Maximising investment outcomes through investment stewardship and ESG integration Stewart Brentnall 12 September 2017
TCorp Overview and Investment Model Summary 1. NSW Treasury Corporation (TCorp), a corporatized entity with its own board and infrastructure, was formed in 1983 as the NSW Government s debt issuer. In 1988, its capability was extended into basic investment management 2. In 2015, the NSW government issued Ministerial Orders that TCorp be awarded contractual responsibility for managing the $35bn defined benefit assets of STC (State Super) and $25bn for the NSW icare insurance business, incl. those of Workcover 3. In 2017, TCorp was mandated for management of the NSW Infrastructure Future Fund (NIFF) privatisation proceeds of certain NSW electricity businesses and the Land Titles Office. TCorp s total FUM is currently just short of A$90bn; 4. The Investment Team is 35 (with operations and implementation another 25); 5. A new CIO role has been created and charged with the responsibility of an end to end review of the investment governance and model. This is being undertaken with the assistance of Willis Towers Watson. 6. All TCorp IM Funds are permitted investment under the Local Government Act Ministerial Order. For Official Use Only / 2 of 26
Brief History of TCorp 1983 Establishment of TCorp as a corporation administered by NSW Treasury. Central borrowing function was established. 1988 TCorp launches Hour-Glass Funds investments 1996 Establishment of SOCs for electricity, ports, water etc. saw significant growth in TCorp s debt management and advisory activities. 2009 TCorp survives the GFC without any credit losses (no Lehman or CDO exposures on balance sheet, or in any client funds) and generates a record dividend for Treasury and significant interest savings for clients. 2015 Funds management functions of STC and icare amalgamated within TCorp. Funds management volumes increased to ~$70bn. 2016 TCorp s Best-in-Class strategy launched 2017 TCorp supporting the NSW Government ALCO. Common Custodian migration to JPM underway. For Official Use Only / 3 of 26
TCorp Manages Financial Assets and Liabilities for the State of NSW State of NSW: Financial Assets ~$90bn funds managed by TCorp State of NSW: Financial Liabilities ~$68bn* debt managed by TCorp * Market value 133 clients across the NSW Government family Financial data as at 30 June 2017 Maximising financial management outcomes for the benefit of NSW For Official Use Only / 4 of 26
TCorp NSW s Gateway to Financial Markets Borrowing Clients Electricity companies, water companies Investing Clients icare, STC, NSW Treasury, local governments/councils, hospitals TCorp Debt, investments and advice Financial Institutions Fund managers, financial markets, banks, etc. For Official Use Only / 5 of 26
TCorp Board Members Non-Executives Phil Chronican (Chair) Director NAB Former CEO ANZ Former CFO Westpac Kerry Schott Rob Whitfield Peter Warne Susan Doyle Former CEO Sydney Water Chair of Transgrid Director NBN Director ANZ and Westfield Chair elect Coca Cola Amatil Former Director Suncorp Chairman Macquarie Group Director ASX Chairman OFX Director Law Cover Insurance Former CIO IAG Former guardian Future Fund NSW Treasury Chief Executive Michael Pratt (Deputy Chair) Philip Gardner David Deverall For Official Use Only / 6 of 26
TCorp Executive Committee Structure and Functions Note: This is a functional view of the organisation For Official Use Only / 7 of 26
TCorpIM Funds Overview For Official Use Only / 8 of 26
Potential Returns TCorpIM Core Funds Cash Strategic Cash 1.5-3 years Medium Term Growth 3 7 years Long Term Growth 7 + years 0-1.5 years Potential Risk For Official Use Only / 9 of 26
TCorpIM Cash Fund Strategic Asset Allocation as at 31 August 2017 Australian Cash and Fixed Interest, 100% Time Horizon 0-1.5 years Performance Benchmark Bloomberg AusBond Bank Bill Index Notification Timeframe Same day (provided requests are received before 1 12 pm on working days). Distribution Frequency Monthly Estimated Indirect Cost Ratio (ICR)* 0.09% p.a. Buy/Sell Spread +/- 0.00% (*) ICR includes the TCorp Management Fee and Other costs, such as custody fees, investment management fees and Expense Recovery Fee. For Official Use Only / 10 of 26
TCorpIM Strategic Cash Fund Strategic Asset Allocation as at 31 August 2017 Australian Cash and Fixed Interest, 100% Time Horizon 1.5-3 years Performance Benchmark Bloomberg AusBond Bank Bill Index Notification Timeframe Up to 5 business days before Distribution Frequency Monthly Estimated Indirect Cost Ratio (ICR)* 0.10% p.a. Buy/Sell Spread +/- 0.02% (*) ICR includes the TCorp Management Fee and Other costs, such as custody fees, investment management fees and Expense Recovery Fee. For Official Use Only / 11 of 26
TCorpIM Medium Term Growth Fund Strategic Asset Allocation as at 31 August 2017 Cash Time Horizon 3 7 years 4.0% 5.0% 5.0% 3.0% Australian Bonds Australian Shares International Shares Unhedged Long Term Return Expectation CPI + 2% p.a. over 7 years 2.0% 4.0% [VALUE] 3.0% 2.0% 9.5% 43.0% International Shares Hedged Emerging Market Shares Listed Property Multi-Asset Class Global Credit Emerging Market Debt Notification Timeframe Up to 5 business days Distribution Frequency Annual (in July - reinvested unless advised otherwise) 7.5% 10.0% Australian Inflation-linked Bonds Bank Loans Estimated Indirect Cost Ratio (ICR)* 0.23% p.a. High Yield 58% Defensive Assets 18% Alternatives 24% Shares Buy/Sell Spread +/- 0.09% (*) ICR includes the TCorp Management Fee and Other costs, such as custody fees, investment management fees and Expense Recovery Fee. For Official Use Only / 12 of 26
TCorpIM Long Term Growth Fund Strategic Asset Allocation as at 31 August 2017 Cash Time Horizon 7+ years 5.0% 2.0% 2.0% 5.0% 2.0% 4.0% 3.0% 13.0% 5.0% Australian Bonds Australian Shares International Shares Unhedged International Shares Hedged Emerging Market Shares Long Term Return Expectation CPI + 3.5% p.a. over 10 years Notification Timeframe Up to 5 business days 7.0% 2.0% 22.0% Listed Property Multi-Asset Class Global Credit Emerging Market Debt Distribution Frequency Annual (in July - reinvested unless advised otherwise) 28.0% Australian Inflation-linked Bonds Bank Loans High Yield Estimated Indirect Cost Ratio 0.30% p.a. 20% Defensive Assets 14% Alternatives 66% Shares Buy/Sell Spread +/- 0.14% (*) ICR includes the TCorp Management Fee and Other costs, such as custody fees, investment management fees and Expense Recovery Fee. For Official Use Only / 13 of 26
TCorpIM Funds Performance cumulative returns as at 31 August 2017 TCorpIM - Cumulative returns from 1 July 1992 to 31 Aug 2017 TCorpIM Long Term Growth Fund TCorpIM Medium Term Growth Fund 700% 600% TCorpIM Strategic Cash Fund TCorpIM Cash Fund 500% 400% 300% 200% 100% 0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1. Past performance is not an indicator or guarantee of future performance. 2. Prior to 17 June 2008, the Strategic Cash Fund was named the Bond Market Facility. The Bond Market Facility invested 60% in Australian Cash and 40% in Australian Bonds For Official Use Only / 14 of 26
Investment Stewardship and ESG Integration For Official Use Only / 15 of 26
What is ESG integration? ESG integration is: Embedding the consideration of environmental, social or governance (ESG) factors into an investment process in an effort to improve risk-adjusted returns over time. Identifying and managing risks and opportunities that arise due to ESG factors. About making better investment decisions leading to better financial outcomes. For Official Use Only / 16 of 26
What s captured by ESG? MSCI ESG Key Issue Hierarchy Source: MSCI For Official Use Only / 17 of 26
Why integrate ESG? Strong growth in ESG integration has been driven by growing evidence of the positive link between ESG factors and corporate financial performance. AUM Linked to ESG Criteria in the US (AUM USD trillion) Source: US SIF Foundation (July 2014) E, S & G Categories & Corporate Finance Performance Link between ESG & Corporate Financial Performance Source: Friede, Busch, Bassen (December 2015) Source: Friede, Busch, Bassen (December 2015) For Official Use Only / 18 of 26
TCorp s approach to ESG The TCorp Board established a new Investment Stewardship Policy on 30 September 2016. Investment Stewardship includes ESG integration and active ownership. Based on the belief that good stewardship will lead to better risk-adjusted returns over time. Advocates an integration-based approach over an exclusion-based approach. Financially-driven NOT values-driven. For Official Use Only / 19 of 26
TCorp s Stewardship Beliefs TCorp believes that integrating ESG factors into the investment process can lead to better risk-adjusted returns over time. TCorp s belief on the benefits of ESG integration and active ownership is evidence-based. TCorp believes in the integration of ESG factors across the entire portfolio. TCorp expects the investment managers we employ to demonstrate a commitment to investment stewardship, ESG integration an active ownership. TCorp believes that an integration-based approach to stewardship is likely to lead to better investment outcomes over time than an exclusion-based approach. For Official Use Only / 20 of 26
TCorp s Stewardship Pillars Integration Engagement Proxy Voting Collaboration Disclosure Embedding good stewardship and ESG principles into investment decision making processes, including the way in which investment managers are selected and monitored. Entering into communication with company management to ensure that ESG risks and opportunities are being identified and managed. Exercising shareholder rights to promote good corporate governance and management of ESG factors within portfolio companies. Working together with like-minded investors to pool resources, share information and enhance influence on ESG matters. Good stewardship starts with a public commitment which is then reported against on a regular basis. Resourcing Measurement Processes For Official Use Only / 21 of 26
Exclusion vs Integration based approach Investment Approach Exclusion/ Divestment Pros Ethically defensible position Sends an easily interpretable signal to companies and stakeholders Cons Reduced returns or increased risk if exclusion/divestment not based on economic assessment Lose ability to continue engagement and influence ESG practices of a company Integration and Engagement Potential to influence a company s ESG practices through collaborative engagement and policy discussion Potential to gain greater disclosure of a company s operations and exposure to risk Unlikely to succeed in changing the nature of the fundamental activity of the company For Official Use Only / 22 of 26
TCorp Stewardship Program how is it done? ESG Integration TCorp Stewardship Team Manager selection and monitoring Active Ownership: Company engagement and voting Measuring impact, disclosure and reporting Industry collaboration Via external investment managers Integration of ESG factors into investment processes Active Ownership: Company engagement and voting Proof of ESG integration: reporting via case studies and quarterly updates Long term value to NSW Government Family For Official Use Only / 23 of 26
Implementing Stewardship - Summary TCorp is committed to establishing and maintaining a best-practice stewardship framework. Milestones Completed Baseline Assessment, including initial carbon footprint and ESG ratings. Established internal resources, and completed first proxy voting exercise. Joined the Investor Group on Climate Change (IGCC). Became a signatory to the Carbon Disclosure Project (CDP). Joined the Australian Council of Superannuation Investors (ACSI). For Official Use Only / 24 of 26
Your Questions? For Official Use Only / 25 of 26
NSW Treasury Corporation (TCorp) Level 22, Governor Phillip Tower 1 Farrer Place, Sydney NSW 2000, Australia T: +61 2 9325 9325 F: +61 2 9325 9333 W: tcorp.nsw.gov.au ABN: 99 095 235 825 New South Wales Treasury Corporation ABN 99 095 235 825 ( TCorp ) is a statutory corporation of New South Wales. This information is correct as at May 2017. This presentation is provided for information purposes only and should not be relied on for trading or other business purposes. The presentation does not constitute investment advice and TCorp does not make any recommendation as to the suitability of any products or transactions mentioned. This presentation is not intended to forecast or predict future events. Past performance is not a guarantee or indication of future results. Any forward looking information is predictive in nature and may be affected by inaccurate assumptions or by known or unknown risks or uncertainties. Expected results may differ from results ultimately achieved. Any estimates, opinions and assumptions constitute the judgment of TCorp or the relevant third party source cited by TCorp as at the report date and is subject to change without notice. Any estimates and opinions contained in this presentation constitute TCorp s judgment as at the date of the presentation and are subject to change without notice. TCorp does not guarantee the accuracy, timeliness, reliability or completeness of the information or data and will not be liable for any errors or actions taken in reliance on the information or data. TCorp does not provide tax advice.