Sustainable & Responsible Investment Policy Local Government Superannuation Scheme Effective date: 1/05/2015 Purpose of policy The Local Government Superannuation Scheme (LGS) is established under a multi-division benefit structure. The structure is designed to replicate the superannuation schemes established under the Superannuation Act 1916, the State Authorities Superannuation Act 1987, the State Authorities Noncontributory Superannuation Act 1987, the First State Superannuation Act 1992, and the Public Sector Executive Superannuation Act 1989. This Sustainable and Responsible Investment Policy ( The Policy ) recognises that LGS is long term in nature, and that the long term prosperity of the economy and the wellbeing of members depends on a healthy environment, social cohesion and good governance of LGS and the companies in which it invests. As a universal investor with index holdings, LGS has an interest in all major companies in Australia and overseas. This Policy sets down the sustainability principles by which LGS will be managed, and the requirements for all investments made by LGS. It covers the total investment portfolio, with specific policies for public and private equity investments and direct property. The Policy includes the list of collective engagement initiatives that LGS will participate in, and the ESG risk assessment that will be required of LGS s asset consultant and investment managers. This policy had the word socially removed from its title in February 2011 to obtain greater consistency with LGS communication media and to reflect current industry trends. However, with this Policy, LGS remains committed to social factors in responsibility and sustainability. This is evidenced by among other things, by social focused activity screening on tobacco, gambling and weapons. This Policy should be read in conjunction with the Investment Policy Statement and the Risk Management Strategy. The Policy is consistent with the long term investment objectives of LGS and its risk tolerance. Regulatory framework to policy The Trustee must have a Risk Management Strategy that covers material risks that have the potential to affect the interests of members. LGS considers environmental, social and governance (ESG) risks to be in this category. LGS specifically identifies climate change risk as a primary concern among environmental risks. The Trustee must also have an investment strategy that has regard for the risks of individual investments, the composition of the portfolio as a whole, liquidity and the ability of the Scheme to discharge its liabilities. LGS s Investment Policy Statement covers the general investment strategy. The Sustainable and Responsible Investment Policy includes the investment strategy to manage ESG risks.
page 2 External asset consultants Asset consultants provide investment advice to the Trustee. Asset consultants to LGS must demonstrate that they have the ability and resources to factor in ESG risks when advising on asset sectors, manager selection and portfolio construction. Asset consulting agreements should specify their expertise in this area and explain how the risks are being accounted for. Asset Consultants to LGS will also be expected to contribute to the monitoring of ESG risks. Manager selection & monitoring When searching for new investment managers, due diligence should include a demonstration of how an assessment of ESG risks is incorporated into the investment process. The manager should also specify the resources available to analyse ESG risks, including personnel and their expertise, and external research services used. Derivative Risk Statements should detail their internal controls for managing ESG risks. Managers will be encouraged to discuss ESG and other risks in their investment reports to LGS. The LGS Investment Team will be charged with monitoring the investment portfolios of its investment managers and analysing exposure to some specific risks, such as climate change risk. Collaboration & engagement LGS is a signatory to the United Nations Principles of Responsible Investment. We will: 1. Incorporate ESG issues into investment analysis and decision making processes; 2. Be active owners and will vote on shareholder issues and participate in collective engagement; 3. Seek disclosure on ESG issues by our investment managers; 4. Promote the acceptance and implementation of the UN PRI Principles in the investment industry; 5. Collaborate with other organisations to enhance effectiveness; and 6. Report on our sustainability activities. LGS is a full member of the Australian Council of Superannuation Investors (ACSI) and utilises ACSI to assist in ensuring that there is adequate scrutiny in the governance policies of listed companies. LGS is also involved with several industry groups aiming to improve responsible investment practices. In particular LGS is involved in groups focussed on understanding the investment risks relating to climate change, which is considered to be one of the most serious environmental risks facing the long term prosperity of LGS and its members. LGS participates in the Asset Owners Disclosure Project and commits to ongoing support for this project. It will assist superannuation funds to understand their climate change risks and manage them. LGS has also joined the Investor Group on Climate Change, which has the objective of raising awareness of climate change risks and encouraging best practices for their management. Investment restrictions The Trustee has determined that Local Government Super (the Fund) will not make investments in companies that derive any revenues in the following areas of activity: a) Controversial weapons: Companies involved in the manufacture and/or production of controversial weapons such as land mines, cluster bombs and nuclear weapons;
b) Tobacco: Companies involved in the manufacture and/or production of tobacco products. The Trustee has determined that the Fund will not make investments in companies that derive 10% or more of their revenues in the following areas of activity: a) Armaments: Companies involved in the manufacture and/or production of armaments; b) Gambling: Companies involved in the manufacture and/or production of gambling machines and services and/or ownership of outlets housing these machines; c) Old growth logging: Companies involved in the logging of old growth forests. page 3 The Trustee has determined that the Fund will not make investments in companies that derive 1/3 (onethird) or more of their revenues in high carbon sensitive activities. a) Companies assessed as being the most vulnerable from the sectors that are evaluated as being highly sensitive to the multiple investment risks associated with climate change. This list will involve companies which derive their revenue or assets from coal mining, oil tar sands and coal fired electricity utilities. LGS will reference external research to determine which companies are high carbon sensitive. The Trustee has also determined that the Fund will not make investment in companies exhibiting the following characteristics: a) Companies with a high Environmental Social and Governance (ESG) risk profile and exhibiting poor management of these risks. Companies excluded under this screen may come from any industry sector. LGS will reference external research to determine which companies are high ESG risk. The risks involved with investments in the above activities or with extremely poor business practices, are deemed to be too high and will be avoided. Companies involved with these activities are often subjected to public protest, government regulation, litigation, legal expenses and a higher cost of capital. For Australian equities these screens will cover the entire ASX 300 universe. For international equities LGS is currently only screening the largest companies whose market capitalisation falls within the top 0.1% of the MSCI ACWI IMI benchmark. In situations where it is not possible, because of index mandates or investments made through pooled trusts, LGS will aim to eliminate exposure to these companies by shorting the same number of securities as per the SRI Overlay process. A separate LGS High Carbon Overlay will also be established to manage the restrictions under the High Carbon Sensitive screen in these situations. Where possible, agreements with investment managers will specify that companies in these restricted industries must be avoided. While these Investment Restrictions formally only cover the Fund s developed market listed equity investments, the Fund will endeavour to extend them across other asset classes including fixed income, credit and unlisted assets. Investment replacements The companies used as replacements for the stocks shorted via the SRI overlay and high carbon overlay processes must be companies that rank highly on objectively determined sustainability scales. LGS will use the services of qualified research institutions that have been approved by the Investment Committee. For Australian and international shares LGS uses MSCI ESG Research.
page 4 Commitments to private equity Prospective investments in private equity must pass a thorough due diligence process that includes a risk assessment. Private equity investments are normally long term in nature and illiquid, which makes them particularly sensitive to ESG risks. Analysis will consider issues such as carbon credit pricing, social trends and conflicts of interest. Where investments are made into pooled funds, the due diligence performed by investment advisors must include ESG risk assessment. Direct property The Trustee is committed to ensuring that sustainable practices are used in the management of the direct property portfolio, to minimise environmental impact and preserve the long term value of the assets. A detailed LGS Direct Property Environmental Sustainability Policy has been developed that aims to improve efficiency in the following areas: Waste reduction and recycling Water conservation Energy management Indoor air quality Operation and maintenance Materials and resources OH&S and liability management Environmental risk management. Major savings in energy and water consumption have been achieved using technology and controls, and large improvements have been made in waste recycling. All base building power consumption is sourced from accredited Green Power, and more than 75% of tenants are also using renewable energy. The policy is to continually monitor environmental performance and demonstrate improvements, with regular audits. Targeted investment The Trustee has developed this Policy to ensure that all investments of LGS will be sustainable. In addition, there is a desire that some investments will be targeted to further offset long term environmental risks. However, it is essential that these investments have competitive risk and return characteristics relative to the wider universe of potential opportunities. In the Private Equity sector, investments have been made in the areas of clean energy technology and renewable energy. These investments will help to offset the risk of punitive emissions legislation. LGS will also consider the appointment of equities managers who can identify companies that will benefit from the trend to sustainable business. Climate change The Intergovernmental Panel on Climate Change has concluded that the global temperature is rising and it is very likely due to the increase in greenhouse gases in the atmosphere. The Trustee considers climate change to be possibly the greatest environmental risk that LGS s investment portfolio faces. LGS commits to: Manage the risks and take advantage of the opportunities associated with climate change; Monitor the carbon performance of the portfolio and strive for improvements; Ensure that climate change risks are considered by LGS advisors and investment managers;
Ensure that climate change risks are analysed as part of the due diligence procedures for new investments; Participate in climate change related collaborative initiatives; and Communicate the climate change performance and activities to members. page 5 Proxy voting LGS votes at shareholder meetings because we believe that it is a key element of company engagement and it is important to fulfil our ownership obligations and rights that come with being a long-term shareholder. LGS uses proxy advisors to guide our voting at shareholder meetings. For our Australian investments we work with ACSI and for our international investments we work with CGI Glass Lewis, both of whom have established guidelines for their voting recommendations. ACSI and CGI Glass Lewis analyse the financial, environmental, social and governance performance of listed companies and make voting recommendations based on corporate governance best practice. In line with our responsibility to invest for our members long-term retirement needs, our approach to voting aims to promote the interest of long-term investors. As a broad rule we vote in accordance with ACSI and CGI Glass Lewis recommendations, however from time to time we may vote against their recommendations when we believe there is a significant long term ESG or contentious issue which has or could lead to a loss of shareholder value. LGS aims to vote at 100% of our ASX200 listed investee company meetings and in the largest international investment markets. Reporting The Trustee commits to regularly communicate the sustainability strategy to members of LGS. This will include: A commentary in the annual report; Updates in the member newsletters; and Making information available on the LGS website. The Trustee will disclose the full list of directly held companies and a report will be provided annually, documenting LGS s voting activities. Regular internal investment performance reports are to be submitted to the Trustee on the performance of the SRI overlay, high carbon sensitive overlay and high carbon sensitive exclusion for their impact on the fund s overall investment returns. Corporate citizenship The Trustee is mindful of its fiduciary obligation to act in the interest of members and the requirement under the sole purpose test that LGS operates solely to provide retirement income for its members. For this reason substantive monitoring is undertaken to validate that the sustainability initiatives outlined in this policy enhance member returns and reduce risk.
page 6 It is also recognised that as a corporate entity the Trustee must operate in a way that reflects community expectations and meets high standards as a corporate citizen. As such, the Trustee undertakes that its actions will as a minimum reflect the expectations it has of the companies that it invests in and will ensure that it has the proper policies and procedures in place to promote good governance and an open and transparent culture. The consumption of energy, water and waste are minimised under the LGS Direct Property Environmental Sustainability Policy. All printed materials sent to members are formulated from recycled paper. A project is currently underway to minimise the use of paper, through the use of electronic communication channels for key documents such as the annual report. A staff education program makes employees aware of sustainability issues to help minimise the impact of LGS and its investments on the environment, to contribute to social cohesion, and to ensure good governance of LGS. Employment conditions for LGS staff are set out in its employment policies, which are approved by the Board. Where possible, outsourced activities are undertaken in areas that benefit the community (e.g. the use of sheltered workshops for mail-outs). LGS will ensure that it promotes and actively supports these measures and encourages thought leadership to further develop this policy.