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HESTA Super Fund

PRI reporting framework 2020

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Investment policy

SG 01. RI policy and coverage

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

01.1. Indicate if you have an investment policy that covers your responsible investment approach.

01.2. Indicate the components/types and coverage of your policy.

Select all that apply

Policy components/types

Coverage by AUM

 
          Climate Change

01.3. Indicate if the investment policy covers any of the following

01.4. Describe your organisation’s investment principles and overall investment strategy, interpretation of fiduciary (or equivalent) duties,and how they consider ESG factors and real economy impact.

Responsible investment is core to delivering HESTA's vision and mission and is part of our Investment Beliefs.

The HESTA Responsible Investment Policy is grounded in HESTA's key investment objective which is to generate financial returns for members while better managing risk and generating sustainable long-term value. As such, the consideration of ESG risks and opportunities in HESTA's investment processes and decision making is consistent with maximising HESTA members' long-term investment returns while minimising risk, and is therefore consistent with HESTA's fiduciary duty and the sole purpose test, to act in the best interests of fund members.

HESTA believes that this approach will have the ancillary benefit of contributing to improved environmental and social outcomes, which will in turn:

* contribute to a stronger economy, which is a prerequisite for delivering the best risk-adjusted returns for members.

* improve the overall retirement outcome for members, as their retirement outcome will not only be affected by the financial returns received, but by the state of the environment and the society into which they retire.

Additionally, during the reporting period HESTA went through an investment strategy review and ESG is an important part of the new Investment Beliefs.

01.5. Provide a brief description of the key elements, any variations or exceptions to your investment policy that covers your responsible investment approach. [Optional]

Purpose

The purpose of the Responsible Investment policy is to formally outline HESTA's principles and commitments in relation to the incorporation of Environmental, Social and Governance (ESG) considerations into investment processes and decision-making.

Scope

The Responsible Investment Policy applies to all of HESTA's investments including:

  • All types including direct, mandated and pooled
  • All styles including active and passive
  • All classes including Australian and international shares, property, unlisted and listed infrastructure, private equity, global bonds, timber and alternatives
  • All geographic locations.

The way in which HESTA incorporates ESG considerations into investment processes and decision-making will differ depending on these investment characteristics.

Variations or exceptions

In general, HESTA's Responsible Investment Policy applies to all of HESTA's investments and HESTA does not seek to restrict investment through the use of exclusions based on ESG considerations. However, HESTA does have the following restrictions:

Portfolio-wide investment restrictions and exclusions

Controversial weapons

HESTA excludes investment in any company that produces whole weapon systems or components developed for exclusive use in cluster munitions, anti-personnel mines, biological or chemical weapons.

Tobacco

HESTA excludes investment in any company that produces and/or manufactures tobacco and other tobacco products.

Thermal coal

HESTA applies the following restrictions on new investment in:

  • Any unlisted company that derives more than 15% of revenue or net asset value from exploration, new or expanded production, or transportation of thermal coal.
  • Any newly listed company, from listing onwards, that derives more than 15% of revenue or net asset value from exploration, or new or expanded production of thermal coal.
  • The provision of direct funding to any listed company, via rights issues or share placements, for any of these activities.

Investment restrictions and exclusions specific to Eco Pool (member choice sustainable investment option):

Tobacco

In addition to the portfolio-wide tobacco exclusion, Eco Pool excludes investment in companies that derive more than 15% of revenue from the manufacture and supply of key products necessary for the production and/or manufacture of tobacco products, or the distribution or retail of tobacco products (consistent with the MSCI Global Socially Responsible Indices Methodology).

Fossil fuel

Eco Pool has a more extensive exclusion on companies involved in fossil fuel than the thermal coal exclusion in the broader portfolio. Eco Pool excludes investment in any company that derives any revenue from the mining of thermal coal, or the extraction, production or refining of conventional and unconventional oil and gas; or derives more than 15% of revenue from the generation of electricity from fossil fuels or the transportation, distribution or retail of conventional and unconventional oil and gas; or more than 15% of revenue from the supply of equipment or services for the exploration and production of conventional and unconventional oil and gas activities.

Uranium

Eco Pool does not allow any investments in companies involved in the mining or processing of uranium.

Implementation

HESTA will incorporate ESG issues into investment processes and decision-making including:

  • Implementing the United Nation Principles for Responsible Investment (PRI).
  • Considering ESG in the asset allocation, portfolio structuring and diversification of the portfolio.
  • Considering ESG in the selection of external fund managers appointed to manage money on behalf of HESTA and its members - and incorporate ESG into the agreements (Investment Management Agreements) HESTA has with external fund managers.
  • Being an active owner by voting all of the shares that it is able to and engage with companies to improve their corporate governance.
  • Being active in public policy in relation to ESG matters - either directly or via like-minded organisations - on issues that are of market-wide significance and material in terms of the economic interests of our members.
  • Understanding the impact of key ESG issues such as climate change and carbon-related risks and opportunities within each of the major asset classes and across the portfolio as a whole, and Collaborating with other organisations to achieve these objectives.
  • HESTA will prioritise activities to implement this policy in accordance with the asset allocations, the importance of the ESG issue and the potential for HESTA to influence change (affected by investment types and styles).

Varying levels of implementation

While HESTA's Responsible Investment Policy applies to all of HESTA's investments, the extent to which it is implemented across all asset classes is dependent on the relevance of ESG issues to that asset class. We are working towards comprehensive implementation across all our key asset classes including equities, infrastructure, property, private equity, timber and alternatives. However, even within these asset classes, implementation varies depending on the type and style of the investment e.g. active vs passive, mandated vs pooled vehicles.

In several asset classes the extent to which we can meaningfully implement the Responsible Investment Policy is limited. This includes some fixed income investments e.g. mortgage backed securities and some of the opportunistic growth investments, liquid alternatives and insurance linked securities. Further we have not identified any way in which we can meaningfully incorporate ESG issues into our investment processes and decision making in relation to cash.

Approval

The Responsible Investment Policy was first approved by HESTA's Board in April 2010. The most recent revisions to this policy were approved by the Board in February 2020, but for the purpose of this reporting period the most recent version dates from July 2018.

Review

The Responsible Investment Policy will be reviewed every three years in line with HESTA's strategic review process. In addition, this policy is required to be updated as necessary to reflect changes in:

  • The legal or regulatory environment as it relates to ESG.
  • The asset classes in which HESTA invests.
  • The investment processes including asset allocation, portfolio structuring and diversification, asset consultant and investment manager selection and management and investment analysis.
  • Strategic or operational changes to HESTA.
  • Member or community expectations.

Subordinate Policies

HESTA's Responsible Investment Policy Framework also includes two subordinate policies:

  • Active Ownership Policy
  • Climate Change Policy

01.6. Additional information [Optional].

SG 01 CC. Climate risk

01.6 CC. Indicate whether your organisation has identified transition and physical climate-related risks and opportunities and factored this into the investment strategies and products, within the organisation’s investment time horizon.

Describe the identified transition and physical climate-related risks and opportunities and how they have been factored into the investment strategies/products.

As at 30 June 2019, HESTA is in the process of embedding climate-related risks into its wider organisational strategy and company-wide risk processes and investment portfolio considerations, as recommended by the TCFD. This undertaking has not been completed as at 30 June 2019, but progress will be apparent for the 30 June 2020 reporting period.

As stated in our Climate Change Policy, HESTA incorporates both transition and physical climate-related risks and opportunities into its investment approach.

We consider the risks facing underlying companies that arise as a result of climate change.

Risks considered include:

  • the physical environment resulting in rising sea levels, extreme weather and climate change events such as fires and floods, storms and storm surges, etc (i.e. physical risks)
  • government policy and legislation resulting in increased costs of compliance (mitigation, taxes or permit, disclosure) and increased input costs (i.e. carbon risks) and
  • the market, such as reduced demand for goods and services that contribute to, or become less desirable or necessary in, a future impacted by climate change and rising temperatures e.g. coal, geographic locations becoming warmer (i.e. market risks). The potential financial impact on asset valuations from reduced demand for fossil fuels has become known as “stranded assets”.

HESTA also considers the opportunities arising from climate change including consequential changes to:

  • the physical environment
  • government policy and legislation resulting in increased energy efficiency of production processes, early adoption of new technologies, greater access to finance for low emissions projects, and
  • the market, such as increased demand for goods and services that address climate change or become more necessary or desirable in a future impacted by climate change e.g. low emissions technologies, design of resilient infrastructure and property etc.

01.7 CC. Indicate whether the organisation has assessed the likelihood and impact of these climate risks?

Describe the associated timescales linked to these risks and opportunities.

As at 30 June 2019, HESTA had commissioned independent advice on the impact of climate change risks on its portfolio. Post-30 June 2019, we have received the advice, and are considering how it will impact HESTA’s current investment approach. The advice includes considerations on the timescale relevant for each of the risks and opportunities identified by the investment team, with reference to the UN-backed PRI’s Inevitable Policy Response, among others.

01.8 CC. Indicate whether the organisation publicly supports the TCFD?

01.9 CC. Indicate whether there is an organisation-wide strategy in place to identify and manage material climate-related risks and opportunities.

Describe how and over what time frame the organisation will implement an organisation-wide strategy that manages climate-related risks and opportunities.

As at 30 June 2019, HESTA is developing a comprehensive Climate Change Transition Plan for publication during the 2020 calendar year.

The Transition Plan will inform how HESTA approaches the risks and opportunities arising from climate change. This is expected to result in a new approach to investment, details of which are being finalised 

1.10 CC. Indicate the documents and/or communications the organisation uses to publish TCFD disclosures.

SG 02. Publicly available RI policy or guidance documents

 

02.1. Indicate which of your investment policy documents (if any) are publicly available. Provide a URL and an attachment of the document.

URL/Attachment

Attachment

Responsible_Investment_Policy_2018.pdf

URL/Attachment

Attachment

Responsible_Investment_Policy_2018.pdf

02.2. Indicate if any of your investment policy components are publicly available. Provide URL and an attachment of the document.

URL/Attachment

File Attachment

URL/Attachment

File Attachment

URL/Attachment

File Attachment

URL/Attachment

File Attachment

URL/Attachment

File Attachment

URL/Attachment

File Attachment

02.3. Additional information [Optional].

SG 03. Conflicts of interest

03.1. Indicate if your organisation has a policy on managing potential conflicts of interest in the investment process.

03.2. Describe your policy on managing potential conflicts of interest in the investment process.

HESTA has a range of policies managing and mitigating potential conflicts of interest in the investment process.

Conflicts Management Framework and Policy

An overarching policy defining conflicts and how they will be managed.

Compliance Framework

Documents the regulatory obligations and the responsible persons within the organisation.

Risk Management Framework and Strategy

Documents the controls implemented to manage the risks associated with conflicts.

Fit and Proper Policy

Requires conflicts to be considered during the initial and ongoing assessment of the propriety of Responsible Persons.

Outsourcing Policy

Requires conflicts to be considered during the appointment of material outsource service providers (including investment managers).

Record Keeping Policy

Requires documents to be maintained in relation to the management of any conflicts.

03.3. Additional information. [Optional]

SG 04. Identifying incidents occurring within portfolios

04.1. Indicate if your organisation has a process for identifying and managing incidents that occur within investee entities.

04.2. Describe your process on managing incidents

HESTA: ESG escalation process The purpose of the framework is to outline a clear and consistent process for identifying and managing Environmental, Social and Governance (ESG) issues that may give rise to significant investment-related or reputational risk for HESTA.  

Part 1 – Identify ESG issues that should be managed through this escalation process  Step 1.1: Identify and monitor ESG issues  Step 1.2: Flag ESG issues that potentially pose a ‘significant’ investment-related or reputation risk to HESTA Step 1.3: Identify ‘priority 1’ ESG issues Step 1.4: Manage priority ESG issues – escalation process  Step 1.5: Determine if the ESG issue relates to a specific company  Step 1.6: Determine if the ESG issue relates to a particular activity, product or service 

Part 2 - Managing ‘priority 1’ ESG issues that relate to a specific company  Step 2.1: Determine whether the ESG issue is caused by the company and concern is appropriately directed at the company  Step 2.2: If not, report on determination to not engage or take any other action in relation to the company  Step 2.3: Identify whether the investment is ‘meaningful’  Step 2.4: Determine whether engagement has the potential to address the ESG issue and/or the associated investment-related or reputation risk to HESTA  Step 2.5: Report on determination to engage  Step 2.6: Engage directly with the company  Step 2.7: Report on progress of the engagement  Step 2.8: Determine whether the change objectives have been progressed or achieved  Step 2.9: Report on outcome of engagement  Step 2.10: Monitor the ESG issue 

Part 3 - Managing ‘priority 1’ ESG issues that relate to a particular activity, product or service  Step 3.1: Determine the ESG issue is caused by the particular activity, product or service and concern is appropriately directed to the particular activity, product or service  Step 3.2: If not, report on determination to not take any other action in relation to the activity, product or service  Step 3.3: Identify whether the investment is ‘meaningful’  Step 3.4: Determine whether a risk management strategy has the potential to address the ESG issue and/or the associated investment-related or reputation risk to HESTA  Step 3.5: Report on determination to implement a risk management strategy  Step 3.6: Implement the risk management strategy  Step 3.7: Report on progress of the implementation of the risk management strategy  Step 3.8: Determine whether the risk management strategy has adequately addressed the ESG issue and/or the associated investment-related or reputation risks to HESTA  Step 3.9: Report on outcomes  Step 3.10: Monitor the issue 

Part 4 - Consider divestment  Step 4.1: Determine that divestment has the potential to adequately address the ESG issue and/or the associated investment-related or reputation risk to HESTA not possible to address through Parts 2 & 3 Step 4.2: Identify strong demand and broad support for divestment  Step 4.3: Identify investment impacts  Step 4.4: Report on determination to not divest  Step 4.5: Implement the divestment  Step 4.6: Report on the divestment
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