ADVANCE SUSTAINABLE INVESTMENT APPROACH July 2018
CONTENTS What is sustainable investing?... 1 What are ESG factors?... 2 Our beliefs... 2 Our approach to sustainable investment... 2 1. Investment process...3 2. Engagement & proxy voting... 3 3. ESG exclusions... 4 4. Reporting, advocacy & research... 4
What is sustainable investing? Sustainable investment adopts a long-term approach, seeking to add value or manage risks through a broader, more comprehensive approach to investment. This includes the integration into investment processes of environmental, social or governance (ESG) factors alongside more traditional measures of financial performance (which is known as ESG integration). It also includes a focus on how components of the stewardship responsibilities of asset ownership are executed, specifically engagement with companies on ESG matters and proxy voting. Whilst Advance refers to this approach as sustainable investment, this term is often used interchangeably with responsible investment across the industry. How does sustainable investing relate to our investment philosophy? Sustainable investment is aligned to our investment philosophy through two key tenets: the balance of risks and expected return, and our long-term approach to investing. Our Investment Philosophy is based on the following 4 key principles that guide the way in which we think as an investment manager. Markets are not fully efficient creating opportunities that can be exploited We believe it s possible to extract value, to varying degrees across markets and over time through the use of both active and passive strategies. Diversification is key to a sound investment strategy Diversification across multiple facets including stocks, managers and strategies ensures a smoother, less volatile outcome for investors. Investing involves balancing risks and costs associated with expected return Understanding not only which risks we are exposed to but also the expected reward, total exposure, costs associated with and how best to manage such risks. Successful investment outcomes require a disciplined, systematic and long-term approach Combining a longer term strategic view, efficient execution and a robust, repeatable and sensible investment process. Consistent with our long-term approach, as an investment manager we seek to apply Humility & Patience to our investment practices. 1
What are ESG factors? ESG is the term used by capital markets and investors to refer to a range of non-financial performance indicators of companies. ESG risk is the risk to a fund s performance and ability to meet its long-term objectives of maximising return for a given level of risk, due to failure to recognise or address material existing or emerging ESG factors. Below are some examples of typical ESG factors: Typical ESG factors ENVIRONMENTAL SOCIAL GOVERNANCE Air and water pollution Biodiversity Diversity and equal opportunities Employee engagement Anti-competitive behaviour Audit committee structure Our approach to sustainable investment We have a well-established model for integrating ESG factors, including integration into the investment process through investment manager selection and mandates, engagement and proxy voting, reporting, advocacy and research. In certain cases we may also exclude certain activities and companies from our investible universe on the basis of ESG risks and/or client preferences. This activity is undertaken within the investment team supported by dedicated ESG service providers and asset consultants including Hermes Equity Ownership Services (EOS) and Regnan Governance Research & Engagement (Regnan). Climate change Government and community engagement Board composition Sustainable Investment Deforestation Human rights Bribery and corruption Energy efficiency Indigenous rights Compliance Waste management Labour standards Executive remuneration Investment Process Water scarcity Product safety and liability Stakeholder engagement Reporting Advocacy & Research Engagement & Proxy Voting Our beliefs We believe the active consideration of ESG factors in the investment analysis and decision-making process enhances our ability to meet the long-term investment objectives of our funds and provides greater insight into investment risks across time frames. Proxy voting and engagement with the companies in which we invest is fundamental in driving positive portfolio outcomes. We believe in being transparent in our approach and progress. ESG Exclusions Our beliefs and actions in relation to the integration of ESG factors are supported by an established body of research and industry evidence that supports the case for greater examination of ESG factors. 2
1. Investment process The level of ESG integration and an individual investment manager s capabilities form an important part of our manager selection process. During the manager selection process and on an ongoing basis, we undertake a formal assessment of a manager s level of ESG integration and resourcing and how that might influence investment outcomes by undertaking desk-based research and meeting with key investment and ESG personnel. Managers are assessed on their: > > Approach to ESG including associated policies; > > People and resources, including ESG research sources; > > Integration of ESG into the investment process, including examples of how ESG matters have impacted or are likely to impact the management of the portfolio; > > Their engagement with companies and proxy voting; and > > Transparency, reporting and advocacy. This formal assessment has a direct bearing on the final assessment of a manager s suitability for the portfolio. We encourage our investment managers to include ESG factors in their investment processes, in addition to having ongoing dialogue around ESG issues. Once appointed, where relevant, specific terms regarding ESG practices are included in the investment mandates. This includes: > > Endeavouring to act consistently with the Principles of Responsible Investment (PRI); > > Acknowledging that ESG issues have the potential to impact investment risks and returns; > > Acknowledging that considering these issues alongside traditional factors in investment decision-making can improve long-term risk-adjusted returns; and > > A requirement for ESG specific reporting. We monitor investment managers on ESG integration on a regular basis, along with ad hoc engagement where there is a material ESG risk, such as a controversy in a security held in the portfolio. 2. Engagement & proxy voting We are active owners and undertake engagement with companies and proxy voting to drive positive portfolio outcomes. Voting rights are exercised with the primary objective of upholding the interests of investors by protecting and enhancing the value of portfolio assets. The underlying investment managers generally undertake proxy voting on our behalf, in line with our proxy voting policy, and we are committed to working with managers to ensure voting rights are exercised appropriately. For contentious issues, such as shareholder proposals, we may consider expert external views and decide how to vote across all holdings. Engagement involves a dialogue with directors and senior management of invested companies with the goal of achieving positive change in areas such as business practice, risk management, governance, sustainability and disclosure to improve long-term shareholder value. It can also involve discussions with regulators, professional bodies and others. As universal owners, large institutional investors have the ability to influence companies and foster engagement through their growing assets under management and long-term investment horizon. There is growing evidence of the link between engagement and improved long-term value generated through higher annualised returns and/or reduced downside risks. We use a combination of engagement approaches. We primarily engage through Hermes EOS (global shares) and Regnan (domestic shares), and also through both our active and passive investment managers. Hermes EOS and Regnan s engagement approaches use pooled assets to provide a higher level of influence, along with economies of scale. We are also involved in collaborative engagement efforts, such as the Climate Action 100+. 3
3. ESG exclusions As an institutional investor our investment decisions can impact the wider economy. We believe that positive outcomes can be more appropriately achieved through ESG risk management and company engagement, rather than blanket screening of certain types of investments. To this end, our preference is to influence the behaviour of companies in which we invest through engagement and proxy voting, with a view to working with boards and management to address material ESG issues. In certain circumstances, and considering our clients preferences, where it is deemed not feasible to influence a company through engagement or proxy voting, we may consider excluding certain securities or industries as an appropriate way to manage risks, where activity undertaken: > > Is unlawful in the relevant jurisdiction; > > Would lead to a contravention of international treaties or conventions ratified by Australia; and/or > > Is a severe breach of accepted business standards. Prior to exclusions being exercised, consideration is given to the impact of exclusions to the investment funds ability to meet investment objectives. A list of activities we currently exclude is provided below but may change from time to time: > > Growing and production of tobacco; > > Production of controversial weapons, including antipersonnel mines, biological and chemical weapons and cluster weapons; and > > Severe breaches of international norms such as the UN Global Compact principles. More detail on each of these activities can be found in the BT Financial Group (BTFG) Responsible Investment Position Statement. These exclusions only apply to Australian and international shares exposures where we have an investment management agreement with the investment manager. Exclusions generally do not apply to investments in pooled vehicles over which we cannot exert our influence to implement this approach. 4. Reporting, advocacy & research BTFG is a signatory to the PRI. BTFG undertakes a range of reporting, including annual reporting to the PRI, a public version of which is made available on the PRI website. A significant component of the BTFG PRI response relates to the activities of Advance. We also publicly disclose proxy voting records for some funds. Advance and BTFG are involved in advocacy and research through the following organisations. These may change from time to time. > > Investor Group on Climate Change (Australia and New Zealand) > > Willis Towers Watson Thinking Ahead Institute > > Principles for Responsible Investment Australian Network Steering Committee > > Member of Responsible Investment Association of Australasia > > CDP (formerly Carbon Disclosure Project) Carbon Action Signatory > > Financial Services Council ESG Working Group We recognise that sustainable investment is evolving and we seek to influence its development through collaboration with other investors. This document aligns to and is consistent with the BT Sustainable Investment Approach for internally managed investment options. 4
Advance Asset Management Customer Relations 1800 819 935 advance.com.au This document has been issued by Advance Asset Management Limited ABN 98 002 538 329 AFSL No. 240902 (Advance). This document contains general information only and has been prepared without taking into account the objectives, financial situation or needs of any particular person. It is not intended to constitute investment, legal or taxation advice and should not be considered or relied upon as a comprehensive statement on any such matter. Before acting on the information, a person should consider its appropriateness, having regard to their objectives, financial situation and needs. Whilst every effort has been taken to ensure that the assumptions on which the outlooks given in this document are based are reasonable, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. Past performance is not a reliable indicator of future performance. Information from third parties is believed to be reliable however it has not been independently verified. While the information in this publication is given by Advance in good faith, it does not warrant that it is accurate, reliable, free from error or omission. Advance is a member of the Westpac Group. An investment in a managed fund issued by Advance does not represent an investment in, deposit with or other liability of Westpac Banking Corporation ABN 33 007 457 141 or any other member of the Westpac Group. Subject to any terms implied by statute which cannot be excluded, neither Advance nor any other company in the Westpac Group and their directors, employees and associates accept any responsibility for errors in, or omissions from the information. Current as at July 2018. AD17765B-0418tc