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First Sentier Investors (including First State Investments)

PRI reporting framework 2020

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Post-investment (monitoring and active ownership)

Overview

INF 11. ESG issues in post-investment activities

11.1. Indicate whether your organisation and/or operators consider ESG issues in post-investment activities relating to your infrastructure assets.

11.2. Indicate how your organisation, and/or operators, considers ESG issues in the following post-investment activities relating to your infrastructure assets.

          We consider ESG issues in our buy/sell/hold decision-making
        

11.3. Describe how your organisation, and/or operators, considers ESG issues in post-investment activities related to your infrastructure investments. [Optional]

The Boards of our infrastructure investments provide governance and oversight of management in setting meaningful and appropriate ESG targets for their annual performance scorecards.

Please refer to the ESG statement and the Minimum Standards mentioned in INF 01.1. These targets are monitored on an ongoing basis and form part of Board and other reporting such as monthly, quarterly and annual reports. KPIs are part of scorecards and management compensation may be impacted by the achievement of the ESG targets. In addition to this we also monitor ESG issues at our investee companies through a ‘ESG Questionnaire’ which is sent to each business, for us to collect and monitor relevant data on a range of ESG issues including staff diversity, workplace safety in operations, emissions, resource use, etc.

We aim for all of our investee companies to have an articulated sustainability strategy or framework. This can take a variety of forms, as relevant for each particular business. These frameworks will need to reflect our minimum standards and may use SDGs to define long term targets and other relevant best practice approaches. The company’s sustainability strategy then defines the business approach to operations and maintenance and ensures ESG issues are embedded across the organisation. In most instances, the way our investee companies act in relation to ongoing operations and maintenance etc. is governed by legal and regulatory national or international framework which are reflected on the company’s internal set of comprehensive policies. However, depending on jurisdiction, policy settings will need to be complemented and reflect various ESG issues that are material to the respective company. This might include processes around ensuring safety in high-risk areas, or considerations around low-carbon maintenance options. These policy settings at the company-level will be subject to the oversight and direction of the Board of directors, on which our investment professionals sit. Stakeholder engagement is vital to an infrastructure business’ social licence to operate and our portfolio companies all include this as part of their business and strategic planning.

Our regular quarterly asset management reviews provide a valuable platform for ESG considerations. We use these not only to monitor a range of ESG metrics, benchmarks and performance around discrete initiatives, but also to consider the buy/sell/hold decision. We maintain this discipline around our investment horizon for each asset. As an example, in respect of one of our regulated utilities, our forward-looking view of its governance and regulatory environment, amongst other things, informed our recent decision to divest our interests in that asset.


Infrastructure Monitoring and Operations

INF 12. Proportion of assets with ESG performance targets

12.1. Indicate the proportion of infrastructure assets for which your organisation and/or operators included ESG performance in investment monitoring during the reporting year.

 (in terms of number of infrastructure assets)

12.2. Indicate ESG issues for which your organisation, and/or operators, typically sets and monitors targets (KPIs or similar) and provide examples per issue.

List up to three example targets per issue

          Emissions / Carbon targets
        
          Resource use
        
          Energy use
        

List up to three example targets per issue

          Health and safety record (Lost time frequency and severity rates) and zero accident targets
        
          Gender balance
        
          Community engagement (including satisfaction and complaints)
        

List up to three example targets per issue

          Board structure (including diversity and independence)
        
          Performance incentives
        
          Reporting and transparency
        

12.3. Additional information. [Optional]

As noted above, we conduct an annual ESG Questionnaire for every one of our investee companies, and we also conduct regular quarterly asset management reviews for each business in the portfolio. These two mechanisms provide a broad reaching platform to monitor ESG metrics and targets. For example, our questionnaire includes data on staff diversity, workplace safety and emissions. Also captured are statistics on alignment with our Five minimum standards as well as UN PRI aspects. There is also scope within the questionnaire for monitoring and reporting against specific ESG metrics that are uniquely relevant to that particular business. The questionnaire, as well as the asset management reviews, also provide a ‘check-in’ on specific initiatives and targets, as well as assessment of compliance with a variety of governance touch points and items, such as Board composition and necessary policy setting.

A further area for monitoring ESG metrics, KPIs and targets is at Board level. Typically, Board meetings are held monthly or quarterly. Board reporting includes scorecards with ESG components. The scorecards include a mix of industry-based standards, which are fairly well developed in the OECD markets in which we operate, and internally generated standards or KPIs, which may be applied to the management team by investors. These standards and scorecards are tracked by management and monitored by the Board (and the independent bodies or certifying associations, as relevant). Our businesses monitor and report against safety metrics and have zero accident targets, in accordance with our Minimum standards. Others have social and governance targets around things like response and repair times in the event of a fault – these are all monitored and reported as necessary.

Other metrics are developed over time, such as gender balance within the workforce. Issues such as these are typically reported on to the Board of each business annually. Other ESG topics can play out more slowly, but are nonetheless monitored closely. For example, considering Board composition with an in-depth Board and governance review may only occur when there is significant change at the Board or otherwise typically annually or every two years.

We aim for all of our portfolio companies to be industry leaders and to implement best practice standards and procedures into their operations. Many of our businesses have ambitious ESG targets. For example, Anglian Water Group has significant carbon reduction targets over time, and Brisbane Airport has recently announced new public targets across emissions, energy, water and waste, including a 50% reduction in scope 1 and 2 emissions by 2030. Nordion, our gas networks in Sweden promote and support the national roadmap to become carbon neutral and to replace natural gas in the system by green gas.

Ongoing management of ESG issues, as with all risks and opportunities that go to value, are considered by our investment team on an ongoing basis. Where changes are required, this can involve action plans for exploiting an opportunity, remedial work to mitigate a risk, or ultimately a divestment if exit is considered the most valuable option.

Finally, our investee companies themselves often take to specific monitoring and reporting of ESG issues, either to the public or relevant stakeholders, such as regulators. For example, many of our investee companies produce and publish standalone sustainability reports, some (such as Adelaide Airport) address sustainability report by way of an Integrated Report. Others, like our Australian airports, produced cyclical Master Planning documents, which include several ESG topics such as environmental sustainability integrated into the master plan, which is then subject to public review and comment.


INF 13. Proportion of portfolio companies with ESG/sustainability policy

13.1. Indicate whether you track the proportion of your infrastructure investees that have an ESG/sustainability-related policy (or similar guidelines).

13.2. Indicate the proportion of your infrastructure investees that have an ESG/sustainability-related policy (or similar guidelines).

(in terms of number of infrastructure investees)

13.3. Describe how your organisation, and/or your operators, contribute to the infrastructure investees’ management of ESG issues. [Optional]

We take a very pro-active role in engaging in various activities to promote and contribute to development of ESG initiatives.

Our investment strategy is to manage a large, in many cases 100% interest in each individual business. By having board representation and/or a majority ownership we are able to closely monitor ESG performance and drive the necessary initiatives if they are found to be lacking via Board and Board committee representations and through direct interaction with management team.

Our team members have a variety of backgrounds and expertise. Some members have relevant industry and operational experience, whilst others have a financial or legal background. The background and experience of the team members is reflected in the allocation of Board membership and support tasks, thus allowing for active involvement and support of the management teams where ESG is concerned.

Our involvement is both formal (e.g. governance and reporting) and informal (e.g. regular engagement with the management teams, visits with the front line).

Formal monitoring 

Our nominee Board directors are active in directing and supporting the management teams of each asset towards an ESG-focused approach. This is typically achieved through strategic direction, policy settings (including ensuring that each business has an ESG or Sustainability related policy or policies), business case approvals, setting of Key Performance Indicators and Company Scorecards. The Board will also typically require regular reporting against measurable metrics, including reporting on all our Minimum Standards. Our team members are involved in various governance bodies at each portfolio company and drive the development of ESG targets that are aligned with management scorecards and incentive KPIs.

Examples of the types of reporting requested include:

  • Environmental and social risks impacting materially on earnings, including contingent liabilities.
  • Governance policies and procedures for assuring compliance with internal ESG policies, improving performance and mitigating risks across operations, the supply chain and products and services.
  • Human capital processes including: retention programs; workplace health and safety performance; staff satisfaction and turnover; succession planning; and training and development programs.
  • Performance reporting on measurable environmental factors, for example: energy use; water use; consumption items; and greenhouse gas and other emissions.
  • Customer satisfaction, quality of service, stakeholder management.

In addition, executive and company scorecards are developed to ensure the alignment of compensation of management teams with the achievement of ESG targets.

After each acquisition we design an individual asset management plan to develop and improve the businesses ESG standards within defined timeframes. We believe that ESG requires strong leadership from the top and a clear picture of shareholder expectations. We focus on key themes for the early stage of implementation and develop key initiatives through active Board management and involvement of the executive management. Over time we believe that cultural change within the companies can be achieved in order to foster creativity and drive innovation, which leads to continual improvement and ultimately to sustainable real returns. Some practical ways we catalyse the ESG components of our acquisition strategy or ongoing asset management strategy is through our Minimum standards, our ESG Toolkit, and the SDG framework. We use these to communicate expectations from our investment team and Board members through to executive management and ultimately all staff within the organisation to develop the culture around ESG and sustainability.

The list below highlights a few key elements of how we manage ESG at a company level:

Governance

  • Board level committees and risk workshops.
  • Reporting of ESG issues at every Board meeting.
  • Risk registers including safety, environment and carbon management.
  • Remuneration programs – such as salaries, bonuses and long-term incentive plans – for senior executives including the Chief Executive include appropriate mechanisms to incentivise sustainable business planning and proper business conduct.

Environmental and Safety

  • Program to implement or retain international standards and sector relevant accreditations.
  • Encourage climate change adaptation planning and emissions reductions targets.
  • Dedicated safety managers to implement and share best practice.
  • All serious environment and safety issues are escalated to Boards and reviewed at the highest level. Learnings from all environment and safety issues form part of a continuous improvement system.
  • Implement zero accident targets and create environment to reach these targets.

Scorecard and reporting

  • Executive and company scorecards aligned to achievement of safety, environment and customer targets.
  • Reporting and monitoring of operating statistics including health and safety, customer satisfaction and environmental impacts at Board level.

Informal monitoring

Our asset managers regularly meet with the companies’ management teams outside of the Board meetings to discuss all relevant matters, which includes ESG issues. This direct involvement provides the opportunity to drive cultural change, to set ESG standards and KPIs, and allows a two-way conversation between management and Investors to ensure alignment on long-term value creation and protection. We regularly convene workshops and committees to undertake deep-dive analysis and debate opportunities and new initiatives. In our capacity as shareholder we also visit business sites and meet with front line staff to determine understanding, engagement with and adherence to ESG.

Portfolio management

Another avenue available to us to contribute to investee companies' management of ESG issues is to take advantage of our role as manager of a portfolio of businesses. We are able to facilitate cross-fertilisation of ideas and techniques across different businesses. This may involve initiatives such as workshops directly between management staff of different businesses within our portfolio, or it may be in a more indirect manner, with our investment staff learning from their experiences in one investee company and applying those lessons learned to other businesses for effective management of ESG and other issues. These cross learnings may occur between businesses in the same sector - for example, amongst our various electricity distribution businesses; or between similar businesses - for example, between a regulated water utility and a regulated gas utility; or between businesses from different sectors - for example, between an airport and water utility.


INF 14. Type and frequency of reports received from investees

14.1. Indicate the type and frequency of reports you request and/or receive from infrastructure investees covering ESG issues.

Type of Reporting

Typical reporting frequency

Typical reporting frequency

          Ad hoc
        

Typical reporting frequency

14.2. Additional information.

By having Board representation on the portfolio companies in which we invest, we drive the development of comprehensive Board information that allows oversight of significant ESG initiatives, including specific performance data against ESG targets (see question 'INF 12' and INF 01.1 for Minimum Standards). For example, companies report on energy and water use, embodied carbon reduction performance, safety performance, pollution and other environment compliance outcomes, customer satisfaction data, service level statistics and other targets as set by the Board. Specific issues, such as health and safety, are typically part of the normal Board reporting cycle, which is usually monthly or quarterly. As a significant shareholder with Board representation we are also included in ad hoc or incident reporting procedures of the companies.

Broader ESG reporting is typically annual or semi-annual. As part of our governance approach we usually establish and actively participate in relevant Board sub-committees; for example, an Environmental, Health & Safety committee. These committees meet on a regular basis to discuss particular topics in a more detailed way. To determine the format of ESG reporting we frequently refer to guidelines and recommendations (for example those given by IFC / World Bank, and Greenhouse gas protocol.) with respect to the relevant sectors, but also to those required by national or international associations which issue certifications and accreditations.

Annual reporting from our companies also provides summary outcomes of ESG performance available to a broader stakeholder audience. Most of our portfolio companies, for example, produce a sustainability or ESG report in addition to the required financial reports (for example, the Brisbane Airport Sustainability Report, which is produced in accordance with the Global Reporting Initiative). More frequently we see our portfolio companies preparing integrated annual reports which combine financial and sustainability reporting, thus demonstrating the importance of sustainability for the financial performance of the business. We also survey all of our investee companies on standardised criteria for the publication of our fund ESG Reports and as noted above, we conduct an annual ESG Questionnaire for each of our businesses. The questionnaire is wide-reaching and covers standard as well as specific ESG metrics and reporting.  Furthermore, we are currently preparing to report on Climate Risk to become compliant with the TCFD.


Infrastructure Maintenance

INF 15. Proportion of maintenance projects where ESG issues were considered

15.1. Indicate the proportion of active infrastructure maintenance projects where ESG issues have been considered.

(in terms of number of active maintenance projects)

15.2. Describe your approach to ESG considerations for infrastructure maintenance projects. [Optional]

Major and ongoing maintenance forms a large part of the expenditure line for most infrastructure businesses. As such it is an area where there is significant scope for driving value. As highlighted in the responses to earlier questions, we have an active approach to managing, monitoring and reporting on ESG matters across our entire infrastructure portfolio; ESG is an integral part of everything we and our companies do, as such the consideration and monitoring of ESG issues in major maintenance projects is part of this approach.

The drivers for ESG considerations include aspects such as:

  • Proven economic benefit (makes good business sense), including whole of life optimisation between capital and operating expenditures;
  • Focus on sustainability to drive operational efficiencies;
  • Reduction or avoidance of greenhouse gas emissions;
  • Reduction of noise
  • Mitigation of climate change effects (rising seawater levels etc.) drives investments to secure asset's sustainability;
  • Compliance with existing regulation (noting that many of our portfolio infrastructure businesses operate in the jurisdictions that have some of the highest standards with respect to environmental regulation in the world);
  • Targeting zero accident safety management in all works performed by staff and contractors (particularly relevant to maintenance projects of infrastructure assets, which are often high-risk engagements);
  • Leading the implementation of ESG considerations increases the resilience against changes in regulation; and
  • Investors looking for responsible and sustainably managed investments.

Management teams within our portfolio companies are incentivised to target ESG-specific initiatives which move the company towards the top of their industry. As such the ESG targets shape every part of the business: from how the company procures its services; manages its supply chains; and down to treatment of the natural resources it exploits.

Contractors' compliance with portfolio companies ESG targets is controlled through setting up procurement processes. These processes are either guided by procurement laws or companies will have a procurement policy in place which considers ESG factors

The long term ownership of portfolio assets allows for long term procurement strategies, which help suppliers and manufacturers to optimise their processes, produce more efficiently and reduce costs. This allows for economic outperformance of capex plans which in turn will benefit customers through lower cost for the services provided.

Another focus has been on full life cycle ESG impacts and managing the individual assets over their whole life. This may or may not involve a higher upfront cost (asset replacement vs maintenance), but delivers whole of life savings on things such as resource use (energy or water for example) and better environmental outcomes (such as reduced carbon output or embodied carbon).


Stakeholder engagement

INF 16. Proportion of stakeholders that were engaged with on ESG issues

16.1. Indicate which stakeholders your organisation, and/or operators, engaged with on ESG issues in relation to your infrastructure assets during the reporting year and what proportion of your investments they apply to.

Stakeholders engaged

Percentage of infrastructure assets these apply to

 (in terms of number of infrastructure assets)

Percentage of infrastructure assets these apply to

 (in terms of number of infrastructure assets)

          Supply chain contractors & adjacent businesses
        

Percentage of infrastructure assets these apply to

 (in terms of number of infrastructure assets)

          Government (non-regulatory arms) & Customers
        

Percentage of infrastructure assets these apply to

 (in terms of number of infrastructure assets)

16.2. Describe your approach to stakeholder engagements in relation to your infrastructure assets.

Each portfolio company generally has dedicated resources that engage with stakeholders on ESG issues and it is in almost all instances incorporated into line management key performance indicators. For example, the CEOs of our investee companies regularly present to community groups and engage directly with broader stakeholders including regulators and politicians on ESG issues. Many of our investee companies operate within a proscribed regulatory environment and as such, there are also dedicated staff for engagement with relevant regulators.

In many instances our portfolio companies have formal community engagement forums set up that provide communities with an opportunity to communicate directly with the senior management of the company about views they may have on the operation, growth and development of our assets. These engagement forums are either set up through open invitation or via formal regulator appointment mechanisms. Community engagement programs may be targeted (for example, in relation to a particular pipeline repair project); periodic (for example, our airport businesses undertake a five-yearly Master Plan process, which involves intensive community consultation); or be more regular and ongoing with a general or varying scope (for example, the ongoing community forums hosted by our storage terminals business).

We are also a member of, or engaged in, a number of forums that bring us in contact with various stakeholders in our investment space. This includes the Investor Group on Climate Change the Long Term Infrastructure Investors Association ("LTIIA"), Investment Leaders Group ("ILG") a project conceived by University of Cambridge and Global Infrastructure Investors Group ("GIIA").


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