Responsible Investment: Environmental, Social & Corporate Governance Policy July 2015 Page # Issued by FSS Trustee Corporation ABN 11 118 202 672 AFSL 293340
Contents Section 1 : Introduction and Background 1 Section 2 : ESG issues and the Trustee s fiduciary and statutory duties 1 Section 3 : The link between ESG performance and financial returns for all asset classes 2 Section 4 : Long-term investment horizons 2 Section 5 First State Super s relationships with fund managers on ESG practices 2 Section 6 : Active Ownership 3 Section 7 : Engagement 3 Section 8 : Proxy voting 4 Section 9 : Disclosure 4 Section 10 : Cooperation of all market players 4 Section 11 : United Nations Principles for Responsible Investment (UN PRI) 5 Section 12 : Review 5 Page i
Section 1: Introduction and Background In accordance with the investment objectives & strategy of First State Super (the Fund or FSS) and its strategic asset allocation, the Trustee of the Fund invests its assets in a range of assets classes from shares, fixed interest, property (listed & unlisted) and alternatives, including infrastructure and private equity. The Trustee regularly assesses and reviews the shareholdings in the context of performance, risk and return considerations. The Trustee believes that properly understanding and assessing the likely material risks and returns of its investments is an inherent requirement of fulfilling its fiduciary duties to its members. The Trustee considers the environmental, social and corporate governance (ESG) performance of companies in which the Fund invests ( investee companies ) to be relevant to the performance of the Trustee s investment portfolio. The Trustee recognises that it should consider ESG risks in its investment decision making processes in order to protect and manage its investments for the long-term. The Trustee also considers the integration of ESG information throughout mainstream investment analysis to be essential, and therefore promotes integration of material issues into its investment decision making by fund managers. This belief is reflected in the Trustee s Statement of Beliefs as follows: Sustainability, active share-ownership and corporate governance are important elements in the construction of portfolios which will assist to maintain long term returns. In reviewing the expected risks and returns of individual asset classes, the Fund seeks to take sustainability considerations into account. Similarly, the Fund expects its investment managers to take sustainability considerations into account when selecting individual assets. Section 2: ESG issues and the Trustee s fiduciary and statutory duties A superannuation fund s primary duties are to: deliver the highest possible return on its investments to its members; and to assess and manage all foreseeable risk factors as effectively as possible. The sole purpose test arising from the Superannuation Industry (Supervision) Act 1993 ( SIS Act ) requires a trustee to pursue activities relevant to the provision of retirement income to members. These legal requirements are expressed in reasonably broad terms. The SIS Act imposes a set of key covenants on trustee, including: to ensure the trustee s duties and powers are performed and exercised in the best financial interests of the beneficiaries; and to formulate and give effect to an investment strategy that has regard to the whole of the circumstances of the fund, including (among other things) the risk involved in making, holding and realising, and the likely return from, the fund s investments having regard to its investments and expected cash flow requirements. Where the Trustee has analysed the overall costs, risk and return profile of an investment (which may include consideration of ESG risks), the Trustee believes that it will have properly discharged its legal obligations. Page 1
Section 3: The link between ESG performance and financial returns for all asset classes The Trustee believes that companies that best manage ESG risks, impacts, and opportunities are more financially sustainable in the long term and will deliver better long-term financial performance. Companies that are unwilling or unable to take important ESG issues into consideration may: put the companies reputation at risk, cause loss of market opportunities, diminish company value, and adversely affect other companies in which the Trustee has invested. Poor ESG practices can lead to financial risks as well as a decline in investment value. If ESG factors have a potential demonstrable impact on the financial performance of investments, they should be analysed and taken into account investment decisions. The Trustee believes that: trustees should, either directly or through their service providers, take steps to understand the relevant ESG issues in companies and the companies capabilities, systems and structures to manage ESG issues before they escalate into events that can threaten the value of the trustees investment, and trustees may risk failing in their responsibilities as fiduciaries if they disregard material ESG concerns that may affect the long-term value of their investments. They should follow up on these concerns and ensure they, or their service providers, deal with them properly. Section 4: Long-term investment horizons Generally, superannuation funds must meet their obligations to members and beneficiaries over a long period. It is therefore appropriate that the Trustee takes a long-term approach to investment. In this context, a long-term investment approach is defined as a research-orientated investment approach that addresses all material risks to the business and which has a focus on protecting and enhancing investments, minimising risk and seeking positive returns over the long-term business cycle. Section 5: First State Super s relationships with fund managers on ESG practices As outlined previously, the Trustee considers the integration of ESG information throughout mainstream investment analysis to be essential, and therefore promotes integration of material issues into its investment decision making by both internal and external fund managers. The ownership of equity carries important responsibilities. Ultimate owners cannot delegate these responsibilities, even when they employ agents to act on their behalf. Therefore, the Trustee, as the ultimate owners of equities (and or assets), must ensure that its responsibilities of ownership are fulfilled by its agents. Trustees need to ensure that their fund managers: exercise the trustee s ownership rights, and manage investments on behalf of trustees, with long-term benefits in mind. Page 2
While ESG risks often feature in the standard risk management practices of leading Australian and International businesses, fund managers generally do not adequately account for the potential damage to long-term shareholder value that mismanagement of these issues could incur. Over time, the Trustee will review the performance of its fund managers to assure themselves that the Trustee s investment objectives are being met, both on a short-term and a long-term basis. Section 6: Active Ownership The Trustee defines active ownership as: Being aware of and monitoring, the key ESG issues in the context of stock selection and portfolio construction. Making full use of the rights of ownership in order to exert influence on a company s policies, through actively exercising votes at company meetings. Holding regular constructive dialogue with the company s management (either directly, collaboratively or through outsourcing). Undertaking engagement with fund managers and companies on relevant ESG issues. In general terms, the Trustee will seek to influence the behaviour of companies by engaging with companies to assist them to improve their behaviour, rather than by divesting. Section 7: Engagement The Trustee has appointed external investment managers to manage most of its investment portfolio. As part of its investment mandate, each external investment manager will, over time, be required to monitor ESG issues that relate to the Fund s investments. In particular, each external investment manager will, if not currently required under their IMA, over time be required to: provide details of the manager s ESG policies to the Trustee. report at agreed intervals to the Trustee about: the manager s ESG activities, including research, voting and engagement with companies, how the manager integrates consideration of ESG issues into its investment analysis and decisionmaking processes, the extent to which, if at all, the manager has voted at meetings for companies, and how the manager exercised its voting rights on these issues, i.e. voted for, against or abstained. The Trustee encourages each external investment manager to have regular communication on ESG issues with investee companies as a key part of its ongoing research, analysis and evaluation process. However, the Trustee reserves the right to engage independently from the fund manager with investee company boards and management on ESG issues. Each external investment manager will advise the Trustee in a timely manner of how it intends to progress ESG issues. The Trustee will monitor how the investment managers manage these issues to ensure that the best financial interests of the Fund s members are advanced. Each of the external investment managers may be asked to report any outcomes arising from its engagement with companies to the Trustee. If the Trustee identifies an ESG issue for a particular company or investment as a controversial issue, the Trustee will give real and genuine consideration to how that issue impacts on the Fund s investments and will determine Page 3
which options for action it may exercise. In determining an appropriate course of action, the Trustee may obtain advice from external providers. Section 8: Proxy voting First State Super (FSS) believes that it has an obligation to ensure that the companies it invests in are directed and controlled by boards of directors and senior executives in an appropriate way which will enhance their performance over the longer term, and thereby produce the best financial outcome for members. FSS takes an interest in the environmental, social and governance practices of the listed companies in which it invests. FSS believes that companies that take a sustainable approach to the environment and to the community, including its workforce, will perform better over the long-term. Superannuation is a long-term investment, so it is important to FSS that the companies in which it invests are successful over the long-term. FSS s belief is that the role of the Board of Directors of a listed company is very important because the Board is the representative of the shareholders. Therefore, the effective functioning of the Board is paramount. FSS generally supports boards that have a majority of independent directors, and that contain a diversity of experience and skills that are appropriate to the business. FSS has an approved Proxy Voting Policy that covers both domestic and international equities. Section 9: Disclosure First State Super will publicly report on ESG policies and its ESG activities (i.e. proxy voting and engagement). A summary of the Fund s Proxy Voting Policy is available on the website under the Governance section. Details of the Fund s voting behaviour will be published on the website on an annual basis within 90 days after the 30 th of June. The Trustee also aims to provide on its website an annual report on ESG related activities including engagements undertaken, summary of proxy voting and the UNPRI progress report. Section 10: Co-operation of all market players The Trustee believes that co-operating with other parts of the investment industry will help to create synergy and increase the impact of collective activities. The key benefits of collaborative initiatives can include: articulating a co-ordinated view on specific issues; maximising the efficiency of research and engagement activities; enabling investors to engage with more companies, sectors and markets than would otherwise be possible; sharing experience and understanding of issues, companies and sectors; strengthening links within the investment industry. Page 4
Section 11: United Nations Principles for Responsible Investment (UN PRI) First State Super is a signatory to the UN PRI. While not an explicit factor in recommending new managers, Management will investigate whether managers are signatories as part of the review process. The Fund will also consider the Principles when reviewing its existing investment managers and will monitor managers to ensure the Principles are taken into consideration. Briefly, the principles are: We will incorporate ESG issues into investment analysis and decision-making processes. We will be active owners and incorporate ESG issues into our ownership policies and practices. We will seek appropriate disclosure on ESG issues by the entities in which we invest. We will promote acceptance and implementation of the Principles within the investment industry. We will work together to enhance our effectiveness in implementing the Principles. We will each report on our activities and progress towards implementing the Principles. The Trustee believes that the UNPRI provides an important universal framework for signatories to work together, learn from each other and provide a collective voice on ESG issues. The Trustee also believes that the UN PRI will continue to grow as a framework for investors to communicate their expectations on ESG issues to their investee companies. Section 12: Review This policy will be reviewed on at least an annual basis or as and when required. Page 5