CSF Pty Limited, the Trustee of Catholic Super, has devoted considerable effort to Responsible Investment (RI) since early in the 2000s.
We have prepared this review on the main developments in the RI field at CSF Pty Limited (CSF) during the 2016/17 financial year. As this is our first review of this nature, we will also cover developments over previous years to give relevant context. You can also find our Responsible Investment Policy and Climate Change Policy, as well as more general information on our approach, HERE.
We intend to provide annual updates on our RI, and welcome input on the sorts of issues our members would like to see covered. Please feel free to contact us with ideas and suggestions.
This report covers eight major areas:
- Integration of ESG factors
- Active ownership
- Sustainability-themed investment
- Climate change
- Divestment/negative screening
- Our new PositiveIMPACT investment option
Our RI activities have four main components:
- Integrating Environmental, Social and Governance (ESG) issues into our day to day investment decision-making through our process for selection and review of our external investment managers, and engagement with them.
- Behaving as an 'active owner' of the companies in which we invest by engaging with them on a range of ESG issues and through exercising our right to vote at company meetings.
- Collaborating with other investors and industry groups to address systemic, industry-wide RI/ESG issues that are best addressed through joining forces with others.
- Investing in sustainability-themed opportunities where they meet our usual risk/return investment criteria, and at the same time generate a positive social and/or environmental impact.
As the overwhelming majority of our investments are externally managed, the main focus of our ESG integration effort entails:
- assessing the extent to which our existing and potential external managers embrace RI thinking and incorporate it into their investment decisions, and
- encouraging our managers to enhance their performance in this area over time.
Since 2014, we have also been assessing property managers. Our assessment of property managers is greatly facilitated by our subscription to the Global Real Estate Sustainability Benchmark (GRESB), which undertakes a comprehensive assessment of more than 800 property vehicles globally (listed and unlisted), including funds offered by all but one of the unlisted property managers with which we invest. It is pleasing to report that CSF's managers, and Australian managers generally, perform extremely well in this survey relative to global peers. Indeed, CSF is invested in the property fund which achieved the highest rating of all 823 funds in the survey globally in the 2017 report. We rated two of our property managers as Leaders and two as Improvers (with one of those managers showing the potential to also be a Leader) based on a combination of the GRESB sustainability rating, the National Australian Built Environment Rating System (NABERS) energy efficiency rating and our direct engagement and meetings with fund managers.
The current ESG ratings of our listed equity and property managers are as follows:
|Rating||Number of listed equity managers||Number of listed property managers|
We subscribed to the GRESB Infrastructure module, which was introduced in 2016. Infrastructure is an asset class where long-term sustainability issues are very much to the fore due to the long economic lives of the underlying assets and because the energy and transport sectors, which are strongly represented in infrastructure portfolios, have traditionally been heavy carbon emitters. Unfortunately, in the first year, the new GRESB service did not achieve very good coverage of the market, much lower than that of the property sector. Nonetheless, we expect that over time this will be addressed and that the GRESB Infrastructure service will enhance our understanding of our managers' position relative to global peers, and that pressure will be brought to bear on managers to enhance their performance on relevant ESG matters.
We note also that managers of fixed interest portfolios, particularly those with a credit orientation, have started to focus on ESG integration or, in some cases, report and communicate their long-standing efforts in this area. To date, we have not formally adopted ratings of our fixed interest managers but will do so as other priorities permit. We have invested in one credit strategy where sustainability analysis is a key part of the investment case (see section 5: Sustainability-themed investment).
Engagement can be undertaken by investors individually or in collaboration with other like-minded parties. It is generally most effective when undertaken in a non-confrontational manner and "behind the scenes". We've had a dedicated engagement effort since 2003 when we became the second client of Regnan, now widely regarded as Australia's leading specialist in the area.
As well as our early support for Regnan and ACSI in Australia, we also use the services of a specialist engagement service globally, being Bank of Montreal's Responsible Engagement Overlay (REO) service. We are one of a very small number of Australian superannuation funds contributing to engagement overlay services both in Australia and globally.
The key engagement issues or themes focussed on during 2016/17 were:
We again voted on all resolutions put before General Meetings of the companies in which we invest directly in Australia, except for the stocks contained in one micro cap mandate (i.e. investing in very small companies) where the voting activity is delegated to the external manager. A summary of our voting over recent years is shown in the following table.
|CSF Votes 2016||CSF Votes 2015||CSF Votes 2014|
|Abstain/ Do Not Vote||0||28 (1.8%)||1.6%||1.9%|
|None (or Other)*||47||0||0%||0%|
|Total Votes||1,655||1,655 (100%)||100%||100%|
* Resolutions where there is no management recommendation usually relate to proposals for remuneration of or grants of options or shares to non-executive directors, or in some cases for remuneration reports.
In 2016, we voted against management recommendations on about 8% of resolutions, which is broadly in line with the pattern of recent years.
The influence of institutional shareholders was also seen in the withdrawal of contentious resolutions, including Director nominations, when it became clear that they lacked shareholder support and would be voted down.
Internationally, we note a new emergence of climate related resolutions. For international shares, our fund managers vote on our behalf because we invest via pooled or commingled funds where we do not have direct control. We review the voting behaviour of our managers and have specifically engaged with them in respect of their voting on these climate change resolutions.
More information on the various collaborative initiatives in which we are involved is provided in our Responsible Investment Policy.
- In 2013, we committed $60 million to a global private debt fund which lends to small-to-medium-sized businesses which have a growth agenda with a clear sustainability angle. Interestingly, the second loan was to a company involved in food processing and which is based in Mill Park, a northern suburb of Melbourne. The investment period for this fund has now been completed and we are receiving distributions.
- In 2014, we made a $60 million commitment to a fund which invests in renewable energy and energy efficiency projects in developing countries. This Global Energy Efficiency and Renewable Energy Fund (GEEREF), was raised by an arm of the European Investment Bank. A number of European governments have contributed so-called "first loss capital" which tilts the risk/return profile in our favour. During 2016/17 we received the first distributions (repayments of capital and profits) from the Fund.
- In 2016/17:
- We committed $60 million to a fund which is undertaking utility-scale solar PV projects in Australia. To our knowledge, this is the first fund of its type in this country. Since 30 June, we have increased the size of this commitment to $90m.
- We committed $90 million to a low carbon power fund which will invest in a range of renewables technologies across the US, and potentially the UK and Australia. We previously invested in a US solar PV fund managed by the key individuals who will be managing this new fund. That fund has since returned the capital, with a satisfactory return.
In the following table, we list the assets in our portfolio where:
- there is a clear sustainability angle to the strategy concerned, and the manager is a global leader in integrating sustainability into its decision-making, or
- the underlying assets generate renewable energy and therefore have inherent sustainability benefits. In some cases, the renewable energy assets form part of diversified infrastructure portfolios. In others, the strategy is dedicated solely to renewables.
|Manager/Strategy||Amount invested1 ($m)||Percent of total
|Total commitment where
|Generation Investment Management||296.9||3.5||N/A|
|Generation Investment Management||26.3||0.3||60.0|
|Windfarms and peaking gas within Infrastructure
Capital Group funds
|Wind, solar and waste-to-energy within
Macquarie Asia Infrastructure Fund
|Lighthouse Solar Fund||36.2||0.4||60.0|
|Global Renewable Energy and Energy Efficiency
|Quinbrook Low Carbon Power Fund||0.0||0.0||88.0|
1 Value of the investment at 30 June 2017.
2 With some unlisted funds, we provide a commitment up-front. This committed amount is then drawn down progressively through an investment period as underlying investments are made. Through the life of the fund, we receive distributions of income and capital gains or losses. In this column, we show the original committed amount. It differs from the amount shown in the first column and can be higher or lower depending on where the fund is in its lifecycle. For the Macquarie Asia Infrastructure Fund, the figure shown is based on the renewables share of total assets as at 30 June 2017.
3 We have only included in this table our investment in property vehicles which achieved very high rankings in the latest GRESB report.
More detail on our thinking on this issue is provided in our Climate Change Policy which has been approved by the Board and is overseen by the Investment Committee. Although we have been active in the area for many years, our Climate Change Policy came into force in 2016 and is reviewed on an annual basis. Some of the highlights of the policy include:
- Beliefs: The policy sets out in detail our investment beliefs with respect to climate change. Some key aspects of our beliefs are that:
- climate change is already having physical impacts which are influencing investment outcomes in some areas
- the world is at the relatively early stages of a decades-long transition to a lower carbon economy
- as a result of mitigation efforts, some assets will become stranded (or may have already become stranded)
- the transition to a lower carbon economy will also present investment opportunities, and
- the integration of climate-related risks and opportunities into investment decisions is vital for enhancing our members' best interests as the low carbon transition process unfolds.
- Engagement and Collaboration: Engagement with companies, fund managers and policy-makers is important, and should be pursued either directly or, where this will achieve greater progress, in collaboration with like-minded parties.
- Climate-themed investment: We will undertake climate-themed investment which satisfies normal risk/return criteria. We will monitor investment undertaken under this banner and would like to see it increase as a proportion of total assets over time. The position as at 30 June 2017 is shown in section 5: Sustainability-themed investment.
- Reporting: We will report to our members on our activities in this area, and hope to refine and improve this reporting over time.
- Such strategies are generally based on unconvincing data, run the risk of building in other unintended biases to the portfolio and more generally are not well-suited to achieving the favourable long-term investment returns which are our fundamental responsibility to members.
- Climate change is best addressed by a comprehensive approach spanning a range of activities and involving governments, companies, institutional investors and individuals acting in their daily lives. We consider that we are responding to the climate change challenge in a number of meaningful ways, as shown in this review.
We frequently sympathise with the underlying concerns driving these requests, however we generally do not see divestment as a viable solution to the issues being raised. If we divest our holding in a particular company:
- In the absence of a concerted global campaign against the company concerned, it is likely to continue to operate in much the same way as it always has.
- The underlying consumer demand which the company is meeting will also continue unaffected by our divestment decision.
- We will have lost our opportunity as a shareholder to engage with the company to encourage it to improve its practices.
- It is likely that our shares will be acquired by another party which is less inclined to engage with the company concerned, reducing the likelihood that progress will be achieved.
This thinking also underpins our strategy of seeking out and investing in climate-related opportunities that can capture this transition process while at the same time producing solid risk-adjusted returns for our members. Our portfolio will transition over time as and when the attractive investment opportunities arise.
At the same time, we are aware that some of our members would like to have their superannuation investment concentrated in assets where there is a clear and tangible social or environmental impact. Because we have embraced RI over many years, we already have a number of strategies in our portfolio where there is such a clear and tangible impact. Accordingly, we introduced our new PositiveIMPACT option on 1 November 2017. This option is diversified across asset classes, but comprises only those strategies within each asset class where there is a tangible social or environmental benefit and/or where sustainability-driven thinking is integrated into decision-making at an advanced level. A number of the strategies included in this new option are mentioned in section 5: Sustainability-themed investment.