​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.

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.

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

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/

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.