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First Sentier Investors (including First State Investments)

PRI reporting framework 2020

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Outputs and outcomes

LEI 12. How ESG incorporation has influenced portfolio composition

12.1. Indicate how your ESG incorporation strategies have influenced the composition of your portfolio(s) or investment universe.

Describe any reduction in your starting investment universe or other effects.

There is a Company-wide exclusion screens on cluster munitions and land mines and manufactures of cigarettes and tobacco products.
Realindex comment: For specific clients, we exclude tobacco or other "red flag" companies. Within our passively managed portfolios, for specific clients, we exclude fossil fuel-related companies.
Stewart Investors comment: We do use our company analysis on ESG considerations to reduce our investment universe but this is not done through any formal or automated screening. The first part of our process could be described as starting with a blank sheet of paper to find high quality companies in which to invest. We do not cover thousands of companies in our universe. We look to find a small sub-set of attractive long-term investment ideas. The single most important step is to assess the overall quality of each company. We aim to identify and invest in those companies most likely to fulfil their long-term potential and avoid companies most likely to fall by the wayside over time. 
The Global Listed Infrastructure team  implement a formal screening process across their universe, with ESG as one of the variables. The process is fluid and results in reducing or increasing our investible universe at any given time.

Specify the percentage reduction (+/- 5%)

5 %

Describe any alteration to your investment universe or other effects.

​We have no written rules preventing us from researching any company, in any country or sector. The vast majority of companies fail our quality criteria but as bottom up investors, we don’t wish for any constraints on our investible universe.

Our Sustainable Funds Group (SFG) focus on long-term sustainable development as a key driver of the investment process. Their search for quality companies is heavily influenced by their thinking on the sustainable development challenges. The team invests in the shares of high quality companies that are well positioned to benefit from and contribute to the sustainable development of the countries in which they operate.          

SFG portfolios invest in companies they believe are particularly well positioned to deliver long-term returns in the face of the development challenges facing all countries.            

The team do not screen but they find it useful as a first step to classify potential investment opportunities into one of the three following categories:             

Sustainable goods and services - Provide products and services that have a positive impact on society and the environment,            

Responsible finance - Operate with trust and understand their license to operate   

Required infrastructure - Providing the required infrastructure to support long-term sustainable development.   

Select which of these effects followed your ESG integration.

Describe the influence on composition or other effects.

The ESG index used for the pasive portfolio is contructed by MSCI and screens out fossil fuels and other controversial companies which are consequently excluded from the portfolio.

12.2. Additional information.[Optional]


LEI 13. Examples of ESG issues that affected your investment view / performance

13.1. Provide examples of ESG factors that affected your investment view and/or performance during the reporting year.

ESG factor and explanation

(FSSA) Health and Safety - As the world’s largest pallet pooling company, Brambles is an inherent part of the circular economy and has been for over 60 years. However, there is no sign that Brambles is resting on its laurels. There are new initiatives, such as collaborating with customers to lower transportation costs and achieve efficiency gains, as well as a level of disclosure and reporting which is first class among the companies in our investment universe. Despite all the progress, things can still go wrong. In 2019, there was the unfortunate death of an employee during operation. When we raised our concerns with management, they communicated the situation clearly and explained the number of initiatives that were being rolled out to prevent future incidents. Notably, the CEO, Division Head, Head of Safety and Head of Operations all had to forgo their discretionary bonuses.

 

ESG incorporation strategy applied Integration

Impact on investment decision or performance

Our view is that Bramble’s attitude to ESG and other aspects of the business are tantamount to quality. It is proactive, process-driven and realistic – characteristics that indicate a quality franchise run by quality management. The result of our engagement regarding Health and Safety helped build out conviction in the quality of management and the result is that we continue to hold the company.

ESG factor and explanation

(FSSA) ESG Disclosure and Target Setting - Vitasoy is company we have owned for decades, but it has not always been smooth sailing. In 1996, the company’s financial and brand value was severely impacted by a manufacturing flaw which turned its soymilk sour. Management quickly recalled 30 million cartons and corrected the manufacturing process, while retaining staff throughout. Although the impacts of this event were substantial in the short term, the company was able to restore both its reputation and financial position with the management’s honest and constructive response. Mistakes inevitably happen as companies scale and professionalise. The subsequent response gives us good sense of whether management truly are good long-term stewards.

We have been encouraged by its proactive approach to sustainability. In 2015 the company released its first standalone sustainability report and, in each year since, they have improved disclosure and set more ambitious targets. The clarity of their reporting and involvement of senior management has enabled us to engage with the company on a number of issues, not least to formalise a packaging policy around plastic usage. This year, we were delighted when Vitasoy requested ESG-related feedback from us to help formulate their new KPIs and policy targets.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

Vitasoy’s mission is ‘to provide sustainable plant-based products that are good for health and good for the environment’. In addition to the positive benefits of their products, the company aims to continue improving the sustainability of its operations, which has impressed us greatly; and we welcome and support their sustainability efforts. The company’s ESG record, quality of management, and the level of disclosure around progress make us feel very comfortable owning this for the next decade. We have confidence in its ability to meet ESG challenges.

ESG factor and explanation

(GLIS) In June 2019 the UK put into law a net zero target for 2050. This will require the UK to bring all greenhouse gas emissions to net zero by 2050, compared with the previous target of at least 80% reduction from 1990 levels.  Any unavoidable emissions will need to be offset, either through planting trees or sequestration. 
This move will have three significant consequences, namely: (1) increased use of renewables in the country’s energy supply (2) electrification of transport and (3) a revolution in the way homes are heated, moving from natural gas to electricity.
As these changes are implemented, significant investment will be required in order to connect renewables to the grid; and to strengthen and upgrade existing electricity transmission and distribution networks. 
These themes will require National Grid, which runs the UK’s electricity transmission grid, to invest significantly over the next three decades.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

Within our investment process, the company has been given an above-average Environmental quality score, reflecting the scope to invest capital expenditure (on which it will earn a regulated return) as it enables the UK to meet net zero.  The company has also made a net zero pledge within its own organisation too. 
The global listed infrastructure strategy maintained an overweight position in the stock throughout 2019. This positioning was a positive driver of absolute and relative performance over the year, as investors were drawn to this long term source of stable, predictable earnings growth. 

ESG factor and explanation

(Realindex) Governance factor based on overall governance score and change in governance score is included in our signals overlay within our Australian small caps strategy.  It is only applied where the company’s overall governance score is below the median (ie the worst 50% of firms). 

ESG incorporation strategy applied Integration

Impact on investment decision or performance

This change is expected to added approximately 10-20bp of return and 20-30bp of Tracking Error relative to the unadjusted strategy.  

ESG factor and explanation

(Australian Equities Growth) - Governance
The four major Australian banks (ANZ, Commonwealth Bank, National Australia Bank, Westpac) have been shown to have failed in their duties to customers.  These issues have arisen in both wealth management (for example, advice quality) and banking (for example, incorrect charging of fees and interest).  Collectively, the four major Australian banks have incurred almost A$7bn in remediation and associated charges to date.  In addition, the banks have encountered issues with Australia’s anti-money laundering / counter-terrorism financing laws (AML / CTF).  Commonwealth Bank incurred a A$700m penalty for breaches of Australia’s AML / CTF laws while Westpac is currently the subject of an AUSTRAC action.  Positively, the banks have eliminated many fees and charges to try to win back customer and community support.  Notwithstanding this, the banks’ customer failures and AML / CTF breaches have driven us to adopt a greater underweight portfolio position to the Australian banking sector. 

ESG incorporation strategy applied Integration

Impact on investment decision or performance

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.

13.2. Additional information.[Optional]

We provide case studies annually in our RI Report, with over 130 case studies in our interactive case study map from the last three years: http://ri.firststateinvestments.com/case-studies/ 


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