosure frameworks.

Outcomes

ACSI engaged with 15 companies, following receipt of ACSI’s letters, regarding their sustainability disclosures. Eight have indicated they are looking to improve their disclosure going forward.

15.2. Additional information. [Optional]


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