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

PRI reporting framework 2017

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Outputs and outcomes

FI 21. Financial/ESG performance

21.1. Indicate whether your organisation measures how your incorporation of ESG analysis in fixed income has affected investment outcomes and/or ESG performance.

Select all that apply
Corporate (financial)
Corporate (non-financial)
We measure whether incorporating ESG impacts funds' reputation
We measure whether incorporating ESG impacts financial returns
We measure whether incorporating ESG impacts risk
We measure whether incorporating ESG impacts funds' ESG performance
None of the above

21.2. Describe how your organisation measures how your incorporation of ESG analysis in fixed income has affected investment outcomes and/or ESG performance. [OPTIONAL]

In the last two years we have reported on the relationship between our internal ESG and credit rating, the ratings of credit rating agencies and the default experience of the global credit fund. 

Last year's report can be found under the Investment Information And Performance tab of the Fixed Income and Credit teams profile: 

A more detailed description of methodology used can be found in our 2015 Responsible Investment report here: 

The results of our analysis shows that where we have a high ESG risk rating we tend to have a lower internal credit rating than the credit rating agencies, this in turn has translated to a significantly lower default experience than investing inline with the credit rating agency ratings. 

While ESG is not the only reason for this outcome we believe the research we have done demonstrates a strong relationship. 


21.3. Additional information.[OPTIONAL]

FI 22. Examples - ESG incorporation or engagement

22.1. Provide examples of how your incorporation of ESG analysis and/or your engagement of issuers has affected your fixed income investment outcomes during the reporting year.

ESG issue and explanation

Mylan NV 

Effectively holding a monopoly on epinephrine auto-injectors in the US, from 2009 to 2016, Mylan increased the price of an EpiPen two-pack from $100 to $608, and has only sold the injectors as a two-pack since 2011 (they must be replaced annually to ensure safety/effectiveness regardless of use). Even following this scandal, CEO Heather Bresch remains in place, and we believe these actions (in conjunction with several other price hike scandals in the US) may increase regulatory actions towards limiting future price actions, as well as driving more competition in the space. In January 2017, the outgoing head of the Centers for Medicare & Medicaid Services informed a US Senator that Mylan, contrary to company announcements, had not yet reached a settlement with the US Justice Department over EpiPen pricing--Mylan claimed it had reached a $465 mm settlement. We believe these issues reflects an aggressive corporate culture, alongside the company's willingness to operate at the lowest-bound of IG ratings while materially increasing leverage via M&A. 

Impact on investment decision or performance

We raised our ESG risk assessment on global pharmaceutical company Mylan NV from Moderate to Very High due to evidence of aggressive and short-term minded pricing strategy via EpiPen, which has greatly increased public outrage and government scrutiny towards drug pricing. As a result, we lowered our internal credit rating from bbb- to bb+.

ESG issue and explanation

Express Scripts (ESRX)

We have growing concerns over ESRX's operating practices around its core business in the Pharmacy Benefit Management (PBM) space and the subsequent fall-out that will ultimately impact the revenue line.

A recent article highlighted the practice of drug pharmacies not disclosing the actual price of drugs when the retail cost is less than the patient’s copay, where the difference (copay minus price) is sent back to the PBM and impacts profitability positively in many instances. Our Negative outlook on the credit profile of ESRX is underpinned by our belief that the company will come under increased headline/political scrutiny over practices that are largely unknown outside the company's walls (and those of fellow PBMs) to extract margins at the expense of the US consumer. 

Impact on investment decision or performance

We raised ESRX’s ESG Risk Assessment from Moderate to High when we also downgraded its Internal Credit Rating outlook to ‘negative’ from ‘stable’. 

ESG issue and explanation


The company is the largest non state-owned aluminium producer in China was initial rated BB/stable by S&P and BB/stable by Fitch when it launched its first bond issue in Jun 2014.   We did not participate the initial bond issue, or any subsequent issues, mainly due to its very high ESG risk assessment for the following reasons:

Aluminium production is considered a highly polluting industry via smelting process.   We were concerned about management’s ability and knowledge in managing its environmental issues;
The company’s consistent very high EBITDA margin and significant total debt growth made us suspicious about their accounting treatment.  In particular, there was a bad history of default in the aluminium/chemical space in China, due to account manipulations.    

Impact on investment decision or performance

We did not buy the bond.

In March 2017, S&P has downgraded the company ratings to B+/watch negative from BB-, and Fitch placed BB rating on watch negative.  The company’s bond prices fell from around $102 to current level of $94 within the past month.

ESG issue and explanation

Crown Resorts Limited ("Crown") is an Australian-based gaming company.

In October 2016, the Chinese authorities launched a criminal investigation into Crown for “gambling crimes”, detaining 18 staff members including senior staff Jason O'Connor, EVP VIP International, in China following simultaneous raids across all of Crown’s Chinese offices. While we or the market couldn’t have predicted the raid by Chinese officials it does highlight the high ESG risk in the gaming industry and the risk of operating in different jurisdictions that are not as transparent as in Australia. The consequences of the Chinese raid saw Crown’s Australian operations suffer material financial impact in its first half FY17 results with its overall VIP program play turnover down 45% to $19.6bn. Its Melbourne casino saw normalised revenue down 13% and VIP program play down 47% while Perth normalised revenue was down 11% and VIP down 38.6%.

Impact on investment decision or performance

We already had a negative internal credit outlook on Crown prior to this incident, as we had assigned a High ESG risk score to the company, primarily to reflect the risks of sudden regulatory change given the impact of problem gambling on families and individuals. Our ESG assessment also took into account the potential risk of money laundering and other illicit activities impacting their operations. Our ESG score also included significant corporate governance risks that could potentially arise from its majority shareholder, the Packer family.

ESG issue and explanation

Bendigo and Adelaide Bank Ltd

Some small concerns have been raised relating to negative director votes and executive pay – particularly where unvested equity awards continue to be paid to the CEO even after early termination. Excessive CEO remuneration and perks are also flagged. Overall, these are generally low levels of concern.


Impact on investment decision or performance

Overall we have a positive rating supported by a small but well developed franchise reinforced by the "Community Bank" model, a conservative management focused on low-risk lending, sound asset quality and capital position. ESG risks are viewed as low and positive for the rating

The bank appears to have adequate environmental/social policies/disclosures in place with no material controversies noted. This partly reflects the smaller footprint/lower profile of the bank’s operations compared with larger peers.

Overall ‘low’ ESG risk assessment on the basis of having adequate policies/disclosures, lack of noted controversies, and relatively simple banking model with ‘Community Bank’ branches helping to align with customer/community interests.

22.2. Additional information.