SUPER FUND RESPONSIBLE INVESTMENT BENCHMARK REPORT 2018 RIAA MEMBER ONLY WEBINAR 21 June 2018 Presenters: Simon O’Connor - RIAA Katie Beith - NZ Super Fund Liza McDonald - First State Super Responsible Investment Association Australasia
Super Fund Responsible Investment Benchmark Report 2018 Responsible Investment Responsible Investment Association Australasia Association Australasia
Why does RIAA publish this Super Fund RI Report? 1. To build on RIAA’s annual RI Benchmark Report 2. Highlight leading practices and share strong case studies 3. Provide a framework that clearly articulates the constituent parts of a management system for RI by superfunds; as well as expectations for leading performance 4. Note any changes on last year and implications for these
Framework’s Five Pillars 1. Governance and Accountability 2. RI Commitment 3. RI Implementation 4. Measurement and Outcomes 5. Transparency and Responsiveness
The research universe 29/53 funds (55%) responded 1. APRA's list of Australia’s largest super up from 40% in funds 2016 2. Select non-APRA regulated but sizable and significant asset owners in our market 3. RIAA member super funds that fall outside the two categories above and that have opted in
Key findings Governance, accountability and RI commitment
70% of super funds have their full board, or board committees, overseeing ESG (An increase of 14%, from 56% in 2016)
The trustees of 64% of super funds are actively considering climate risk HOWEVER … Up to a third of trustee boards are still not actively considering climate risk,
60% have a least one negative screen across the whole fund (up from 34% in 2016)
Responsible investment employee numbers have doubled since 2016 45% are employing one or more full-time employees with significant responsibility for RI Nearly half of the super funds offer a total of 75 responsible investment options (compared to the similar proportion offering 54 options in 2016)
Key findings RI implementation – ESG implementation
The expertise, knowledge and RI performance of external investment managers is fundamental to the success of the Australian super fund industry 70% of super funds identify external investment • managers’ responsibility for RI 53% consider external investment managers as either • wholly or largely responsible for the ESG information provided to the fund
Management of external managers is done comprehensively by leaders but to a basic standard by a majority of funds Approximately half (or less) of funds: • minimum RI expectations across listed equities and/or fixed income are discussed with external managers • require that external managers discuss how ESG factors have impacted specific investment decisions/portfolio performance require them to discuss their role in influencing investee • company behaviour
Key findings RI implementation – Stewardship
Company engagement 43% indicate involvement in direct company engagement (up from • 30% in 2016) • 64% engage in collaborative company engagement (up from 52% in 2016) Some funds (13 out of 53) keep reliable data on engagements in the • form of engagement reports, and fewer still disclose their engagement activities (9 out of 53)
Voting 94% of super funds have a formal voting policy (all but one are made public) – up from 58% in 2016 Of the 29 funds providing responses to how they voted in 2017/18 • only 3 funds voted with the company board and/or, proxy voting adviser on every occasion
Key findings Measurement and outcomes
25% of super funds have performance targets for their RI strategy including: • Reducing carbon intensity • Building climate resilience • Contributing to SDGs Ensuring voting of a certain percentage of shares • PRI reporting rating as a standard for measuring performance •
Stewardship practices – measurement and reporting Of the 23 funds that undertake direct engagement, all report monitoring company actions taken after the engagement, either • all of the time (8 funds) • the majority of the time (15 funds) 16 out of these 23 funds (30% of all funds) keep reliable data on engagements in the form of company engagement reports.
Key findings Transparency and responsiveness
Annual reporting on RI : 60% up from 44% in 2016 External fund manager : 81% up from 60% in 2016 Voting : 80% up from 60% in 2016 Engagement : 23% up from 20% in 2016 Full holdings disclosure : unchanged
Leading RI Super Funds
Leading RI Super Funds are vigilant, skilful and courageous stewards • • can be traditional and ethical are aggressively transparent • • know what’s important for their client and offer choice
Leading RI Super Funds 2018 Fund name Australian Ethical AustralianSuper Leading RI Super Funds scored Cbus Comprehensive for quality and Christian Super scope of their disclosures across at least 4 of the 5 pillars: First State Super Future Fund 1. Governance and accountability HESTA 2. RI commitment Local Government Super 3. RI implementation Mercer Superannuation (Australia) 4. Measurement and outcomes 5. Transparency and responsiveness NZ Super Fund Unisuper VicSuper Assessment scale of quality and scope of disclosures Vision Super Limited Basic Broad Comprehensive
Super Fund Responsible Investment Benchmark Report 2018 Responsible Investment Responsible Investment Association Australasia Association Australasia
TITLE: Global engagement at NZSF AUTHOR: Katie Beith Senior Investment Strategist, Responsible Investment EVENT | PRESENTATION: RIAA webinar: Super Fund RI Benchmark Report, 21 June 2018
C2 - INTERNAL USE ONLY \ FILE INFO \ PG 2 Why engage? n Active owner responsibilities (including Principle 2 of the UNPRI) n Good for returns* n Supports peer collaboration n Manages reputational risk n Support key global initiatives relating to long term capital and stewardship * See next slide for evidence of the financial impact of engagement
C2 - INTERNAL USE ONLY \ FILE INFO \ PG 3 The financial impact of engagement “Engagement can preserve and enhance long-term value creation which benefits shareholders and beneficiaries” UNPRI Guide on Active Ownership (October 2017) STUDY SUMMARY OF FINDINGS Dimson, E., Karakas, O. and Li, X. (2015). Active The study found that companies targeted in corporate governance - and climate Ownership. The Review of Financial Studies, 28(12), change-related engagements by an investment manager between 1999 and 2009 pp. 3225-3268. showed significant financial outperformance of the market in the period following engagement. The average one-year abnormal return after initial engagement was 1.8%, growing to 4.4% for successful engagements, and no market reaction for unsuccessful ones. Junkin, A., CFA, CAIA (2015) , Managing Director, This review found that companies targeted by CalPERS for engagement and Update to The “CalPERS Effect” on Targeted performance improvement delivered an excess cumulative return of 13.72% above Company Share Prices Wilshire. the Russell 1000 Index, and 12.11% above their respective Russell 1000 sector indices following engagement. This includes both those on the public Focus List and those identified for confidential engagement. Becht, M., Franks, J., Mayer, C. and Rossi, S. (2010). The study found that Hermes Focus Fund “substantially outperforms benchmarks” Returns to Shareholder Activism: Evidence from a with an abnormal return net of fees of 4.9% a year against the FTSE all-shares index. Clinical Study of the Hermes UK Focus Fund. The The research estimates that abnormal returns are largely associated with Review of Financial Studies, 23(3), pp. 3093-3129. engagements rather than stock picking.
C2 - INTERNAL USE ONLY \ FILE INFO \ PG 4 Engagement objectives Corporate engagement programme – GLOBAL n Monitor, identify and engage with companies which breach international standards of good practice, in particular the UN Global Compact. n Our engagement seeks to encourage companies to address poor ESG practices and improve ESG disclosure.
C2 - INTERNAL USE ONLY \ FILE INFO \ PG 5 Engagement priorities Four priority areas for engagement: n Human rights (child labour; worker safety; operations in weak states) n Business ethics (bribery & corruption) n Severe environmental damage n Climate change Companies in breach of standards are brought to our attention by MSCI through ‘red flag’ alerts. If the breach aligns with our priorities, it is added to the CFI Global Focus List (CFI GFL).
C2 - INTERNAL USE ONLY \ FILE INFO \ PG 6 Engagement implementation n Engagement service provider (BMO) n Direct (GNZS) n Collaborations n Managers n NZ Active Equities Team
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