We are focused on ensuring all material investment risks, including environmental, social and governance (ESG) risks, are taken into account when investing on behalf of our members.
Our environmental, social and governance (ESG) policy outlines our beliefs and approach to including ESG factors in our investment process. Here’s a summary of our ESG policy.
What ESG means in terms of our investments
ESG factors are any environmental, social, governance or other sustainability-related factors which have the potential to materially impact the financial performance of an investment.
Failure to consider ESG issues can lead to mispricing investment risk and poor investment decisions. Effective management of ESG issues is an important part of our investment strategy, and reflects our Board's duty to consider the risks associated with different kinds of investments.
Our ESG beliefs
As a Western Australian statutory authority, we operate within the State Government's policy framework, legislative and regulatory requirements, and strive for industry best practice.
Recognising ESG risks helps us to achieve our investment goals
We believe that ESG and climate change-related factors can impact the ability of some assets or securities to meet investment objectives and provide optimal outcomes for our members. It’s appropriate that we give clear recognition to the risks that ESG factors represent to potential investment outcomes.
ESG risks are best considered at the asset level
When selecting our investment managers, we consider how they integrate ESG and climate change-related factors into their investment selection process. Most ESG risks are asset specific in nature, and so are best considered at the asset level by our external investment managers.
There are many approaches, but no single way, to assess ESG risks effectively
Some investors use screening processes that exclude investments with excessive ESG risks; others factor ESG risks into their valuation models for assessing a company's earnings prospects and thus the price they are prepared to pay for an asset; some apply ESG ratings when ranking securities in their investment universe, which influence the size of their investment. We believe that all these and similar approaches, can enhance the long-term risk and/or return outcomes for investment portfolios. Currently, our only exclusion is direct investments in tobacco companies.
Engaging with companies on ESG issues is important
Actively engaging with companies and investment managers about ESG issues is an important way that our investment managers integrate ESG factors into their investment activities. This aims to have a positive influence on outcomes, rather than simply avoiding investments that rank poorly, or companies with sub-standard practices. In some cases, engaging with companies with poor ESG credentials can promote change and bring strong investment returns as the company's ESG practices improve.
Our approach to ESG
Our investment process takes ESG issues into account
ESG factors may create risks which have the potential to affect our ability to provide long-term benefits to our members and the state. For example, a company that pollutes the environment may face penalties or clean-up costs later on, or loss of reputation and market share through use of slave labour in supply channels.
We take these risks into account during our investment process, to help produce improved returns for our members over the long term.
Our investment managers identify any material ESG risks
This includes carefully assessing the risk of an investment failing to provide suitable outcomes for our members, and engaging with investee company management to ensure they manage ESG issues appropriately and employ good ESG practices.
We consider ESG factors when hiring investment managers
When appointing investment managers, together with our asset consultant(s), we apply the following due diligence principles:
- We review the manager's philosophy in relation to ESG and how this translates to consideration of ESG factors in their investment process
- We seek to understand how a manager thinks about ESG, regardless of the language they use to describe their approach
- We look for consistency between the way in which an investment manager considers ESG factors and their approach to other factors that may influence investment decisions
- We seek to ensure that ESG-related risks and considerations are taken seriously and are given material weight in a manager's investment decisions
- Although not a formal requirement, we encourage our investment managers to be signatories to the United Nations Principles for Responsible Investment (UNPRI), or otherwise to adopt the principles as part of their investment processes
- An assessment of a manager's approach to ESG is a key element of our formal manager evaluation process, together with other investment considerations
- We will not consider working with managers who demonstrate insufficient or inadequate consideration of ESG-related issues
We discuss ESG issues as part of investment manager reviews
We regularly review our investment managers to ensure that our portfolios are managed in accordance with our expectations and requirements.
Investment managers promote good ESG practices
Investing in equities provides investors with ownership and in most cases, voting rights. We require our equity investment managers to manage our investments according to our objectives and, where appropriate, to promote good ESG practices by investee company boards and management. This may involve meeting with company management to raise issues and concerns, and exercising voting rights for the benefit of our members in accordance with our proxy voting policy.
Fixed income managers globally are increasingly engaging with bond issuers on ESG matters that may affect the credit risk profile of fixed income securities. We also require our fixed income managers to assess these risks when managing investments on our behalf.
From time to time, investment managers may invest in companies with poor ESG histories. However, we require our managers to take these factors into account when determining the suitability of the investment for our objectives. Similarly, we require our investment managers to promote good ESG practices and improved ESG outcomes. This may be either through dialogue with senior company management or by exercising voting rights.
Investment managers to report on ESG issues
Our investment managers are required to exercise their right to proxy vote on securities they manage on our behalf and in accordance with our obligations and objectives. Investment managers report on all proxy voting actions they undertake on our behalf, which our Investment team then reports to the Board.
Our asset consultant(s) assess investment managers on ESG factors
We make sure that our asset consultant(s) have suitable expertise and capacity to evaluate investment managers' ESG capabilities, and apply the above principles when researching and monitoring managers, and carrying out investment due diligence, in relation to our portfolio.
We consider the implication of various climate change scenarios
We acknowledge the Australian Prudential Regulation Authority’s (APRA’s) stance on climate change-related risk and the need to model the potential financial impact of these risks. Where appropriate, we stress test our portfolio against various climate change scenarios.
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