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Active Super

PRI reporting framework 2020

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

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities; and the breakdown of your actively managed listed equities by strategy or combination of strategies.

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
85 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
13 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
2 %
Total actively managed listed equities 100%

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

Local Government Super first entered responsible investing in 1999. It recognises that the long-term prosperity of the economy and the wellbeing of members depends on a healthy environment, social cohesion and good governance of the companies in which it invests.

Screening:

LGS started screening tobacco in 2001.  Screening has been developed over time and now covers Controversial weapons, Tobacco, Armaments, Gambling, Old growth logging, Uranium mining/nuclear, High ESG risk profile and "High carbon sensitive" companies.  The current investment restrictions list is generated internally by LGS using data obtained from MSCI ESG Research and in consultation with one of our fund managers, Hermes Investment Management. The main list is generated on an annual basis, with reviews of specific companies and review of the overall policy undertaken throughout the year. It currently covers the MSCI Australia IMI and MSCI ACWI universes. The restrictions list is issued to all relevant fund managers across listed equities and fixed income for immediate implementation and monitored by the LGS Investments Team, Operations and the LGS custodian through their monthly compliance reporting mechanism. We currently screen 272 companies across 29 countries. 

Thematics:

As a result of revising the Policy in 2010 and establishing a commitment to allocating funds to positive investments, LGS engaged its first thematics manager in international listed equities. This mandate is managed externally and focuses specifically on environmental products and services.

Integration:

With increasing awareness about the benefits of ESG integration (i.e. more holistic risk management, with potentially more value to be gained), LGS actively engaged its first ESG focused manager in international listed equities in 2012. ESG integration capabilities are now routinely assessed as part of the selection/due diligence process for all new managers. ESG incorporation is well developed across all of our listed equity mandates. We have developed proprietary methodology to rank all our managers and align ESG integration with performance. On a regular basis we report ESG quality and carbon emissions on our website. 

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

Where screening and integration is combined, the following process is utilised:

  1. LGS investment restrictions are applied.
  2. ESG integration elements are used in the final stock selection and removal process - LGS external fund managers have in house models which integrate ESG into company ratings that influence the size and position taken in the Portfolio.

Where screening, thematics and integration are combined, the following process is utilised:

  1. LGS investment restrictions are applied.
  2. Thematic overlay is then applied to narrow down investable universe e.g. all companies in investable universe must earn over 50% from environmental products or services.
  3. ESG integration elements are used in stock selection and removal process.

LEI 02. Type of ESG information used in investment decision

02.1. 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 

02.2. Indicate whether you incentivise brokers to provide ESG research.

02.3. Describe how you incentivise brokers.

The LGS SRI Overlay uses prime brokerage accounts for both ASX and international equities. This means that LGS can ‘tag’ or direct brokerage to the specific analyst in these broker houses that are producing ESG research. LGS has tagged research on its ASX companies to the ESG analyst. LGS also motivates brokers by reading their research and attending their events.

02.4. Additional information. [Optional]

LGS sources ESG research from ESG research houses, sell side stock brokers, fund managers, engagement service providers, mainstream media, industry press, industry associations, NGO's and company media releases. This is used to inform the development or our RI policy and implementation of our RI activity program.

We use MSCI ESG Research to inform the development of our investment restrictions list and to identify our potential long investments for the SRI Overlay. A number of our managers also use MSCI ESG Research and Sustainalytics to inform their ESG and carbon integration strategies.

We source governance research from ACSI and CGI Glass Lewis for Australian and international listed companies respectively that is used to inform our voting decisions at company meetings.

We receive ESG research from brokers including Citi, Credit Suisse, Macquarie, Goldman Sachs, Morgan Stanley and HSBC.

We also review reports issued by Hermes EOS and industry associations and NGO's such as the IGCC and the 2 Degree Investing Initiative.


LEI 03. Information from engagement and/or voting used in investment decision-making

03.1. Indicate whether 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.

03.2. Additional information. [Optional]

For all separately managed accounts across Australian and international listed equities, LGS retains the right to undertake our proxy voting directly (rather than allowing the fund manager to do this for us). This means that the voting is separated from the investment decision making/stock selection process. We also undertake direct engagements with companies in addition to indirect engagements undertaken by our external fund managers and services providers such as ACSI and CGI Glass Lewis. Information that is derived from our direct ESG engagement and proxy voting activities will be used to inform the development of our internal investment restrictions list and activity program. Information from this process may be raised with our fund managers thereby contributing to investment decision making. 


(A) Implementation: Screening

LEI 04. Types of screening applied

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

Type of screening

Screened by

Description

LGS will not make investments in companies that derive any revenue from:

  • Controversial weapons;
  • Tobacco.

LGS will not make investments in companies that derive more than 10% of their revenues in the following areas of activity:

  • Armaments;
  • Gambling;
  • Old growth logging;
  • Uranium mining and nuclear power.

LGS will also not make investments in companies that derive more than 33% of their revenues from carbon intensive activities including:

  • Coal mining
  • Coal fired electricity generation; and
  • Oil tar sands.

LGS may also exclude companies with a high environmental, social or governance (ESG) risk profile and exhibiting poor management of these risks. Companies excluded under this screen may come from any industry sector.

Screened by

Description

LGS invests in positive thematics and has a mandate which specialises in this area.

Screened by

Description

LGS' negative screen for companies with high ESG risk is determined by MSCI ESG Research "ESG Impact Monitor" product. This assesses companies against 18 International Conventions and Norms.

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

The current set of LGS negative screens were established by the LGS Investment Committee in 2017, following multiple reviews of the original screens developed in 2001. The review of the screening criteria involved several facets, including:

  • The amount of the revenue threshold for excluded criteria;
  • Wording of the screens to ensure transparency and clarity;
  • Review of the appropriateness of the existing screens; and
  • Recommendation for any new screening criteria.

The review was undertaken with detailed paper(s) by internal LGS RI and investment staff using external ESG research and in dialogue with our existing managers along with ongoing review by the LGS Investment Committee. Factors that have been important in the review are:

  • The number of companies that are excluded under a screen and the cumulative market capitalisations of the excluded companies. Risk and tracking error considerations are paramount.
  • Reviewing ESG macro trends that might be creating new opportunities or altering valuations across industries
  • LGS' acceptance that climate change represents the largest ESG risk for our members' long-term returns.
  • The values of LGS members (as expressed by the current screens).
  • LGS commits to regularly communicate the RI strategy to our members via: commentary in the Annual Report, updates in the quarterly newsletters and making information available on the LGS website.
  • Our policy is publicy available and any changes are published to our website. 

LEI 05. Processes to ensure screening is based on robust analysis

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

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]


LEI 06. Processes to ensure fund criteria are not breached

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

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

In the event that a breach occurs, the manager is:

  1. Notified about the breach
  2. Directed to exit the stock in question as soon as possible
  3. Questioned on how the breach came about to ensure that a process improvement can be implemented to prevent future breaches.
  4. Ensure that any loss to the fund due to adverse market movements/trading costs are reimbursed.

In the event there are continual breaches by the same manager, LGS may look to terminate their mandate.

06.3. Additional information. [Optional]


(B) Implementation: Thematic

LEI 07. Types of sustainability thematic funds/mandates

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

07.2. Describe your organisation’s processes relating to sustainability themed funds. [Optional]

LGS has invested in several environmentally and socially themed funds across listed equities, property, private equity and infrastructure. These are all managed by external fund managers.

The environmentally and socially themed investments must meet all standard return and diligence thresholds. There is no question of trading off environmental or social return against financial return. Overall, LGS' environmentally and socially themed investments are fulfilling their investment objectives and have performed satisfactorily.

While the overall investment strategy is determined in house by LGS, external managers undertake on-going stock selection and portfolio management.


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the proportion of actively managed listed equity portfolios where E, S and G factors are systematically researched as part of your investment analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

We review all ESG factors across all sectors and companies for all listed equities in Australia and overseas.


LEI 09. Processes to ensure integration is based on robust analysis

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

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

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

09.6. Additional information. [Optional]


LEI 10. Aspects of analysis ESG information is integrated into

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

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

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

10.3. Describe how you integrate ESG information into portfolio weighting.

For our internally managed SRI Overlay, we use MSCI ESG Research to develop a list of suitable long companies, which relies on strong ESG ratings and performance with limited controversies.

10.6. Additional information. [OPTIONAL]


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