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Vision Super

PRI reporting framework 2020

You are in Indirect – Manager Selection, Appointment and Monitoring » Outputs and outcomes

Outputs and outcomes

SAM 08. Percentage of externally managed assets managed by PRI signatories

08.1. Describe how you ensure that best RI practice is applied to managing your assets

Measures

          Vision Super encourages its managers to address and discuss any specific ESG matters concerning our portfolios at meetings in our office or on-site, emails, phone/conference calls, quarterly portfolio updates and at annual sector review updates as part of investment working program agenda.
Vision Super is involved with several other industry groups who seek to improve responsible investment practices. In particular, we are involved with groups that are focused on understanding the investment risks that relate to climate change.
We encourage our agents to undertake company-specific engagements where we believe that:
•	Engagement will lead to an improvement in the value of a company’s shares over the long term
•	Engagement will lead to an improvement in the company’s current operations in relation to environmental, social and/or governance considerations
•	It is in our members’ best interests.
        

Measures

          The Trustee will consider termination of an investment manager if it is of the opinion that it's responsible investment practices are not in line with it's investment beliefs, ESG Policy and or the Investment Governance Framework. The Fund's "Investment Manager Appointments, Terminations and Monitoring Policy" outlines the main approach and processes that we undertake as part of this evaluation.
Responsible investment considerations are also formally integrated into our investment advisors (Frontier Advisors) investment manager assessment, monitoring and engagement processes and formally incorporated into annual reviews of our fund managers. 
Frontier Advisors also place heavy emphasis on the appropriateness and suitability of the investment manager’s responsible investment approach in the context of its overall strategy rather than on strict and potentially arbitrary metrics.
We believe it is our duty, along with our investment managers, to engage with companies to communicate our concerns and position on environmental, social and governance issues. In engaging with a company, we assess the likely impact of the engagement and the ultimate benefit to the value of our holdings.
        
          Signatory of the PRI and other ESG industry bodies
        

Measures

          Vision Super is a founding signatory to the Principles of Responsible Investment (PRI), so we are committed to:
•	Incorporating ESG issues into our investment analysis and decision-making processes
•	Being an active owner that incorporates ESG issues into our ownership policies and practices
•	Seeking appropriate disclosure on ESG issues from our investment managers
•	Promoting the acceptance and implementation of the PRI within the investment industry
•	Collaborating with other organisations to ensure that the PRI are effectively implemented
•	Reporting on our activities and progress towards implementing the PRI.
We also believe corporations should pay their fair share of tax on a country by country basis and we support tougher measures on tax transparency that will reduce tax avoidance.
        

08.2. Additional information. [Optional]

A high proportion of Vision Super's fund managers are signatories to the PRI, and where they are not, we encourage that elements of the PRI principles are emedded within their firms DNA and as part of their overall investment/risk process.

Below are some examples where our investment managers have made investment decisions which have been impacted by their ESG assessment which have provided improvements and or additional initiaves within their responsible investment framework during 2019:

Harris Associates (Global listed equity mandate)

Harris became a signatory of the PRI in 2019 and continue to do so in 2020 and going forward. They believe maintaining this membership to the United Nations Principles for Responsible Investment allows their organisation to publicly demonstrate their commitment to responsible investment. As their commitment to the six principals is aspirational and a work-in-progress, they believe the UN PRI provides expertise they can utilize on the direction for enhancing their responsible investment efforts.

Below are two investment decisions provided by Harris which have been impacted by their ESG assessment:

Wells Fargo

Following the announcement of CEO Tim Sloan’s departure in 2019 after 31 years at Wells Fargo, Harris's concerns regarding governance increased. They spoke with the chairwoman about our disappointment in the 5% pay raise that they gave to CEO Sloan, despite Wells Fargo’s sub-par operating performance and issues with regulators. They also became more concerned about the board’s ability to identify a successor. Harris's analysis also revealed it was increasingly likely that Wells Fargo would fail to hit all of its objectives within the same timeframe: appease regulators, cut meaningful amounts of costs, and improve underlying growth of the business. Specifically, they were concerned that Wells Fargo would moderate cost cuts in order to placate regulators, which would impact near-to-intermediate term earnings power of the business. While they still believe the company can grow per share value growth over time, the challenges mentioned above potentially delay the successful execution of the full turnaround. Harris's investment team divested from Wells Fargo due to these concerns.

Glencore

In December 2019 the UK’s Serious Fraud Office (SFO) announced that it was launching an investigation into suspicions of bribery by employees or agents of Glencore. While specific matters being investigated have not yet been detailed, Harris’ investment team discussed the headline immediately with management. They believe the most likely scenario is that they are looking into similar issues being pursued by the US Department of Justice (DOJ), an investigation which was launched in July 2018. 

Subsequently Harris’ investment team hosted a call with Glencore Chairman Tony Hayward to assess the potential impact of the SFO revelation. Glencore enlisted a separate subcommittee of the Board of Directors that is completely walled off from management, to manage the investigations. Harris believed the independent subcommittee is an appropriate response to such issues. They do not believe that there are endemic cultural issues at the company as many of the items in the DOJ investigation predate Glencore’s IPO in 2011. Glencore is taking the investigations seriously, and Harris view the recent management changes at the entities under investigation, African copper and oil trading, positively. Since the launch of the DOJ investigation there has not been an impact on Glencore’s licenses to operate or on Glencore’s ability to earn profits and generate cash flow. Although they believe that a fine from the DOJ is likely, Harris have already incorporated an impending fine in our valuations. Harris continues to monitor the SFO investigation closely. Should events occur that materially lower their estimate of intrinsic value, they will reassess there position; however, at this time they still see enough upside to warrant Glencore’s weighting in our portfolio.

ISPT Super Property (Property exposure in core fund)

During FY2019, the Core Fund completed $1.1B in acquisitions and $147.8M in divestments. As part of ISPT's investment principles, ESG is considered in all property acquisitions. ISPT consider industry benchmarks and standards such as the Property Council of Australia Guide to Building Quality, Green Star and NABERS ratings which have specific environment and social aspects. Climate change risk is also addressed through the asset acquisition process, including consideration towards location, building fabric and building services.

ISPT annually reviews the forecast investment returns of all properties and identifies non-core property assets for disposal. Assets with poor investment fundamentals including ESG are divested or upgraded accordingly. ISPT has also been an active participant in the Cleaning Accountability Framework (CAF) as a member of the Steering Committee, and the first company in Australia to adopt the CAF in all ISPT's cleaning contracts. CAF is an independent, multi-stakeholder initiative that establishes a new benchmark for labour and cleaning standards in Australia. ISPT has certified 7 sites within the portfolio, and we have committed to 100% coverage of CAF certification across our commercial and retail assets.

Barings (Alternative debt fund exposure)

Global Enterprise Communications Services Provider (Governance example)

A lack of disclosure regarding underlying business performance gave reason for concern. Barings’ analyst engaged with the Treasurer over the phone and via email requesting greater transparency regarding underlying performance drivers. In a subsequent earnings release, improved performance metrics were disclosed by management. Barings’ investment committee deemed the disclosure sufficient enough to make an initial investment. Reporting is still deemed poor and Barings’ analyst continues to engage with the company for further improvements.

Negative impact

We declined a deal because a company is involved in the defence segment and primarily sells radar/situational awareness instruments. It does not directly sell lethal weapons; however, it does sell guidance systems helping missiles to reach targets. Based in Germany, the company is regulated by stringent German weapon export regulation, albeit some of the company’s production capacity is in South Africa which we understand is subject to less stringent regulations. There have been a number of corruption cases in the defence industry, notably related to Saudi Arabia, which is a major customer of the company.

Furthermore, Barings was not aware of any ongoing cases against the company or any of its current employees.


SAM 09. Examples of ESG issues in selection, appointment and monitoring processes

09.1. Provide examples of how ESG issues have been addressed in the manager selection, appointment and/or monitoring process for your organisation during the reporting year.

Topic or issue
          Zee Entertainment Company Holding - Management & Governance Concerns (Sands Capital Emerging Markets Growth Strategy)
        
Conducted by
Asset class
Scope and process

Over the last year, Zee Entertainment went through financial difficulties as the founding family pledged shares to make investments in other non-core businesses. The family has been unable to pay, and lenders have been selling their collateral (Zee shares), leading to significant pressure on the company’s share price. Furthermore, Sands Capital believes that balance sheet and cash flow issues could develop as management takes action to remedy the issues around pledged shares.

Outcomes

Sands Capital exited the business due to the deterioration of the company’s management quality and corporate governance.

Topic or issue
          Britannia Industries Holding - Social Issues (Sands Capital Emerging Markets Growth Strategy)
        
Conducted by
Asset class
Scope and process

Despite India’s great economic strides over the past couple of decades, the country still grapples with a malnutrition crisis that affects more than 60 percent of children under the age of five. In fact, according to a 2019 UNICEF report, malnutrition was the cause of nearly 70 percent of child deaths in India.

To help combat this emergency, Britannia Industries launched the Britannia Nutrition Foundation to address malnutrition among under-privileged women and children. The company has worked with the foundation to enrich a portion of its products with essential micronutrients, iron, and vitamins to address the prevalent cases of anemia.

In one study, the company’s biscuits contributed to a 68 percent decrease in the prevalence of anemia observed among children. With its four Health Fortification Programs, Britannia Nutrition Foundation has aided over 84,000 children and adolescents to reduce the prevalence of anemia and help the severely acute malnourished children. Britannia is also working with the UNICEF to become its global partner to continue addressing these challenges. The company has also been upgrading and renovating the Bai Jerbai Wadia Hospital for Children in Mumbai and Palghar.

Outcomes

Sands Capital investment analysts are particularly focused on identifying social issues that revolve around: human capital management, data security & privacy, product safety & impact, supply chain management, labor rights, human rights.

The manager maintaines this position in the portfolio on the grounds of a business focused on strong social good.

Topic or issue
          First Solar Holding - Corporate Culture Issues (Baillie Gifford Long Term Growth Portfolio)
        
Conducted by
Asset class
Scope and process

First Solar is the manufacturer of thin film solar cells and despite its positive environmental strategy, Baillie Gifford had strong concerns about the company's competitive advantage coupled with issues about corporate culture, which ultimately undermined their confidence in the investment case. With regards to culture in particular, with hindsight Baillie Gifford were too tolerant of management changes both in personnel – i.e. there were four CEOs within just a few years, and in strategic direction. This was a poor investment from which the manager sought to learn lessons to be applied in the future.

Outcomes

Baillie Gifford sold their holding position in First Solar in 2012 after having first invested in 2007.

Topic or issue
          Baidu Holding - Corporate Culture Concerns (Baillie Gifford Long Term Growth Portfolio)
        
Conducted by
Asset class
Scope and process

Having initially invested in Baidu as one of China’s leading search engines in the global market place Baillie Gifford sold their position in 2019 due to a number of issues and concerns.

Outcomes

1. Conviction in the upside case for the company's artificial intelligence (AI) capabilities given that the investment required was being held back by Baidu's need to defend its core market share against new entrants, most notably ByteDance's newsfeed product Toutiao.

2. It was increasingly clear that there was a structural shift underway with the rise of 'super apps' in several key verticals (for example, Meituan Dianping in food delivery, hotels and local services), which Baillie Gifford felt could constrain the growth of Baidu's search product and potentially deprive it of the data required to capitalise on its early lead in AI.

3. There was concern on whether the business culture was clearly differentiated and adaptable. Baillie Gifford after much evaluation, felt that CEO Robin Li's increasingly stubborn and autocratic management style - evidenced by the departure of both Andrew Ng and Qi Lu from the AI side of the business - was undermining Baidu's long-term ability to adapt at a time when corporate culture is absolutely central to retaining talent in a rapidly evolving Chinese internet landscape.

Topic or issue
          Residential Property Affordability & Social Unrest - Deutsche Wohnen (DWNI) Holding (Resolution Capital GREITS Portfolio)
        
Conducted by
Asset class
Scope and process

Residential property affordability continues to be a focal point for regulators struggling to resolve the backlash over rising housing costs. Increasingly for politicians rent control has emerged as the most voter palatable “quick-fix” solution. Perhaps the most extreme example is that of Berlin, which recently implemented a rent freeze on Berlin apartments for five years.

Landlords now face a 3 to 5 year wait while the constitutionality of the new regulations are tested in the courts. As the potential for governmental price controls for residential rental properties increases, Resolution Capitals enthusiasm for the sector was tempered.

Outcomes

Resolution capital held a position in listed German residential landlord Deutsche Wohnen (DWNI) with a Berlin focused footprint. This was exited in favour of Vonovia (VNA) which has a broader German residential portfolio exposure.

During Q3 2019, the sustained social unrest in Hong Kong posed challenges for local landlords and real estate investors more broadly. Given the seriousness of the social unrest in Hong Kong and the ramifications for the broader economy, Resolution Capital aggressively reduced its exposure to Hong Kong investee companies over the quarter.

Topic or issue
          Tertianum Private Equity Co-Investment - Social Factors (LGT Capital Partners)
        
Conducted by
Asset class
Scope and process

LGT Capital Partners considered a number of ESG factors in their investment decision when they were evaluating a co-investment in the healthcare sector where due diligence was conducted in 2019.

The company, Tertianum, is one of the largest private operators of elderly care homes in Switzerland, with more than 2,000 apartments for independent and assisted-living residents and 3,400 beds for nursing care patients at 80 different locations. In addition to the company’s sound financial and market fundamentals, LGT Capital were attracted to the investment for its positive social dimension of providing care and services to the elderly.

Outcomes

The key ESG risk in this sector is the potential for substandard care, mistreatment of residents or lax health and safety standards. In drilling down into the details of the company, LGT Capital learned that Tertianum has a well-established quality management process in place that is in line with industry best practice and in accordance with ISO standard 9001:2015.

LGT Capital also ascertained that the care process is audited on a monthly basis, with any care-related issues reported to the relevant regional manager for follow up. Additionally, the company carries out annual audits of each care facility, collecting KPIs on a range of factors, such as operations, hygiene and day-to-day management.

Given the apparent robustness of these management systems, the General Partner was convinced that Tertianum’s leadership team has good grip on the key ESG risks. As a result, LGT were able to approve the company on ESG grounds, in conjunction with the company’s attractive fundamentals.

Topic or issue
          German Wood Products Manufacturer - Governance Consideration (Barings Alternative Debt Fund)
        
Conducted by
Asset class
Scope and process

The company’s disclosure in their Q2 2019 accounts was viewed as insufficient to properly understand underlying trends impacting the business. During a legal amendment request, Barings’ analyst engaged with the financial sponsor and company CEO and CFO.

Barings consented to the legal amendment request on the condition that there would be improved financial disclosure in their legal documentation. The company added the following language to the consent request: “Quarterly reporting to include meaningful key performance indicators (KPIs), including but not limited to (i) price/ volume data by product category, (ii) input price data and (iii) divisional reporting”.

Outcomes

Subsequently, the quality of reporting in the Q3 2019 accounts and reporting disclosure had significantly improved from the previous quarter. Barings’ investment committee therefore remained comfortable holding an investment given the improved disclosure and reporting.

09.2. Additional information.

SSgA who manage our global passive low carbon portfolio, undertook a robust research and due diligence examination of close to 30 data providers, they partner with multiple data providers for climate data that can offer insights into portfolios.

SSgA's data covers over 10,000 listed companies, which represents approximately 93% of global markets by market capitalisation and coverage may differ depending on the different metrics in question and access to multiple datasets from multiple vendors where they can cover for all major indices. They use the climate metrics recommended by Task Force on Climate-related Financial Disclosures (TCFD).

Identifying companies with high carbon emissions intensity and exposure to fossil fuel reserves is the cornerstone of any climate-focused strategy.  SSgA expect companies with high direct carbon emissions to face increasing challenges, as they navigate challenges ranging from cap-and-trade schemes to carbon pricing regulations.  In addition, companies with high indirect carbon emissions (e.g., Scope 2 emissions from electricity consumption) are likely to face increased energy costs as carbon pricing regulations become more widespread. SSgA partner with S&P TruCost as their primary source on carbon intensity and emissions data. 

SSgA also partner with ISS Oekom Research to make use of several ratings on a company’s position on climate change.  These ratings evaluate the following:

•  Whether a company has a clear position on climate change (i.e. position on the scientific evidence of climate change, the company's responsibility in this context and its commitment to contribute to the reduction of greenhouse gas emissions). 

•  Whether a company has GHG Reduction Plans. For the maximum grade, the company must have set a science-based target in line with the emission reductions required to limit the global temperature increase to 2°C compared to pre-industrial levels. Further, it must have implemented a comprehensive action plan to reduce greenhouse gas emissions, comprising sub-goals, planned measures to achieve emission reductions and progress reports.

•  Whether a company assesses most important industry risks with regard to climate change, and whether it has respective adaptation and mitigation strategies in place.

Vision's property opportunities exposures via the BlackRock Real Estate Funds have now been fully exited, with the last sale being Academy Gardens in Greece via Europe Fund III. As a result of this milestone, we thought its still worth noting how BlackRock Real Estate work have worked with their asset operators and property managers to identify opportunities for continually improving the ESG performance of their assets. This may include the development of asset-level Sustainability Action Plans to identify opportunities and associated KPIs (Key Performance Indicators).

Opportunities for improvements in areas such as energy efficiency, water efficiency, waste management and improved community, occupier and tenant experience are also regularly reviewed.

Some recent examples from across their portfolios are as follows:

Data management and measurement

BlackRock Real Estate continue to increase auditing and monitoring activities across their assets to improve the quality and quantity of the environmental performance indicators being measured, analyzed and reported. Data management programs have been rolled out across their global portfolios to obtain key information, including energy consumption (and associated greenhouse gas emissions), water consumption, and waste generation and waste recycling rates.

Environmental auditing

Environmental audits are undertaken across their real estate assets to help identify where improvements in environmental and operational performance can be achieved. In some instances, such audits have helped them identify those properties where efficiency upgrades should be prioritized. They also enable BlackRock to collate detailed information on energy and water efficiency, which they use to target efficiency and retrofit opportunities.

Green leases

BlackRock Real Estate strive to include ‘Green Clauses’ in all new lease agreements across their direct real estate portfolios to improve the environmental performance of those properties and encourage collaborative sustainability opportunities. They aim to develop clauses around the responsible operation of an asset, including tenant cooperation, to drive best practice and share data and information on asset-level sustainability performance.

Green financing opportunities

The manager alo recently secured a ‘Green Loan’ and sustainable finance package for one of their European real estate developments. The mechanism led to loan margin discounts in return for the achievement of certain sustainability objectives. Given the growth of the green loan market, and the increasing emphasis on sustainable construction and development, they continue to explore future opportunities for green financing initiatives.

Tenant engagement

Where possible, BlackRock aim to engage actively with their tenants to better communicate, and further progress, sustainability performance across their assets. They have some great examples across their global portfolios, ranging from energy ‘switch-off weeks’ to recycling campaigns, tree planting, pond dipping, and the establishment of tenant yoga classes and cycling clubs.


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