Our responsible investment strategy is based upon three strategic pillars of Quality, Stewardship and Engagement. Information our approach, strategy and governance of responsible investment can be found in the Our Approach to Responsible Investment and Stewardship section.
Below we have provided an update of progress made during 2014 in relation to each pillar. We have also published an update on the specific items we disclosed as goals in last year's report.
The mid-point in the delivery of our strategy provided an opportune moment for reflection on our progress to date and for us to identify and agree a set of objectives, targets and deliverables for the business in the years ahead. The review involved an assessment of our progress against the original plan, a review of the current business environment, and a consultation process with investment and business leaders where we sought to challenge their current assumptions and beliefs about what leadership in RI really means.
The consultation addressed:
- Beliefs and commitment to RI and stewardship;
- Culture and behaviours;
- Investment capabilities and products;
- Client relationships;
- Client engagement/communications/reporting; and
- Industry leadership.
Following this process, which included detailed consultations with senior business leaders as well as an all staff consultation, the Global Responsible Investment Committee (GRIC) noted the progress made to date and approved the re-prioritising of a number of areas and added some new initiatives, including:
- Employee engagement components of the strategy prioritised, with RI and stewardship becoming part of the behaviours assessment for all staff and included in induction training for all new staff;
- Develop a set of responsible investment principles which build on our Global Stewardship Principles;
- Incorporate RI into the investment risk and product development and management processes;
- Focus performance reporting on timeframes appropriate to the assets, specifically by presenting long-term investment performance first rather than last, and avoid reporting monthly performance wherever possible; and
- Set standards for simplifying our language when communicating both internally and externally so that we can be clearer and more concise in our communications.
Linked to the strategy review process, was an all staff consultation. The purpose of this survey was to help us assess the level of awareness and understanding of our RI and stewardship activities and goals across the business and to gather insights on issues our people are particularly interested in. We will be conducting the survey every two years to benchmark our progress and identify any areas of opportunity or concern.
In last year's RI report, we committed to reviewing our policies in 2014. While this process has commenced, it is yet to be completed. To date we have:
- Performed a benchmarking assessment of policies across the industry;
- Incorporated policy discussions into our strategy review consultation process and all staff survey;
- Reviewed our existing practices and policy set;
- Drafted new RI principles and RI policy (which will include active ownership and proxy voting), and
- Initiated consultation across the Group on the policy.
Once we have completed this consultation process, it will be approved by the GRIC. We expect this process to be completed by the end of June 2015.
Each of our investment teams has an RI representative who co-ordinates information flows across their respective teams. The RI representatives sit on an ESG Committee which plays a key governance role by representing their teams, reporting on team progress, contributing to thought leadership and looking at new approaches to addressing current and emerging ESG risks and opportunities. The ESG Committee is an important part of ensuring that we have the highest quality of ESG integration embedded within our investment processes.
In 2014 the ESG Committee met six times and during the course of the year they focused on:
- Developing an accountability and an assessment framework for assessing each team's RI and stewardship practices;
- Considering best practice approaches for integrating human rights considerations into investment decision making. This included reports from HESTA following a benchmarking study they conducted and Oxfam's report 'Banking on Shaky Ground';
- Providing feedback on the work of the Stranded Assets Working Group (SAWG);
- Overseeing the implementation of the ESG information management plan;
- Considering our approach to proxy voting in share blocking and power of attorney markets;
- Monitoring the growth in stewardship codes and UK Law commission's review of fiduciary duty; and
- Information sharing and case studies.
Stranded asset risks
During the year, the SAWG concluded the research phase of their work and developed a toolkit for investment teams. This toolkit will allow investment teams to assess whether their investment processes adequately assess companies exposure to stranded asset risk across three areas (baseline analysis, resilience testing, and management approach).
We will be rolling out the toolkit throughout 2015 and incorporating assessment of each team's approach to stranded asset risk within our investment assurance framework. While investment teams are not required to adopt the toolkit in full, they will be required to demonstrate how their existing processes adequately address the issues highlighted.
Where investment teams believe that enhancements to their processes are required, the toolkit is sufficiently flexible to allow them to mix and match different elements in a way which can be integrated into existing investment processes.
More details on the toolkit and the work of the group can be found here.
Approach to sanctions monitoring
During 2014, our Risk and Compliance teams reviewed our approach to monitoring sanctions globally. Following the review, new processes have been put in place to provide additional assurance.
Current process for investments
In both fixed income and equity systems, we enforce country level restrictions based on the constituents of the Australian Department of Foreign Affairs and Trade (DFAT) Sanctioned Countries List and similar lists issued by Governments in other jurisdictions where our funds are domiciled. The constituents on each system are regularly reviewed and updated.
Within this list, a two-tier system is in operation, whereby some countries are completely blocked (such as Iran, Cuba, North Korea, Syria) and others are heavily restricted. Any potential investments in companies domiciled in these countries would be rigorously screened to ensure that there is no association with any sanctioned individual, entity or regime prior to investment. No investment is possible in companies domiciled in any country on the DFAT list without clearance from Investment Compliance personnel as the system controls do not allow it.
During 2014 a project was launched to assess our approach and identify areas for improvement. In response we implemented a more stringent framework to extend our controls to include any potential investment from a country deemed to be 'very high risk' in relation to politically exposed persons, sanctions and ultimate beneficial ownership controls. The scope of this framework will be wider than the sanctioned countries list and the countries deemed to be 'very high risk' will be updated where appropriate. The system was implemented on by 31 March 2015.
ESG information management
In late 2013 we developed a plan to enhance the quality, relevance and timeliness of ESG information provision to our investment professionals. The plan addresses services providers, access to information, integration of information with existing systems and training.
- During 2014, we made significant progress on our ESG information management plan, the highlights of which include:
- Integration of Sustainalytics and GMI Ratings (GMI) data with Bloomberg which was then made available to all Bloomberg users;
- Developed an Excel-based ESG dashboard which draws on Sustainalytics, GMI and Bloomberg data to provide a comprehensive view of a company's ESG performance;
- Integration of Sustainalytics and GMI data with the Australian Equities Growth team's proprietary database;
- Made GMI data available through FactSet which is being used by three investment teams including our smart beta team Realindex. Access has allowed the team to undertake research which culminated in recent paper.
In 2015, we plan to finalise the main elements of our information management plan, which includes:
- The launch of a new intranet site which will provide training material, research, policy guidance and other information needed to effectively exercise our responsible investment and stewardship obligations;
- Finalise the integration of ESG information on FactSet and our data warehouse;
- Develop portfolio level ESG reporting for use by Investment Assurance, the Investment Committee and investment team heads; and
- Enhance our client and public reporting.
Historically we have not voted proxies in shareblocking and power of attorney (POA) markets, which is common practice in the industry. Shareblocking markets are markets where a shareholder is prevented from trading a company's shares for a period after they have lodged their proxy votes, while POA markets are markets where POA's must be lodged in order for the votes made to be counted.
We believe proxy voting is an important investor right and asset, and should be exercised wherever possible. During 2014, we reviewed the practice of not voting in these markets and have made the following changes:
- We will be lodging POAs for markets where we hold shares in order to vote in these markets; and
- We will provide portfolio managers with the option to vote in shareblocking markets so that they can balance the benefits of voting with any risks of not being able to trade on a case by case basis.
These new procedures are currently being implemented and will be fully rolled out across all equity teams by the end of 2015. For Realindex, voting will be rolled out for POA markets but not shareblocking markets.
We conducted an employee survey as part of our RI strategy review process. The response rate for this exercise was a very high 62%, with most respondents provided detailed feedback. We are now using the results as a baseline for improving our engagement with all employees.
Of all respondents, 35% were from investment teams, representing approximately 60% of investment staff globally. There was also a good mix from other areas of the business, including all of the senior Executive Committee.
We plan to conduct the survey every two years and will share the key highlights in this report.
The key highlights of the staff survey were:
- 76% believe that RI and stewardship is embedded in our culture; and
- 77% 'believe' or 'strongly believe' that as a firm we should have a firm and public stance on issues that may have a medium to long-term impact on investment returns
The consultation also told us that over the next 12 - 18 months our people would like us to:
- Enhance our communications with clients and investment consultants and work to increase our colleagues understanding and knowledge of RI;
- Establish our views on what is best practice for the companies that we invest our clients' money in; and
- Share more examples of companies that investment teams decide not to invest in for ESG reasons.
As reported last year, we have been reviewing our HR processes and incorporating our RI and stewardship principles across the employee lifecycle. We have made good progress in this regard and expect to finalise the key elements of this plan in 2015. During 2014, we implemented the following:
- RI Report and Stewardship Principles are now provided to all new hires;
- Our commitment to RI and stewardship is now highlighted in all job advertisements globally;
Ensuring that our commitments have been fully appreciated by new hires via training and induction programs is now underway. In addition, we are working towards integrating behaviour assessments for implementation in 2015/16. This work is being done as part of a broader review of HR processes and has been prioritised by the GRIC as part of the RI strategy review.
Diversity and inclusion in the investment industry
Like many responsible investors we recognise the benefits of diversity and inclusion for company senior management and boards. We believe the same holds true for the investment industry. Gender is the most common prism through which we consider diversity and inclusion but more broadly it also focuses on characteristics such as cultural diversity, disability, age, sexual orientation and experience.
In this year's report we have chosen to disclose the gender split of our investors and we have done this for three reasons:
- To disclose information similar to what we expect companies to disclose;
- To highlight the challenge of gender diversity with investment professionals;
- In our hiring practices we actively include diversity as a benefit to be sought, however we believe there is a larger role the industry can play in attracting more women into investment roles.
We hope that our disclosure of the gender split will encourage others to do the same and as result focus the industry's attention on rectifying this imbalance. As at 31 December 2014, 21% of investment professionals were woman.
During 2014 we assessed our investment practices against the CFA Institute's Code of Ethics and Standards of Professional Conduct for asset managers and found that our practices are fully compliant with the code. We believe the CFA code is an excellent framework for assessing an investment manager's approach to internal governance, ethical conduct and a fiduciary mindset.
We will be reviewing our adherence to the code annually through our compliance process and more formally every two years when we review our Global Stewardship Principles. The code is available to view on the CFA Institute website.
NAPF Stewardship Framework
During 2014, we also assessed our stewardship approach against the NAPF Stewardship Framework. NAPF represents more than 1,300 pension schemes in the UK and has developed the framework to allow funds to consider the stewardship practices of managers at a glance. The framework provides assets managers with a maturity matrix against which they can assess their practices. Our self-assessment is available in the Policy and Reports section of our website and as well as on the NAPF website.
Investment Leaders Group (ILG) Long-Term Mandates Working Group
In 2014, our Global Head of Responsible Investment became chair of the ILG Long-Term Mandates Working Group. We believe a critical issue exists where short-term mandates, use of benchmarks and performance monitoring are driving short-term investment decision-making, herding behaviour and a failure to properly incorporate long-term environmental and social challenges into investment practice.
The Working Group has been established to explore opportunities to break down this barrier and open the way for long-term partnerships to be built between asset owners and asset managers. We believe these types of relationships will allow for the investment implications of these long-term challenges to be worked through together.
Towers Watson - Thinking Ahead Institute
We have become one of the inaugural members of a new initiative launched by global investment consultancy Towers Watson. This initiative is the establishment of a 'Thinking Ahead Institute' (TAI) which is headed by senior consultants Tim Hodgson and Roger Urwin.
The TAI is a limited membership group which has been established to “provide a forum where likeminded parties can meet to discuss, challenge and, ultimately, bring about positive industry change for the benefit of the end saver”. The TAI has three pillars, research, roundtable meetings and one-to-one meetings.
The research plan for 2015 includes work on the following topics:
- The state of the industry;
- What is investment success?;
- Market efficiency;
- Rethinking compensation;
- Industry outlook;
- Money-weighted returns;
- Culture and leadership;
- Limits to growth; and
- Time horizons.
Our membership of TAI, along with that of the Cambridge University Investment Leaders Group, are the two main components of our industry thought leadership strategy.
During 2014, we reviewed the range of industry initiatives that we were involved with. The purpose of this review was to ensure that any initiatives we committed to supporting met a number of criteria. These criteria are based upon the interest of and long term value to our clients and our ability to provide sufficient resources to effectively support such initiatives. The initiatives that we remain supportive and engaged with can be found here
During 2014, we were involved in a number of collaborative engagements including:
Financed emissions disclosure
We worked with other investors and key industry groups (Investor Group on Climate Change, Responsible Investment Association of Australasia, Australian Council of Superannuation Investors and Regnan) to engage with Australia's four largest banks (including our parent, the Commonwealth Bank of Australia) on carbon disclosure.
The engagement included a workshop with the banks, meetings between our two Australian equity teams and the banks, and other correspondence which led (along with pressure from other interested groups) to improved disclosure practices for financed emissions. We believe that this constructive engagement has created good momentum for Australian banks to lead the world on financed emissions disclosure.
Remuneration in the mining industry
We contributed to a PRI-led working group focused on the integration of ESG issues into the remuneration practices of mining companies. This project has led to a report a being published which will help investors to better assess pay practices in utilities and extractives companies. Our Global Resources and two Australian Equites teams were involved in the project.
Fixed income engagements
Our Fixed Income and Credit teams supported an engagement led by the Asian Corporate Governance Association with Hyundai Motors. We were the only fixed income investor to support the engagement and believe there is significant scope for fixed income and credit investors to be involved in collaborative engagements in the future.
Our Fixed Income and Credit team also produced a case study of the semi-government engagement program the team embarked on last year, in the hope of encouraging other investors to also engage with sovereign and semi government issuers. We have submitted this case study to the PRI and hope it will be published shortly.
Transparency and client engagement are key components of effective stewardship. Each year we seek to improve our reporting to provide our clients and stakeholders greater insight into our responsible investment and stewardship practices. Over the last two year we conducted a survey at the time of the report's launch and a clear reoccurring theme has been that the industry is still not clearly linking RI activities to investment outcomes.
In this year's report we have included a number of additional pieces of information to begin to address this. These include:
- More clearly drawing the links between each team's RI and Stewardship practices and their investment philosophy;
- Being more specific on how ESG issues are incorporated into investment processes;
- Including new sections in the team snapshots including team profile and fund information and performance information;
- Introducing a new investment team's 'at a glance' section with key metrics for each team;
- Providing a full proxy voting record and relevant statistics; and
- Improving the presentation and interactivity of the RI Report on our website.
These improvements follow greater transparency in our Proxy Voting and Corporate Governance report and new client reporting for European Diversified Infrastructure Fund. We hope that these enhancements will engage our clients and consultants to a greater degree and provide a deeper understanding of the strengths of our investment teams.
We welcome feedback and further suggests for improvement as we continue our reporting journey.
Australian Stewardship Code
As a member of the Investment Committee of the Australian Financial Services Council (FSC), our Chief Investment Officer for equities was involved in the FSC working group which developed the soon-to-be launched FSC Stewardship code.
In working on the code, we advocated for high standards and believe we have achieved a world class disclosure standard for asset managers, both in relation to their internal governance and stewardship practices. We congratulate the FSC and the other members of the working group on the outcome.