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First Sentier Investors (including First State Investments)

PRI reporting framework 2020

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Outputs and outcomes

LEA 09. Number of companies engaged with, intensity of engagement and effort

Indicate the proportion of companies in your listed equities portfolio with which your organisation engaged during the reporting year.
We did not complete any engagements in the reporting year.

Number of companies engaged

(avoid double counting, see explanatory notes)

Proportion of companies engaged with, out of total listed equities portfolio

Individual / Internal staff engagements

2118
51

Collaborative engagements

164
4

09.2. Indicate the breakdown of engagements conducted within the reporting year by the number of interactions (including interactions made on your behalf).

No. of interactions with a company
% of engagements
One interaction
2 to 3 interactions
More than 3 interactions
Total
100%

09.3. Indicate the percentage of your collaborative engagements in which you were the leading organisation during the reporting year.

Type of engagement

% leading role
  Collaborative engagements

09.5. Additional information. [Optional]

For most teams company meetings form part of an ongoing and long-term relationship with the companies invested in making individual instances of engagement difficult to isolate.  

Our Stewart Investors team noted:

09.1 – This may include engagement with the same company more than once. We do not have the granularity of data to complete this further.
We consider every interaction with a company to be a form of engagement. We believe every company meeting gives us the opportunity to build relationships and engage if we feel it is necessary. Given our long-term approach (3-to-5 year view), company meetings may also flag potential future engagement topics. In 2019 we held c.1500 meeting with companies. 
The 76% quoted for individual engagement of the proportion of companies engaged with, out of total listed equities portfolio relates to meetings only which understates our level of engagement. This does not take into account other forms of engagement such as letters and telephone calls. 
Currently, we cannot provide any further granularity to this number.

Our global listed infrastructure investment team noted:

Over the 12 months to 31 December 2019, the global listed infrastructure investment team engaged with companies on ESG-specific topics many times. On 17 occasions, sustainability-related issues formed a substantial part of the main topic of discussion.  Key issues discussed included: 
• Management succession planning
• Board composition and experience
• Board tenure and independence
• Remuneration – targets set for both financial and non-financial KPIs
• Board diversity
• Capital management
• Auditor independence
• Alignment of interests
• Meeting a 2 Degree Scenario
• Levelised cost of renewable technologies
• Evolution of the competitive landscape, and renewable deployment opportunities globally
• Ways to support the further development of renewables, including government subsidies and bill impact
• Technological innovation – batteries, decentralised grids, electric vehicles, assessment of water quality
• Disruption
• Net Zero
• Health and safety
• Customer satisfaction and customer solutions
• Implications of higher customer rates / charges
• Stakeholder engagement for environmental asset siting (eg building new roads, pipelines etc)

Our Australian Equity Growth/ Equity Income team noted:

Over the 12 months to 31 December 2019, the Australian Equities Growth team had 307 engagements across 96 companies. Of these we had 32 meetings directly on ESG issues across 19 companies. 

 

 

 


LEA 10. Engagement methods

10.1. Indicate which of the following your engagement involved.

10.2. Additional information. [Optional]


LEA 11. Examples of ESG engagements

11.1. Provide examples of the engagements that your organisation or your service provider carried out during the reporting year.

ESG Topic
Deforestation
Conducted by
Objectives

Team: Stewart Investors
Objective: To encourage the companies we invest in, our clients and the broader industry to join the movement to a zero-deforestation future. 

Scope and Process

We wrote to 20 of our most exposed companies we invest in asking them to disclose the following information (taken from the CDP Forest questionnaire) in support of their deforestation commitments:
·Percent of total production/consumption covered by commitment.
·Percent of total production/consumption volume traceable; point to which commodity is traceable.
·Whether the company specifies any sustainable production/procurement standards for its disclosed commodity(ies), other than third-party certification? And to indicate the percentage of production/consumption covered if it monitors supplier compliance with these standards.
In addition, we ask companies to show greater ambition in terms of deforestation, engage with the large trading companies who dominate deforestation-linked soft commodities, and to review industry group memberships to ensure alignment on deforestation.
We invited our clients to join this engagement.
Of the 20 companies we wrote to, we received high quality responses from 9. This engagement is ongoing.

 

Outcomes
ESG Topic
Diversity
Conducted by
Objectives

Team: Stewart Investors
Objectives: Engaging with the top 10 companies we invest in on addressing gender diversity
In 2019, we commissioned a research project with the University of Technology (UTS) in Sydney to compile a set of recruitment and retention policies that have been implemented across geographies, industries, and organisations and can be tied to tangible improvements in diversity outcomes. This report, entitled Improving Gender Diversity lays out a list of 13 tools that have been successfully used to recruit and retain women in organisations. 
These policies of course might not be comprehensive solutions nor might they be of relevance to all organisations, and we are not advocating for adoption each and every one of them. We simply hope that they will spur further conversation within organisations to think more deeply about recruitment and retention of talent, and new measures that may be taken to make institutions more inclusive. 

Scope and Process

We sent this report to the top 10 companies we hold on clients behalf. Most responded, agreeing that diversity of thought is critically important, and addressing gender diversity essential. Interesting examples of what these companies were able to achieve include:

An IT services provider that was able to open an all-women Business Processing Services centre in Riyadh, employing over 1,000 women, of whom 85% are Saudi nationals. With multiple other examples of initiatives taken to retain women within the broader organisation, they have been able to keep the attrition rate for women at the same level as the overall attrition rate – unique within the IT services industry.

A company in the auto & farm sector that could ensure that a minimum of 30% of new hires in ‘core’ roles of engineering, R&D, sales, and manufacturing were women, by changing the incentive structure for their recruitment consultants, providing higher consultancy fees and referral bonuses for every female candidate shortlisted.

While the companies we have written to are making changes to address diversity, we remain concerned that they are not moving as fast as they should. In the coming few months, we plan to continue our dialogues with these management teams. 

Outcomes
ESG Topic
Other

specify

          
        
Conducted by
Objectives

Team: Global Listed Infrastructure
Objectives:
Dominion Energy’s investment program includes the construction of the Atlantic Coast Pipeline, a gas pipeline which will run 970 kilometres between West Virginia and eastern North Carolina. The pipeline’s path crosses the Appalachian National Scenic Trail – a hiking trail which is home to four threatened and endangered species. 
In order to complete this section of the pipeline, the company requires a Biological Opinion, a permit issued by the Fish and Wildlife Service. Receiving this permit in a timely manner is key to enabling the company to begin construction of the pipeline during the tree felling season; and to avoiding significant delays and cost overruns. We wanted to better understand how Dominion are managing the necessary environmental permitting process. 

Scope and Process

We met with the company to discuss in detail the work that had been done so far on this front. For a Biological Opinion to be issued, Dominion must demonstrate that the pipeline will not jeopardise the continued existence of the vulnerable species in question; namely the rusty patched bumble bee, the northern long-eared bat, the clubshell mussel and the Madison Cave isopod (a rare species of freshwater crustacean). 
The company explained what the process involves. Their efforts thus far have focused primarily on the rusty patched bumble bee, as field surveys are needed to determine what effect the new pipeline may have upon this species. 
Outcomes we achieved / next steps
We better understood the substantial extent of the work required – and being carried out – in order to obtain this permit.  We will continue to monitor Dominion’s efforts on this front to ensure that they satisfy their environmental stewardship remit and that sufficient work is being carried out to enable the pipeline project to begin in a timely manner. Continued engagement on this issue will be needed. 

Outcomes
ESG Topic
Sustainability reporting
Conducted by
Objectives

Team: Global Listed Infrastructure
Objective: Improving sustainability reporting structure and transparency

Scope and Process

Transurban works hard to reduce its environmental impact, to mitigate the impact that noise and air pollution have on the people living near its roads. We identified lack of structured reporting on ESG issues, and needs for greater transparency on how remuneration is linked with individual performance.

Met with the chairman, CEO and group executives for Corporate Affairs and People & Culture. We also had discussions with KPMG, which conducted an external review of the company’s reporting. We made number of recommendations on their public reporting, including:

Integrated reporting of financial and sustainability reports

Reporting against the UN SDGs

More disclosure and history on individual KPIs

Published evidence of customer satisfaction and community engagement.

The latest annual corporate report takes a holistic approach by outlining how the company has performed for 6 stakeholder groups, including customers, employees and business partners. There are now detailed disclosures against the nine most relevant SDGs that become more meaningful once trends have had time to develop. The company has also provided detailed disclosure on individual KPIs of the CEO. There are a number of helpful examples of customer benefits and community engagement, which Transurban hopes to build on in coming years.

Outcomes
ESG Topic
Other governance
Conducted by
Objectives

Team: ​Global Listed Infrastructure
Objectives: In August 2019 reports emerged that pipeline operator Williams was considering the acquisition of smaller peer Noble Midstream. We failed to see the strategic rationale for deploying capital in such an acquisition; and did not believe that such a move would have been in the interests of minority shareholders. 
The acquisition would have implied a shift away from Williams’ current shareholder-friendly strategy (simplifying its corporate structure, rebasing its dividend, improving its balance sheet, and divesting its non-core assets) which is a core part of our thesis for owning the stock.

Scope and Process

We wrote to Williams’ executive team in order to clearly state our continued support for the company’s current strategic direction. We also expressed our concern that the cost of an acquisition would undo much of the good work that Williams has done over the past two years to reduce debt and strengthen its balance sheet. 
Outcomes we achieved / next steps
Since writing to them, the company has not engaged in any acquisition-related activity, other than consolidating some of its assets in the North-East of the US – a rational move which we believe was in the interests of shareholders. Williams remains on the path to becoming a leaner, more focused business. While we cannot claim to have changed the company’s course of action, we believe that our views were factored in to its decision-making process. 

Outcomes
ESG Topic
Executive Remuneration
Conducted by
Objectives

Team: Australian Equities Growth
Objectives: changes to remuneration structure

Scope and Process

Over the past 4 years, we have been engaging with the Goodman Group (GMG) Chairman and the Director in charge of remuneration committee over the level of remuneration for the CEO and the methodology used.  

On October 2019 Goodman disclosed the following changes to FY20 remuneration:          

25% of long-term incentive performance rights will be issued if 6%pa EPS growth is achieved over next 3 years. 100% of performance rights will vest if 9%pa EPS growth is achieved over this time. GMG has removed the “cliff vesting” whereby all rights vest at a particular growth rate.        

The number of performance rights to be issued to the CEO has been adjusted, resulting in a 20% reduction.

We welcome these changes as a sign that the GMG board was prepared to respond to concerns voiced by the market at the 2018 AGM.     

We remain concerned, however, that Goodman continues to exclude security based payments from operating earnings. It has continued with its own method of calculating diluted earnings per share. We have highlighted to GMG the fact that comparable companies include Security Based Payments when calculating diluted EPS, also our concern that these expenses now represent more than 50% of employee costs.

Outcomes
ESG Topic
Executive Remuneration|General ESG|Shareholder rights
Conducted by
Objectives

Team: Australian Equities Growth 
Objectives:
Challenge: Afterpay’s poor track record of corporate governance. As well as a lack of Board independence, the company failed to provide appropriate disclosure on:-
1.     executive pay;
2.     shareholder dilution from employee equity plans; and 
3.     regulatory risk related to AUSTRAC before a capital raising and management sell-down

Scope and Process

Meetings with the then company Executive Chairman.
Outcomes: 
Following our engagement, Afterpay rapidly made changes from the Board to management level (Independent Chairman appointed, Group Head resigned), and improved the transparency on management and employee incentive plans. The company’s commendable turnaround on these corporate governance issues led to the team further adding to our position in the stock, having confidence in the company’s growing professionalism and transparency.

Outcomes
ESG Topic
Pollution|General ESG|Diversity|Water risks
Conducted by
Objectives

Team: Australian Equities Growth, Equity Income
Objectives: Address risks associated with Rio Tinto’s:-
1.     reduced female board representation; 
2.     GHG emissions; and
3.     water efficiency on operational sites

Scope and Process

Meetings with company Chairman
Outcomes: 
1.       Reduced Female Board Representation. 
After the departure of Moya Green in June 2019, Rio were left with 1 female representative, Megan Clark. Since that time they have added 3 high quality female directors including Hinda Gharbi, Jennifer Nason and Ngaire Woods. This takes current female board representation to 33%.
2.       GHG Emissions
We discussed the company’s plan to adopt longer term GHG emissions reduction targets. Their ten year GHG emission reduction targets were subsequently released in February 2020
3.     Water efficiency on operational sites
We expressed a desire to see longer term goals on water efficiency for the operational sites. The company has subsequently redesigned their water targets for 2019-2023 to comprise one Group target and six site based local targets, but are yet to provide details on permitted surface water allocation volumes, annual allocation usage and the associated surface water allocation catchment rainfall runoff volume estimates. We would like to see these details released earlier and will continue to share our views with the company.

Outcomes
ESG Topic
Executive Remuneration
Conducted by
Objectives

Team: Australian Small Companies
To help achieve best-practice remuneration structures.

Scope and Process

Senior management from Iress approached the Small Companies team prior to the implementation of revised long-term incentive plans. Iress wanted to engage with the team on the structure of the plans and to receive feedback. We welcomed the opportunity to engage on this issue and held lengthy discussions with Iress to help align interests between management and stakeholders.
Outcome
Through collaboration we contributed to the development of effective long term incentive structures for senior executives. This helped foster alignment and ensured appropriate stewardship accountabilities towards stakeholders and the future of the businesses. Iress continues to be an overweight position in our portfolios.

Outcomes
ESG Topic
Health and Safety|Labour practices and supply chain management
Conducted by
Objectives

Team: Australian Small Companies
Objective: To encourage best-practice disclosure for listed companies 

Scope and Process

In September 2019, Independence Group (IGO) posted an ASX Release, advising that a fatality had occurred at its Nova Operation. The incident involved an employee of IGO’s concentrate haulage contractor. We take safety incidents very seriously and had constructive engagement with IGO’s Company Secretary on the matter.
We undertook further research and it transpired that the haulage contractor involved was ASX-listed Qube Logistics, which was an overweight holding in our mid-cap portfolio at the time. Unlike IGO, Qube had not made a public announcement in relation to the incident. We engaged with the Director of Corporate Affairs at Qube to gain an understanding of why they had not deemed it necessary to make an ASX announcement. 
Outcome
Following our engagement with Qube we remained dissatisfied with the poor accountability and the absence of an ASX announcement. We subsequently reduced our holdings and no longer hold an overweight position. We maintain an overweight holding in Independence Group.

Outcomes

11.2. Additional information. [Optional]

In our annual RI and Stewardship Report each team provides engagement and ESG integration examples. These examples are featured on an interactive case study map which includes over 130 case studies from the last three years. 

https://www.firststateinvestments.com/global/responsible-investment/responsible-investment-case-studies.html 


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