Stewardship and ESG Integration
ESG issues are fundamental to infrastructure companies, given they have significant service obligations and moral accountability to the communities in which they operate. We therefore believe it is important that ESG issues are fully integrated into the investment process.
We do not screen companies on ESG criteria, but seek to understand the risks and capture them in our proprietary quality ranking.
ESG analysis is integrated into our investment process through our quality assessment and ranking model. This model consists of 25 criteria that influence stock returns in general and infrastructure securities in particular. A score is assigned to each criterion; a lower quality score makes it harder for a stock to be included within the overall portfolio. ESG criteria account for 24% of the overall quality score.
Incorporating ESG considerations into the investment process in this way helps to inform our decisions of whether or not to hold shares in a specific company at any given point.
Assessment and monitoring
Infrastructure companies are assessed on a broad range of ESG-related factors and are relevant for every company we look at. Some notable examples include:
- Environmental issues are key drivers for electric utilities, energy infrastructure (oil & gas pipelines & storage) and railways.
- Social issues are particularly important to utility companies, as they have obligations to the communities where they provide essential services.
- Governance issues are important performance drivers for all infrastructure stocks. Board composition and alignment of interests are considered to be particularly important, so they are rated separately in our ESG scoring process.
We look to positively influence companies towards ESG best-practice. Through company engagement, we seek to highlight areas for potential improvement, encourage disclosure on ESG issues, and commend companies that are making progress in this area. We typically engage companies on material issues to achieve specific outcomes, namely to ensure good ESG practices to help protect investor interests.
"ESG issues are fundamental to infrastructure companies, given they have significant service obligations and moral accountability to the communities in which they operate."
"ESG analysis is integrated into our investment process through our quality assessment and ranking model, accounting for 24% of the overall quality score."
We believe that a strong commitment to stewardship is an essential component of a strong approach to responsible investment (RI), and that embedding RI into the core of our investment activities is in the best long-term interests of our clients. For more than a decade we have systematically and progressively improved our practices and processes across our investment capabilities globally.
The section below provides additional, team specific, information on climate change. Further information on our approach to climate change can be found in our climate change statement.
Team Climate Change Statement
Climate change is the most material ESG theme affecting our investment strategy. In the utilities space, attempts to reduce carbon emissions has significant implications for the way in which electricity is generated, transmitted and distributed. Renewable energy is currently experiencing a virtuous cycle of falling costs, improving productivity and growing market share. In contrast, non-renewable energy is in a vicious cycle of declining market share, reduced revenues and rising costs.
Large-scale capital investment in renewables is being led by large cap, publicly-listed electric utilities. The replacement of uneconomic, older coal-fired power stations with wind and solar power is likely to present substantial capex opportunities for many utilities over coming years. Looking ahead, climate change also has material implications for energy pipelines, which could face stranded asset risk; and freight railways, whose coal haulage volumes may decline further.
We seek to understand the risks associated with climate change by capturing them in our proprietary Quality Ranking model. We have identified 25 criteria that we believe influence stock returns in general and infrastructure securities in particular – several of which are relevant to climate change. A score is assigned to each criterion. The Quality Ranking of each stock is then combined with its Value Ranking, to provide an overall ranking of the securities we cover. This overall ranking is the focus of our stock selection and portfolio construction process.
One of the key frustrations facing investors seeking to deploy capital in an informed way is the subjective nature of the information provided by many companies on environmental matters. We have lobbied US utility companies including Southern Company, Alliant Energy and Evergy Inc on this issue. We encourage them to disclose to the Edison Electric Institute (which represents all US investor-owned electric companies) a set of consistent and easily comparable environmental, social and governance metrics. We hope that continued engagement on the topic of improved disclosure will bear fruit, helping us to make better informed decisions relating to climate risk.
In December 2017 we launched the First State Sustainable Listed Infrastructure Fund. This Fund was developed as a result of our team’s fundamental belief that a focus on sustainability is integral to reducing risk and achieving positive long term return outcomes. It seeks to invest in infrastructure companies that are positively positioned to benefit from sustainable development. The Fund builds on First State’s investment expertise in listed and unlisted infrastructure, including a 10+ year track record within the global listed infrastructure asset class. It also complements First State’s wider commitment to Responsible Investment across its fund range.
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Proxy voting history by type of resolution
The table below contains the proxy voting history for the team by issue type. The chart provides the same information for FY2019.
The chart below shows the number of times the team has voted against management recommendations, proxy advisors' recommendations, or against both. The purpose of this table is to show the independent judgement which is applied by the team when making voting decisions.
Proxy voting by region
The chart below shows the number of times the team has voted in each region and the percentage of votes against management and our proxy advisors' recommendations, or against both. The purpose of this table is to show the regional difference in voting patterns and governance concerns.
Proxy voting information is as at 31/12/2019
Source: First State Investments / CGI Glass Lewis