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

PRI reporting framework 2017

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You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes

Implementation processes

LEI 03. Percentage of each incorporation strategy

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

03.1. Indicate (1) which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities and (2) the breakdown of your actively managed listed equities by strategy or combination of strategies (+/- 5%)

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied
82.2 %
Percentage of active listed equity to which the strategy is applied
17.8 %
Total actively managed listed equities 100%

03.2. Describe your organisation’s approach to incorporation and the reasons for choosing the particular ESG incorporation strategy/strategies.

Each team has a unique investment process most of which have been developed over many years by our leading investment professionals.

Responsible investment practices are applied by each of these teams in a way which complements their investment process and philosophy. Principles of stewardship and responsible investment are the common thread which tie our diverse investment capabilities together.

In order to maintain the high standards consistent with our ambitions and commitments, while allowing for the innovative and diverse approaches exhibited by our different teams, a strong governance framework around responsible investment is critical. 

In recent years we have begun to develop ESG themed investment funds led by our Stewart Investors team’s sustainability strategies. Development of these strategies occurs within our existing product development process.

In terms of screening, currently our policy is to screen out companies involved in the manufacture of cluster munitions and landmines, and companies/individuals on sanctions or high risk of sanctions lists.

03.3. Where assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

The Stewart Investors Sustainability Strategies are managed consistently with other investment strategies managed by the team, which have from their inception in 1988 integrated the consideration of ESG factors into investment decision-making through an investment approach which is focused on:

• Stewardship

• An absolute return mind-set

• Bottom-up analysis

• Long-term thinking

• Searching for quality companies

• Finding sustainable and predictable growth

• Strong valuation disciplines

The sustainability strategies augment this process by seeking to invest in the shares of those companies which the team believes are particularly well positioned to benefit from, and contribute to, the sustainable development of the countries in which they operate.

The team operates within and contributes to the broader Stewart Investors process which serves to strengthen both the traditional investment strategies and the newer sustainability strategies.


LEI 04. Type of ESG information used in investment decision

04.1. Indicate what ESG information you use in your ESG incorporation strategies and who provides this information.

Type of ESG information

Indicate who provides this information  

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

04.2. Provide a brief description of the ESG information used, highlighting any differences of sources of information across your ESG incorporation strategies.

ESG information is obtained from a wide range of sources and incorporated into different teams' investment processes in different ways. In addition to the sources highlighted above there is an array of institutions who also provide relevant information that investment teams will use from time to time e.g. the World Bank. International Energy Agency, OECD etc.

Managing this flow of information is a significant challenge as we strive to ensure that investment professionals have the most relevant information. In order to achieve this an ESG information management project has been initiated which during 2016 made the following enhancements:

  • We finalised the development of "ESG Portfolio Monitor", an interactive online tool which has connected the ratings of two of our ESG research providers to our holdings and benchmark information. 
  • We established working groups on Human Rights, Climate Change and Executive Remuneration to gain a deeper understanding of the issues and develop guidance for the entire firm.
  • We conducted a tender process for climate change related research including for carbon footprinting.
  • The Stewart Investor team conducted open tenders for directly funded research on a range of specific ESG subjects. 

04.3. Indicate if you incentivise brokers to provide ESG research.

04.4. Describe how you incentivise brokers.

Each team has its own process for selecting and remunerating brokers. Four teams have an explicit process for doing so, while two remunerate on an ad-hoc basis, and three do not remunerate brokers for ESG research (it is our Indonesian equities team where brokers are not routinely producing ESG research). Two of our teams have an execution only service, one being a passive investor and the other has moved to a completely unbundled broker service. 

For those that have an explicit process this can take the form of panel reviews which include ESG criteria, voting by analysts or direct allocations for particular research.

One of our teams has an execution only service after they decided to unbundle brokerage from research. The team is now tendering for ESG research independently and paying for it from its own P&L.  

The unbundling of execution from research costs will increase with a number of our teams adopting that position. While driven by regulatory change we are supportive of greater transparency and value for clients from research services. 

04.5. Additional information.[Optional]


LEI 05. Information from engagement and/or voting used in investment decision-making

05.1. Indicate if your organisation has a process through which information derived from ESG engagement and/or (proxy) voting activities is made available for use in investment decision-making.

05.2. 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 a ESG issues which can influence an investment decision can also influence engagement and proxy voting activities or visa-versa. All investment teams either have a centralised database with ESG information or have a standard section of company reports which include their ESG assessments. 


(A) Implementation: Screening

LEI 06. Types of screening applied

06.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

We exclude cluster munition and loan mine manufacturers. The criteria were established under our cluster munitions policy which was approved by the Global Responsible Investment Steering Group. The companies captured by the policy are reviewed annually with any changes reported in our annual responsible investment and stewardship report. 

We also exclude sanctioned and very high risk countries, companies domiciled in those countries and indviduals. The process includes a two-tier system whereby some countries are completely blocked (such as Iran, North Korea, Syria) and others are heavily restricted. The process is described in the additional inforamtion section below.

06.2. Describe how the screening criteria are established, how often the criteria are reviewed and how you notify clients and/or beneficiaries when changes are made.

For cluster munitions and land mines the criteria were established under our cluster munitions policy which was approved by the Global Responsible Investment Steering Group. The companies captured by the policy are reviewed annually with any changes reported in our annual responsible investment and stewardship report. 

For sanctioned and high risk countries we enforce country level restrictions based on the constituents of the Australian Department of Foreign Affairs and Trade (DFAT) Sanctioned Countries List and similar lists issued by Governments in other jurisdictions where our funds are domiciled. The constituents on each system are regularly reviewed and updated.

Any potential investments in companies domiciled in these countries would be rigorously screened to ensure that there is no association with any sanctioned individual, entity or regime prior to investment. No investment is possible in companies domiciled in any country on the DFAT list without clearance from Investment Compliance personnel as the system controls do not allow it.

In addition our controls include screens for any potential investment from a country deemed to be ‘very high risk’ in relation to politically exposed persons, sanctions and ultimate beneficial ownership controls. The scope of this framework will be wider than the sanctioned countries list and the countries deemed to be ‘very high risk’ are updated on a regular basis.


LEI 07. Processes to ensure screening is based on robust analysis

07.1. Indicate which processes your organisation uses to ensure screening is based on robust analysis.

07.2. Additional information. [Optional]


LEI 08. Processes to ensure fund criteria are not breached

08.1. Indicate which processes your organisation uses to ensure fund criteria are not breached

08.2. If breaches of fund screening criteria are identified - describe the process followed to correct those breaches.

Pre and post trade compliance systems prevent investment in excluded companies. Any breaches are managed through the investment compliance processes. 

08.3. Additional information.[Optional]


(B) Implementation: Thematic

LEI 09. Types of sustainability thematic funds/mandates

09.1. Indicate the type of sustainability thematic funds or mandates your organisation manages.

09.2. Describe your organisation’s processes for sustainability themed funds. [Optional]

The Stewart Investors Sustainability Strategies are managed consistently with other investment strategies managed by the team, which have from their inception in 1988 integrated the consideration of ESG factors into investment decision-making through an investment approach which is focused on:

• Stewardship

• An absolute return mind-set

• Bottom-up analysis

• Long-term thinking

• Searching for quality companies

• Finding sustainable and predictable growth

• Strong valuation disciplines

The sustainability strategies augment this process by seeking to invest in the shares of those companies which the team believes are particularly well positioned to benefit from, and contribute to, the sustainable development of the countries in which they operate.

The team assesses sustainability through three lens:

1. Sustainable Goods and Services

• Companies with a positive impact on society, environment, health

• Well positioned for shifting consumer preferences, regulatory headwinds, long-tail liabilities

2. Responsible Finance

• Purpose, license to operate, risk aware

3. Required infrastructure

• Infrastructure necessary to support long-term sustainable development

• Focus on environmental efficiency, operational performance, license to operate

The team operates within and contributes to the broader Stewart Investors process which serves to strengthen both the traditional investment strategies and the newer sustainability strategies.


(C) Implementation: Integration of ESG issues

LEI 10. Review ESG issues while researching companies/sectors

10.1. Indicate if E, S and G issues are reviewed while researching companies and/or sectors in active strategies.

ESG issues

Coverage/extent of review on these issues

Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

10.2. Additional information. [Optional]

Six of the investment teams systematically review the significance of ESG issues, two teams occasionally review the significance of ESG issues while our smart beta team does not currently review or incorporate these issues into their company analysis due to the nature of their investment process. One of the six teams reported that they systematically review the significance of environmental and governance issues but only occasionally for social issues. 

A full description of each team's approach is provided in our annual responsible investment and stewardship report: http://ri.firststateinvestments.com/2016/investment-team-profiles.htm 


LEI 11. Processes to ensure integration is based on robust analysis

11.1. Indicate which processes your organisation uses to ensure ESG integration is based on a robust analysis.

          Structured meetings and portfolio reporting is completed as part of quarterly reporting to Global Investment Assurance Committee.
        

11.2. Describe how ESG information is held and used by your portfolio managers.

          ESG ratings from two providers integrated with analyst tools Bloomberg and Factset. Group-wide ESG portfolio monitor tool has been developed.
        

11.3. Additional information.[Optional]

ESG information is maintained by each investment team separately. Some teams use multiple ways of collecting and storing information. One team has ESG information as a standard part of stock notes, while another maintains a centralised database with ESG ratings. Five teams do both these things while two also keep systematic records for how ESG information was incorporated. 

The quality of the ratings we receive from external providers is monitored by the responsible investment team using our ESG Portfolio Monitor tool . This includes feedback from investment teams on where they disagree with ratings which in turn is fed back to the providers. This process forms part of the quarterly investment committee reporting process. In addition, as part of this process, we compare ratings from our controversy monitoring provider (RepRisk) and our ESG research providers (Sustainalytics and MSCI Governance). 

We have also initiated a regular process where we compare the ratings from three ESG research providers (Regnan, Sustainalytics and MSCI Governance) providers for our Australian equities coverage. 


LEI 12. Aspects of analysis ESG information is integrated into

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

12.1. Indicate which aspects of investment analysis you integrate ESG information into.

12.2a. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis and/or portfolio construction.

12.3. Describe how you integrate ESG information into portfolio construction

ESG issues are integrated in a number of ways for eight of the nine equity teams. The Realindex team don't currently incorporate ESG factors except for applying the policies on cluster munitions, landmine manufacturers and sanctions lists.

All but one team reduces or prioritises the investment universe (Two always, two often and four sometimes.)

One often and two sometimes overweight/underweight at a sector level (note three teams are sector strategies and so it was not applicable and two teams are benchmark unaware and so don't allocate across sectors) 

Six teams overweight or underweight at a stock level as part of overall analysis (one always, three often, two sometimes and two are benchmark unaware and so doesn't seek to over or underweight stocks); and

All eight of the active equity teams' buy and sell decisions consider ESG factors with the frequency and degree to which they influence the decision differing by team based on the type of asset and its circumstances. The majority of teams report their buy/sell decisions are often influenced by ESG factors. 

12.4a. Describe the methods you have used to adjust the income forecast / valuation tool

Three teams reported adjustments to valuation tools and three teams reported adjustments to income forecasts.

One response noted that "There are no hard and fast rules but quality companies with better ESG credentials will generally merit a higher multiple; conversely, discounts may be applied to take into account any weaknesses or concerns we have in this regard."

Four teams do not make these types of adjustments but instead reported that it was implied or captured in quality assessments which influenced portfolio weights. For example one of our teams reported that:

"ESG analysis is integrated into our investment process through our quality assessment and ranking model. This model consists of 25 criteria that influence stock returns in general and infrastructure securities in particular. ESG criteria account for 20% of the overall quality score. The Quality Rating is combined with the Value Rating, which seeks to rank stocks in our focus list according to their relative mispricing, to provide an overall ranking of the securities on the focus list. This overall ranking is the focus of our stock selection and portfolio construction process."

12.2b. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis and/or portfolio construction.

12.4b. Describe the methods you have used to adjust the income forecast / valuation tool

Three teams reported adjustments to valuation tools and three teams reported adjustments to income forecasts.

One example of how this is achieved is that an ESG score out of five is incorporate into the company CAPM beta and discount rate calculation feeding into the company valuation.

However four teams reported that do not make these types of adjustments but that it was implied or captured in quality assessments which influenced portfolio weights. For example one of our teams reported that:

"ESG information is not explicitly integrated into fair value analysis. We regard each of the areas within ESG as broadly equivalent in importance and avoid investing in companies which cannot demonstrate that they meet appropriate standards or who are not making clear progress towards meeting them in the context of their operating environment."

12.5. Additional information.


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