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First Sentier Investors (including First State Investments)

PRI reporting framework 2020

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Engagement

LEA 02. Reasoning for interaction on ESG issues

Indicate the method of engagement, giving reasons for the interaction.

Type of engagement

Reason for interaction

Individual / Internal staff engagements
Collaborative engagements
Service provider engagements

02.4. Additional information. [Optional]

Collaborative engagement opportunities are normally identified by the responsible investment team where either a firm-wide approach is taken (i.e. for engagement with regulators and industry bodies) or the opportunity is directed to the relevant investment teams for participation.

All of teams responded that they engage to influence corporate practice, five said to encourage more/improved disclosure and to understand ESG strategy / management.

Stewart Investors stated that all engagement activities are conducted by them. They do not utilise the services of third-party service providers for engagement purposes.

The FSSA team commented: As part of our belief that ESG inclusion is a natural extension of our investment process, we maintain that it is the duty of every investment team member to incorporate ESG into all company analysis, decision-making and engagement. We take our ownership responsibilities seriously and frequently engage with companies where we have material concerns over quality, be it governance matters or their approach to environmental and social issues. Engagement has always been core to our investment strategy as an important way to reduce the risk in our portfolios and better analyse long-term investment potential. A company’s response to the issues we raise provide us with valuable insights into the quality of management. Integrity, attitude to risk and foresight are just some of the traits which are often unearthed when prompted by the right questions.

We do, however, recognise the benefits of collaboration and are constantly looking for ways to improve and refine our process. To this end, we utilise additional support from First State Investments / First Sentier Investments (FSI) and, where appropriate, will work with reputable external partners. Resources within FSI, such as the team of Responsible Investment (RI) Specialists, the Global Investment Committee and the Climate Change Working Group, allow us to pool information and participate in wider discussions regarding engagement, ESG integration, and reporting. Our team has also benefited from working with specialist external ESG consultants, who have helped to expand on our understanding of materiality to ensure that our engagement is focused and actionable.

 


LEA 03. Process for identifying and prioritising engagement activities

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

03.1. Indicate whether your organisation has a formal process for identifying and prioritising engagements.

Indicate the criteria used to identify and prioritise engagements for each type of engagement.
Type of engagement
Criteria used to identify/prioritise engagements
Individual / Internal staff engagements

Individual / Internal staff engagements

Collaborative engagements

Collaborative engagements

03.3. Additional information. [Optional]

Of the seven actively managed investment teams (including a range of asset classes, regions and sector focused portfolios) who regularly engage with companies:

1) Individual / Internal staff engagements

All seven engage based on the materiality of the ESG issue, Responses to ESG impacts that have already occurred, Follow-up from a voting decision.
Five in Response to ESG impacts that have already occurred.
Five engage in response to Client request.

2) Collaborative engagements

All seven teams prioritise collaborative engagements based on the Ability to have greater impact on ESG issues and the materiality of the ESG issue.

Six engage for the Ability to add value to the collaboration.
Five engage based on Exposure (size of holdings) to companies targeted by the collaboration, Responses to ESG impacts addressed by the collaboration that have already occurred and to Follow-up from a voting decision.

 


LEA 04. Objectives for engagement activities

New selection options have been added to this indicator. Please review your prefilled responses carefully.
Indicate whether you define specific objectives for your organisation’s engagement activities.
Individual / Internal staff engagements
Collaborative engagements

04.2. Additional information. [Optional]

Each team has its own process for setting objectives and monitoring engagements with all teams either doing one or more of the following:

Maintaining a company meeting database
Incorporating engagement outcomes in stock notes
Discussing engagements in regular team meetings

When surveyed teams responded as follows for these questions:

Four teams set objectives for all engagements, remaining three teams set objectives for the majority of engagements.


LEA 05. Process for identifying and prioritising collaborative engagement

Indicate whether you monitor and/or review engagement outcomes.
Individual / Internal staff engagements
Collaborative engagements
Indicate whether you do any of the following to monitor and/or review the progress of engagement activities.
Individual / Internal staff engagements
Collaborative engagements

05.3. Additional information. [Optional]

When evaluating collaborative engagements we consider whether the company has changed the practice in question or whether it has provided sufficient information to reassure us that the issue is being adequately managed. We also consider whether the process has added to our understanding of the industry, companies or issues in question.
When agreeing to participate in a collaborative engagement the relevant investment team undertakes to follow up with the company in individual meetings and to monitor progress. We have been concerned that letter writing campaigns without individual investor follow-up may ultimately undermine the effectiveness of collaborative engagements.


5.2
6 teams revisit and revise objectives on a continuous basis.
5 teams set milestones for objectives and monitor progress against defined milestones, track and monitor progress against defined objectives and KPIs, and track the progress of action when the original objectives are not met.


For example, the following teams responded:
Stewart Investors: We are long-term investors and see engagement as a continuous process. For engagement to work we believe it must be based on trust, longevity and ongoing open dialogue. Our engagement with companies takes place against a backdrop of a long-term relationship with the company and our process of questioning can take years. 
We continually monitor investee companies to understand any changes to their strategies, relevant sector or market related changes and impacts, and movements in their share prices. We do this by meeting companies, visiting their offices and retesting our investment case. Through this monitoring and more formal reviews we identify further areas for engagement and progress on key issues we have engaged on in the past.

FSSA: We continually monitor investee companies to understand any changes to their strategies, relevant sector or market related changes and impacts, and movements in their share prices. We do this by meeting companies, visiting their offices and retesting our investment case. Through this monitoring and more formal reviews we identify further areas for engagement and progress on key issues we have engaged on in the past.

Australian Small Companies: We identify material issues through internal reflection, company disclosure, third-party resources and most importantly, meetings with management. Issues raised are considered at every stage of our research and engagement process; and our actions and the company’s responses are recorded to measure progress.
Controversies and areas of concern are recorded in a central log which is reviewed weekly. We are building a database which consolidates our pervious engagement, material issues, company performance and examples of industry best practice for each company. With this information, we aim to improve the quality of our research, strengthen relationships with management and increase the efficacy and impact of our engagement.


LEA 06. Role in engagement process

06.1. Indicate whether your organisation has an escalation strategy when engagements are unsuccessful.

06.2. Indicate the escalation strategies used at your organisation following unsuccessful engagements.

06.3. Additional information. [Optional]

Five of our teams use a combination of: "Divestment", "Reducing Exposure", "Voting against re-election of relevant directors" and "Voting against the board of directors or the annual financial report"
Three teams Collaborating with other investors.
Two teams Submitting nominations for election to the board.
In general, because engagement is embedded in our investment process, engagement dialogue is an ongoing process. Therefore success criteria are not necessarily tied to individual interventions that can be easily deemed successful or unsuccessful.  


For example, the following teams responded:
Stewart Investors: We are long-term investors and see engagement as a continuous process. Our engagement process reinforces the imperative that our long-term investments should be a multi-faceted partnership between a company and every one of its stakeholders and we all have an active role to play in that relationship. 
If we feel that management have not sufficiently addressed the problem, then at that stage we might take the more extreme measure of engaging the board with the goal of providing pressure on the management. This could take the same forms of phone calls, face to face meetings or even a letter. At this stage we would hope that the board shares our concerns and pressures management. If the board doesn’t share our concerns then it can mean one of two things:  
1) We have misunderstood the issue; or  
2) We have misjudged the quality of governance. 
At this stage there are few avenues that are left open to us. We can vote against resolutions regarding reappointment of board members or against granting certain rights with a clear explanation to the company as to why we have decided to vote against them (we don’t take voting against a company lightly). At that point, if we still consider the initial risk to be materially damaging to one or more of the three pillars of our investment case, then we would be pushed to sell shares.

FSSA: In instances where we might be unsuccessful in our engagement, or management fail to alleviate our concerns due to an underwhelming response, questions are inevitably raised regarding the management’s approach to stewardship. We are willing to divest (and have done in the past), but it is usually the last resort. We place tremendous value on our right to vote and devote substantial time and resources to make informed judgements. It is the responsibility of investment analysts and portfolio managers to formulate our stance. We seek to vote on all possible resolutions at company meetings and where we are inclined to vote against management, engagement will always precede any controversial voting action.

GLIS: Firstly, the listed infrastructure team raises issues in meetings with company management, in order to put our view across and to understand the situation from the company’s perspective. 
If we don’t see change, we will then contact the Board, for example by writing a formal letter, outlining our concerns. 
If we feel that our concerns are still not being addressed, we may vote against the company via proxy shareholder voting. 
In instances where management does not respond adequately to engagement, this may impact negatively on our ranking of the stock, which could result in our divesting ownership. We view this approach as being an important element of our fiduciary responsibilities.

Australian Equities Growth and Equity Income: the Australian Equity Growth team’s rigorous ESG scoring system lays the foundation of their engagement escalation strategy. They are more likely to invest in those companies whose management they have already identified as being open to engagement on ESG risks.
They then assess how companies are managing ESG issues and, where necessary, encourage the entities in which they invest to improve their ESG performance and disclosure practices through active dialogue with many boards and senior company management. They try to gain comfort that the company’s senior management and board are aware of, and accountable for, the management of material ESG issues. Material issues that are not being appropriately addressed are then escalated to proxy voting, investment decisions and ultimately divestment.


LEA 07. Share insights from engagements with internal/external managers

07.1. Indicate whether insights gained from your organisation`s engagements are shared with investment decision-makers.

Type of engagement

Insights shared

Individual / Internal staff engagements

Collaborative engagements

07.2. Indicate the practices used to ensure that information and insights gained through engagements are shared with investment decision-makers.

07.3. Indicate whether insights gained from your organisation’s engagements are shared with your clients/beneficiaries.

Type of engagement

Insights shared

Individual/Internal staff engagements

Collaborative engagements

07.4. Additional information. [Optional]

ESG engagement and proxy voting is performed by the relevant analysts and portfolio managers not by a separate team. As a result, analysis of ESG issues which can influence an investment decisions can also influence engagement and proxy voting activities or visa-versa. We strongly believe this integrated approach to company analysis and stewardship is critical for the full and consistent application of responsible investment principles within each team. 
For collaborative engagements, progress is incorporated by the team(s) involved, however we only share the information with other teams where we believe the engagement is relevant to them. 
Proxy voting records are published and engagement case studies are shared on our website. Over 130 examples from across the organisation are provided in our interactive case study map: https://www.cfsgam.com.au/au/en/institutional/about-us/responsible-investment/responsible-investment-case-studies.html  
Investment teams regularly share engagement insights with clients, both formally and informally. For example, the Stewart Investors Sustainable Funds Group team produce an engagement booklet which is shared with clients.

 

 


LEA 08. Tracking number of engagements

08.1. Indicate whether you track the number of your engagement activities.

Type of engagement
Tracking engagements
Individual/Internal staff engagements​

Collaborative engagements

08.2. Additional information. [Optional]

In terms of tracking individual engagements, five teams track the number of engagements in full and three teams partly tracks the number of engagements.

In many cases engagement occurs as part of the ongoing relationship with companies that can take years to develop. For the most part ESG meetings are not held separately to meetings discussing the financial performance of the company and so for some teams narrowing engagements to ESG related interactions is difficult. 

Each team has its own process for monitoring engagements with all teams either doing one or more of the following:

  • Maintaining a company meeting database
  • Incorporating engagement outcomes in stock notes
  • Discussing engagements in regular team meetings.

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