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Pendal

PRI reporting framework 2020

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Investment policy

SG 01. RI policy and coverage

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

01.1. Indicate if you have an investment policy that covers your responsible investment approach.

01.2. Indicate the components/types and coverage of your policy.

Select all that apply

Policy components/types

Coverage by AUM

01.3. Indicate if the investment policy covers any of the following

01.4. Describe your organisation’s investment principles and overall investment strategy, interpretation of fiduciary (or equivalent) duties,and how they consider ESG factors and real economy impact.

​Pendal follows a 'multi-boutique' business model - teams of investment professionals focus on asset management while compliance and other general management functions are delivered centrally. Given our boutique structure across multiple asset classes, we do not have a Pendal-wide investment philosophy. However, common themes related to our active, fundamental and long-term investment approach apply such as:

  • Our fiduciary responsibility is to always put our clients first.
  • The importance of active stewardship. Our actions and decisions can affect practices in our investee companies, in turn affecting the environment, our stakeholders, and the community.
  • Attention to material ESG factors can improve the quality and consistency of long-term wealth creation.
  • Markets are imperfectly efficient and active management can be beneficial as a mechanism to improve portfolio risk and return.
  • All factors (financial and non-financial) considered material to risk/return outcomes of an investment should be taken into account. How an organisation manages ESG issues can provide valuable insight into the quality of management as well as possible exposures to negative incidents or emerging opportunities.
  • Time horizons and materiality of ESG factors vary across asset classes as well as by strategy and in many cases flows from the different characteristics of asset classes themselves.

01.5. Provide a brief description of the key elements, any variations or exceptions to your investment policy that covers your responsible investment approach. [Optional]

Responsible investing is part of Pendal Australia's strategic vision. One of our five year goals is to be a leading provider of responsible investment solutions for our clients and it is a key part of our Business Strategy Plan. This stems from a commitment from the Board and our Global CEO.

Pendal Australia has a RI Philosophy and Approach document that is available to the public on our website. We believe there are important responsible investment principles that can be applied across all of our investment boutiques, providing guidance to our investment teams. The document has been approved by the Pendal Australian Management Team and is reviewed annually or more frequently if required.

Pendal's RI philosophy is based on three core beliefs:

  • Attention to environmental and social performance and to corporate governance can improve the quality and consistency of long term wealth creation.
  • As an active manager, we are well positioned to help our clients manage these risks and thus enhance returns, including through innovative investment solutions that provide opportunities to invest in line with the values of our clients.
  • Our actions and decisions can affect practices in the entities in which we invest, in turn affecting the environment, our stakeholders and the community. We have both a duty and an interest in managing this influence.

In addition to integrating ESG via our active management processes, we strive to assist our clients to meet their objectives through innovative, performance-driven investment solutions (namely customised RI products utilising ethical and sustainable investing strategies) and this RI tailoring extends through to our active ownership services. Active ownership is a natural extension of our active management investment process. Pendal engages in an ongoing dialogue with the management of the companies in which we invest to manage risk, effect change and protect value over the long term. We are committed to transparency in our active ownership practices, and provide comprehensive information to clients such as disclosing proxy voting and engagement on our website.

As a fiduciary and a corporate citizen, our approach to RI also extends beyond ESG integration and dedicated RI product solutions for our clients: we view effective management of our impact upon the environment, the community and other stakeholders as critical to our continued ability to deliver sustainable value to our clients, employees, and our shareholders.

01.6. Additional information [Optional].

          
        

SG 01 CC. Climate risk

01.6 CC. Indicate whether your organisation has identified transition and physical climate-related risks and opportunities and factored this into the investment strategies and products, within the organisation’s investment time horizon.

Describe the identified transition and physical climate-related risks and opportunities and how they have been factored into the investment strategies/products.

We actively consider climate-related risks and acknowledge that the escalating nature of climate change is impacting the time horizons over which many of these risks are becoming financially material. Where any risk is deemed to be material, it is factored into investment decision making.

Transition risks centre around regulatory and policy changes; technological developments; and changing market dynamics such as consumer preferences as the global economy moves to net zero. The transition pathway (orderly vs disorderly) also needs to be considered as this is likely to result in stronger policy responses being enacted rapidly, and market forces reacting accordingly. As such, we monitor policy and regulatory developments around the world.

Further, we monitor changing market dynamics, such as demand changing in response to carbon pricing elevating costs, or consumers actively seeking climate-friendly products. Changes in both regulations and market dynamics will increase the likelihood of stranded assets; and we actively monitor this risk.

Transition risks are particularly relevant to companies and issuers from jurisdictions that are more carbon-intensive and/or at risk of increased carbon-related regulation. Companies with higher emissions, for example energy or airline companies, have a greater exposure to regulatory and litigation risks due to having direct liabilities. They are most affected by mechanisms such carbon taxes and, as they have direct operational control of emissions, any harm caused by their business can be more readily traced.

The physical impacts of climate change can have many and varied direct implications for both equity and debt investments. Extreme weather events can disrupt operations and thus destroy value - cyclones may halt mining production, floods can cut off rail supply routes. Longer term shifts in the climate - such as permanent changes in rainfall patterns and increased temperatures - can often present risks that are more challenging to mitigate against. We continue to strive to better understand country/regional and asset-level physical risk exposure. For example, our dedicated ESG research team Regnan has been working with a number of our investment teams to better understand physical related risks. Our Fixed Income team’s focus this year was on water-related risk, while our Listed Property team enhanced their framework to assess company and asset level resilience to extreme weather events.

Our climate-related research (e.g. changing policy, technology and consumer preferences) also informs portfolio construction, asset allocation (such as Australia vs international, or DM vs EM exposures) and product development processes (e.g. introducing thematic tilts in equity portfolios to renewable energy and sustainable building or active allocations to green and sustainable bonds across fixed income funds).

Further to the ESG integration undertaken across all our asset classes and strategies, we also offer low-carbon and impact investment products. Within these products, a greater emphasis is placed on identifying climate opportunities as well as companies whose products and services positively contribute to the transition or adaptation efforts.

Some of these opportunities and climate-positive activities include energy efficiency initiatives; R&D into lower carbon products; renewable energy; water security; low carbon transport; and sustainability-linked lending.

01.7 CC. Indicate whether the organisation has assessed the likelihood and impact of these climate risks?

Describe the associated timescales linked to these risks and opportunities.

Many climate change impacts are expected to increase or emerge over time. Thus, impacts that are more distant may be much more significant than near term impacts although we have less certainty about how they will play out. However, within our investments, given the time horizons of our strategies, greater attention is given to near term impacts and these weigh more heavily in valuations.

In assessing exposure to an impact, analysis considers the timeframes over which the impact is likely to materialise and provide greater weight to impacts the closer they are. What constitutes short or near term will vary somewhat depending on the industry and asset class. We reference short, medium and long term risks, and as a guide these timeframes are: short term = 1-2 years; medium term = 3-5 years; long term = >5 years. This draws on our work done with our in-house ESG specialist team Regnan, as well as external sources. Generally, impacts that are not expected to be significant within a 20-year time horizon are be ignored, we consider these impacts to be incapable of having a material effect on valuation.

We consider it important to view ESG issues in light of the chosen method of implementation and investment time horizon. For example, ESG issues will have much more importance for directly or indirectly held securities where the holding period may be three years or more, than for a short term momentum-based trade using futures

01.8 CC. Indicate whether the organisation publicly supports the TCFD?

01.9 CC. Indicate whether there is an organisation-wide strategy in place to identify and manage material climate-related risks and opportunities.

Describe

Consistent with our approach to managing any investment risk, material climate risks are identified in line with investment risk frameworks. Pendal Australia operates under a boutique model with four investment teams: Australian equities; global equities; fixed income and multi-asset. Each team applies its own investment processes to identify and manage material climate-related risks as appropriate to the asset class.

Material climate risks (or opportunities) are identified as part of our fundamental security analysis processes and thus are an input to investment decisions. Our investment teams have been increasingly utilising a range of sources, including ESG research covering climate risks, to form a view of companies'/issuers' exposure to and management of climate-related risks and opportunities.

Especially given we are an active manager, we also focus on the role that engagement and other stewardship practices can play in identifying and managing climate-related risks and opportunities. Not only does our active engagement program support increased understanding of the issues, but it allows us to use our influence as a large investor to achieve climate-related objectives at investee companies.

Investment governance processes provide oversight to climate risk management across Pendal. The Investment Solutions and Oversight team, led by the Investment Director, ensures a consistent approach. The Investment Director reports directly to the Pendal Australia CEO.

We note that we are actively evolving our processes around climate-risk and opportunity management, in line with the recommendations of the TCFD. This is an iterative process, and one that we expect will take a number of years before we achieve a comprehensive response and establish ongoing practices to ensure our approach continually evolves in line with climate science, as well as regulatory and stakeholder expectations.

More information on how the Pendal Group business, of which Pendal Australia is a subsidiary, considers climate-related risks to our operations, please see our most recent Annual Report and Corporate Sustainability and Responsibility Report. Both are available on our website here: https://annual-report-2019.pendalgroup.com/

1.10 CC. Indicate the documents and/or communications the organisation uses to publish TCFD disclosures.

specify

          Ad hoc client requests on portfolios or specific companies.
        

SG 02. Publicly available RI policy or guidance documents

 

02.1. Indicate which of your investment policy documents (if any) are publicly available. Provide a URL and an attachment of the document.

02.2. Indicate if any of your investment policy components are publicly available. Provide URL and an attachment of the document.

URL/Attachment

URL/Attachment

02.3. Additional information [Optional].


SG 03. Conflicts of interest

03.1. Indicate if your organisation has a policy on managing potential conflicts of interest in the investment process.

03.2. Describe your policy on managing potential conflicts of interest in the investment process.

Pendal employs an overarching Conflicts of Interest Policy, which is intended to identify, monitor and manage conflicts of interest. The policy sets out the procedure for managing potential conflicts, including procedures relating to:

  • participation in activities that involve an actual or perceived conflict with duties and responsibilities to Pendal or transactions which are prejudicial to Pendal;
  • participation in dealings that involve an actual or perceived conflict with the interests of a customer or a position which unfairly puts the interests of one customer before another's, regardless of the size or nature of that relationship;
  • where acting as a trustee, ensuring that employees make decisions in that capacity having regard to the fiduciary obligation to act in the best interests of the fund members; and
  • acting in accordance with the terms of Pendal's investment mandates.

03.3. Additional information. [Optional]


SG 04. Identifying incidents occurring within portfolios

04.1. Indicate if your organisation has a process for identifying and managing incidents that occur within investee entities.

04.2. Describe your process on managing incidents

Pendal has an effective incident management process in place to ensure prompt notification, escalation and rectification of any incidents or potential incidents. The process requires all employees to identify, report and escalate any known or suspected incidents. The Risk & Compliance and Legal functions are stakeholders in the incident management process to assist with assessing the incident, the actions required to contain and rectify the incident and the reporting implications.

All incidents involving non - compliance with regulatory requirements, licence conditions or internal policies and procedures, or a breakdown of key controls are assessed by Risk & Compliance to ascertain their significance and regulatory reporting requirements. Significant breaches are reported to ASIC as required by the Corporations Act. Incidents are governed by the Pendal Incident Management Policy, which is owned by Risk & Compliance. All incidents are reported to the Executive Risk & Operations Groupon a quarterly basis and the Pendal RE Boards, Managed Investment Compliance Committee and the Audit and Risk Committee on a monthly basis. Pendal's management of incidents in portfolio companies involves a detailed analysis by the analysts and portfolio manager team, drawing on public disclosures, internal resources, and our own direct engagement with the company. The 3 key steps in our analysis are identifying:

  • What happened? (And what is the likely impact on the company's performance? What are the likely implications for shareholders?)
  • Should the company have known about it? (Is it a signal of larger oversight or accountability issues in the company or its supply chain?)
  • What is the company doing to fix the situation? [Most companies will have an incident at some point. It is how management responds (accepts responsibility) and what they do about it (addressing internal and external, financial and non-financial issues or impacts and consideration of the potential for broader implications). This is the real test in terms of the quality of management and the overall sustainability of a company.]

In addition, our process also utilises Regnan's Incident or "Red Flag" system to independently identify incidents with the potential to be material within our portfolio companies. Where such "Red Flags" are identified by Regnan, we will review the incident alongside our own research (as per above) and will adjust our exposure with consideration in a manner consistent with the materiality of the incident and the fund's investment guidelines.

Examples of such incidents within our RI strategies may be:

• Companies that have committed significant or recurrent environmental offences within the last three years, or have been successfully prosecuted and required to provide remedies for such offences within the last year are excluded.

• Companies that have breached human rights, OH&S, anti-discrimination/equal opportunity or trade practices legislation within the last three years, or have been required to pay compensation or provide remedies for such breaches within the last year are flagged.


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