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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 » (C) Implementation: Integration of ESG issues

(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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