ESG and responsible investment policy
1. Purpose
The purpose of this policy is to describe GESB’s approach to incorporating Environmental, Social and Governance (‘ESG’) factors, including climate change related risks, into investment decisions.
It also sets out expectations for GESB’s appointed investment managers to take into account ESG-related risks and opportunities when investing on behalf of GESB.
The policy does not serve to give effect to individual opinions, preferences or moral judgements.
2. Introduction
Responsible investment plays an important role in how we manage assets on behalf of our members and the WA State Government over the long term. For GESB, responsible investing means taking ESG risks and opportunities into account when making decisions across the portfolio and throughout the investment process.
ESG factors are defined as any environmental, social or governance factors that have the potential to materially impact the long term investment returns.
- ESG factors may arise in relation to the full range of investments, including but not limited to, listed and unlisted equities, fixed interest and property
- Where the investment pertains to a company, ESG factors can arise directly through the entity's own operations, indirectly through those of its customers and suppliers, or in relation to the industry or regulatory environment in which the company operates
- Inadequate consideration of ESG issues can lead to investment risk being mispriced, opportunities overlooked, and/or poor investment decisions being made
In some cases, ESG factors can be hard to measure and may not impact all investments to the same degree. Effective management of ESG issues means recognising and managing the risks and opportunities associated with different kinds of investments.
Responsible investing is consistent with meeting investment objectives for GESB members and the State over the long term.
3. Definitions
ESG refers to Environmental, Social and Governance. ESG covers a broad range of factors, examples of which are provided below:
Environmental
Environmental factors are those affecting the natural environment including climate change, pollution, exploitation of resources, water depletion, habitat and biodiversity loss (deforestation), and waste generation.
As a subset of environmental factors, climate change refers to changes to regional or global weather and climate patterns, affecting factors such as temperatures, rainfall and sea levels. Financial risks arising from climate change are classified by the Australian Prudential Regulatory Authority (APRA) as:
- Physical climate risks, including both long-term changes in climate as well as changes to the frequency and magnitude of extreme weather events, which can cause direct damage to assets or property, changes to income and costs, and changes to the cost and availability of insurance
- Transition climate risks include risks related to changes in domestic and international policy, technological innovation, social adaptation and market changes, which can result in changes to costs, income and profits, investment preferences and asset viability, and
- Liability risks which stem from the potential for litigation if institutions and Boards do not adequately consider or respond to the impacts of climate change.
Social
Social factors include human and labour rights, modern slavery, child labour, human capital management, workplace diversity and gender equality, workplace health and safety, supply chain management, and community relations, including consideration of issues surrounding indigenous communities.
Governance
This includes issues regarding how companies or assets are managed or ‘governed’, including how strategic and operational decisions are made and the alignment of a company’s Board and management with its shareholders. Governance issues include Board composition and skills, executive remuneration, accounting and audit practices, legislative requirements, decision-making processes, bribery and corruption, and culture.
4. Governing legislation and regulatory requirements
As a Western Australian statutory authority, GESB operates within the State’s policy framework, legislative and regulatory requirements, and aims to align with industry best practice as far as is practicable.
GESB’s approach to ESG and responsible investment is to be consistent with the State’s policy framework and regulatory requirements, including the Board’s role to act in best financial interest of its members. This includes aligning with the WA Climate Change Policy and guidance from the Australian Prudential Regulation Authority (APRA) in relation to ESG risks and opportunities, where practicable.
GESB acknowledges our duty to assess and manage all foreseeable material risk factors as effectively as possible. In the context of ESG considerations, this means identifying, managing, and disclosing (where appropriate) material ESG risks and opportunities that may affect investments.
5. Philosophy and beliefs
Underpinning our approach to responsible investment is a set of beliefs. These beliefs inform our actions on ESG issues and are a key part of the investment strategy approved by the Board.
GESB believes:
- ESG factors can impact long term, risk adjusted returns for members. It is important to understand material ESG risks and opportunities and manage these as part of the investment process
- Climate change and the transition to a low carbon economy is an important ESG factor to incorporate into the investment process across the total portfolio
- Well governed companies and assets that manage material ESG risks and opportunities effectively are expected to enhance the long term value of an investment
- Effective stewardship can play a role in improving the ESG practices of companies as well as enhancing the long term, risk adjusted returns of investments. Voting and engagement are important avenues to influence the companies in which we invest
- Transparency is important and GESB is committed to making ongoing improvements to the information we disclose to members and key stakeholders, while balancing the reputational risk and regulatory considerations.
Climate change
GESB recognises climate change is the highest priority ESG factor posing a systemic risk to our investments and to the economy. Climate change also creates opportunities as companies respond and adapt as the real economy shifts towards a lower carbon environment.
In line with meeting its investment objectives, GESB has made a commitment to transition its investment portfolio to net zero carbon emissions by 2050, which is consistent with the goals of the Paris Agreement and in line with the Western Australian Climate Change Policy.
Under this commitment, GESB has set interim reduction targets over the medium term for listed equities and unlisted property, where pathways to achieve such a target have been clearly identified. These interim targets will be used to monitor and report on GESB’s progress.
The overarching commitment and interim targets are based on scope 1 and scope 2 emissions as defined by the Greenhouse Gas Protocol. It is our intention to include scope 3 emissions in line with the timeframes stated by any governing legislation and/or regulatory requirements.
Similarly, GESB will gradually broaden the interim reduction targets into asset classes where there is reliable data and where climate risk is identified as material.
GESB, through the Investments Division, will continue to engage with appointed investment managers and other stakeholders to keep abreast of developments, new data and to confirm consideration of climate risk is reflected in its investment decisions.
6. Roles and responsibilities
The Board
The Board is responsible for GESB’s overall governance, compliance and performance, which extends to setting the overall approach to managing ESG risks and opportunities. This includes approving changes to this policy as well as any ESG and/or climate related objectives.
Investment Committee
The Investment Committee is responsible for reviewing and providing input into the update of this policy. This includes oversight of ESG integration across the portfolio.
Chief Investment Officer
The Chief Investment Officer is responsible for overseeing the implementation and monitoring of the policy, and reporting to the Board and Investment Committee on material ESG issues that may impact GESB. This includes overseeing the management of climate-related risk and ensuring there is appropriate understanding of, and opportunity to discuss, ESG risks and opportunities with the Board and Investment Committee.
Head of Responsible Investing
The Head of Responsible Investing is responsible for implementation of this policy. This includes providing recommendations to the Board on any ESG objectives, asset class strategy and structure and policies as they relate to managing and monitoring ESG risks and opportunities and maintaining relationships with key responsible investment service providers.
Investments Division
The Investments Division is responsible for supporting the Head of Responsible Investing in the implementation of this policy. This includes incorporating ESG considerations into asset allocation, portfolio construction and investment manager recommendations.
Appointed investment managers, Asset Consultants and service providers
Investment managers, Asset Consultants and service providers support the implementation of this policy through integration of ESG factors into investment analysis and decision making. GESB’s appointed investment managers, contracted through an Investment Management Agreement, are required to comply with any policy of GESB concerning the integration of ESG factors, or any other ESG risks and opportunities arising out of the portfolio that they manage on GESB’s behalf.
7. ESG integration
GESB considers ESG factors during the following stages of the investment process:
- Investment strategy – through understanding the impact that climate change could have on long-term investment returns and risk
- Portfolio construction – through understanding exposures to various ESG related risks and opportunities within the asset classes we invest in
- Investment manager selection and monitoring – through understanding how appointed investment managers integrate ESG factors into their investment decisions and monitoring whether they act in a manner consistent with their stated approach
- Stewardship – through requesting that appointed investment managers engage with investee companies and undertake proxy voting on GESB’s behalf to generate value and promote good ESG practices
- Engagement with Asset Consultant(s) – through requiring that appointed Asset Consultant(s) include ESG considerations when carrying out investment manager due diligence and providing advice
Investment strategy
When formulating investment strategy, GESB identifies and measures investment risk with an aim to understand the impact of material risks, such as ESG and climate change risk, on investment performance.
GESB currently undertakes annual stress testing and scenario analysis across our investment options. Stress testing and scenario analysis helps to understand and assess the potential impact that climate change may have on investment returns. The scenarios considered by GESB may include different policy action assumptions, a range of emissions pathways and level of physical impact (i.e. temperature changes). This work is carried out in conjunction with GESB’s Asset Consultant.
Portfolio construction
GESB acknowledges the importance of understanding ESG risks and opportunities at a portfolio level. That is, while appointed investment managers may be appropriately managing ESG risks and seeking opportunities within each of their underlying portfolios, unintended portfolio risks could arise at an aggregate level through the combination of underlying positions.
GESB aims to use a range of tools to measure and monitor the portfolio from an ESG perspective.
Investment manager selection and monitoring
GESB predominantly uses appointed investment managers to implement investment strategies and select underlying investments within asset classes. Initial and ongoing investment due diligence of appointed investment managers is carried out by professional, independent Asset Consultant(s) appointed by GESB.
GESB expects its appointed investment managers to identify, assess and manage material ESG risks and opportunities. Understanding these risks and opportunities assists appointed investment managers in engaging with investee company management to ensure that ESG issues are appropriately managed and good ESG practices are employed.
GESB accepts that each appointed investment manager may have different methods to integrate ESG into investment decisions, especially across different asset classes.
When selecting and appointing investment managers across each asset class, GESB’s Investments Division and the appointed Asset Consultant(s) apply the following due diligence principles in relation to ESG capabilities:
- Review the investment manager’s philosophy in relation to ESG and how this translates to consideration of ESG factors in their investment process
- Understand how the investment manager integrates ESG considerations, irrespective of the language used to describe their approach
- Look for consistency between the way the appointed investment manager considers ESG factors and their approach to other factors that may influence investment decisions
- Ensure that ESG-related risks and opportunities are considered and given weight in the active investment manager’s investment selection decisions
- Understand how the appointed investment manager uses stewardship to assess ESG issues affecting the investment and encourage good ESG practices
- Encourage appointed investment managers to be signatories to the Principles for Responsible Investment (PRI) or otherwise to adopt the principles as part of their investment processes. This is not a formal requirement and is not a sole determining factor in relation to assessing the investment manager’s ESG credentials
- Review the investment manager’s approach to ESG as part of the formal manager evaluation process, together with other investment considerations, and
- Investment managers whose investment process demonstrates insufficient or inadequate consideration of ESG-related issues will not be considered for a GESB mandate, and would lead to the divestment of a mandate with an existing manager if no improvement is demonstrated over an agreed timeframe
The ESG approach adopted by GESB’s appointed investment managers’ is reviewed and assessed regularly to ensure that portfolios are managed in accordance with GESB’s expectations and minimum requirements (as detailed above). Where beneficial, GESB will request its appointed investment managers to complete a questionnaire to help gather further insights into a manager’s approach to ESG and/or specific ESG issue, such as modern slavery. As part of this process, GESB may encourage its appointed investment managers to make improvements to ESG practices, if required.
The Investments Division and/or Asset Consultant(s) will discuss ESG matters with appointed investment managers to understand ESG integration into their investment process. These discussions may be general in nature or relate to specific investments. These conversations form part of regular monitoring meetings with GESB’s appointed investment managers. If necessary, the Investments Division will have dedicated meetings to address ESG issues arising from the manager or from specific investments.
Stewardship
Company engagement
Engagement with companies about ESG issues is an important way that GESB’s appointed investment managers integrate ESG factors into their investment activities. Engagement seeks to influence the responsible business practices of a company, rather than merely avoiding investments that rank poorly, or companies with sub-standard existing practices.
GESB expects its appointed investment managers to use engagement as a tool to encourage good ESG practices and to better understand ESG risks and opportunities within the portfolio(s) they manage. The Investments Division requests its appointed investment managers engage with companies directly, via a collaborative approach or using third party providers. At a minimum, GESB requires its appointed investment managers investing in listed equities via a mandate to report on their stewardship activities annually. This reporting aims to demonstrate how such stewardship activities support the objective of delivering financial returns to members.
GESB acknowledges that from time to time investment managers may invest in companies with poor ESG histories. However, GESB expects its appointed investment managers take these factors into account when making active investment decisions. Similarly, GESB expects that its appointed investment managers promote good ESG practices with the aim of improved valuation of the investment over the long term. This may be either through dialogue with the Board and/or management of investee companies, or by exercising voting rights.
GESB maintains oversight of active stewardship undertaken by its appointed investment managers. GESB may choose to monitor stewardship activities with a focus on key themes and/or a subset of focus companies identified by GESB’s Board and/or internal Investment Division.
Voting shares
Investing in equities provides investors with ownership and in most cases, voting rights. Prior to exercising voting rights, our appointed investment managers are encouraged to engage with the companies to raise issues and concerns. Where appropriate, GESB endeavours to understand the role of voting in its appointed investment managers escalation process.
GESB’s appointed investment managers exercise voting rights for the benefit of GESB members in accordance with GESB’s Proxy Voting Policy.
Asset Consultant(s)
GESB undertakes due diligence to ensure that its Asset Consultant(s):
- Have suitable expertise and capacity to evaluate investment managers’ ESG capabilities
- Apply the above principles when researching and monitoring managers
- Carry out investment due diligence in relation to the GESB portfolio
Any advice provided by GESB’s Asset Consultant(s) should take into account the above beliefs and approach as well as regulatory frameworks and standards as they relate to ESG matters.
8. Reporting and disclosure
GESB expects that its appointed investment managers report to GESB on ESG issues relating to their portfolio. This information includes how the manager incorporates ESG into their investment process, ESG related portfolio metrics including carbon related metrics or portfolio activities such as ESG research, company engagement and proxy voting actions.
GESB endeavours to disclose meaningful and useful ESG related information to its members.
GESB provides updates on our website including disclosures related to GESB’s climate change transition plan and portfolio holdings.
9. Exclusions
The integration of ESG factors into the investment process means that exclusion of a particular company or industry is usually a last resort.
To determine whether a company or industry is considered for exclusion from the portfolio, the following factors will be taken into account:
- Whether the goods and/or services produced by the company/industry are reasonably expected to directly cause:
- Human death
- Significant and irreparable damage to the environment
- Gross inequality in society, or
- Breaches in law, international standards, treaties or convention, including modern slavery legislation, and
- Whether the exclusion is expected to be in the best financial interest of members, and
- Whether the company has failed to address material ESG risks and feedback from the appointed investment manager(s) support the view that company engagement has proven ineffective
In addition, GESB does not invest in sanctioned countries identified in the Department of Foreign Affairs and Trade (DFAT) Autonomous Sanctions Framework.
In exceptional circumstances, exclusions may be determined by the Board and/or Treasurer where there is undue reputation risk to both GESB and the State from owning certain investments.
The following table summarises the exclusions and the respective conditions applied.
Portfolio wide exclusions are applied across the portfolio where a segregated mandate with an appointed investment manager is in place. For some pooled fund investments, exclusions may not be practical. Exclusions do not apply to equity index futures or other derivatives which may have an indirect exposure to these companies and/or industries.
| Definition | Conditions/thresholds | |
|---|---|---|
| Tobacco | GICS Industry Tobacco classification | Manufacturers of cigarettes and other tobacco products (all equities and issuers that fall within the classification). |
Bloomberg Barclays Global Aggregate Corporate Tobacco Index | All fixed income issuers that fall within the classification. | |
| Controversial weapons | Companies with any ties to controversial weapons (cluster munitions, landmines, depleted uranium weapons, biological/chemical weapons, blinding lasers, non-detectable fragments and incendiary weapons | Using MSCI Business Involvement Screening Research:
|
| Nuclear weapons | Companies that manufacture nuclear weapons or components that were developed, or are significantly modified for exclusive use in, nuclear weapons | Using MSCI Business Involvement Screening Research:
|
| Sanctioned countries | Countries that are identified as part of DFAT Australian Autonomous Sanctions | The only exception is one remaining holding in Russia that was purchased prior to Russia being a sanctioned country, which is unable to be sold. |
10. Sustainable Balanced plan
GESB offers a Sustainable Balanced plan for members who would like to invest their super with a greater focus on ESG considerations.
The Sustainable Balanced plan invests across a range of asset classes that are selected to meet stricter ESG criteria and applies additional exclusions to those mentioned above.
Any investment manager appointed to invest for the sole purpose of the Sustainable Balanced plan will be expected to adhere to this policy.
11. Collaboration
GESB recognises the benefit of collaboration with others in using its influence and managing internal resources more effectively.
GESB may seek opportunities to participate in broader industry forums with the aim of promoting best practice, sharing knowledge, and increasing awareness of ESG and climate change as it applies to investment decision making.
GESB is supportive of collaborative effort undertaken by its appointed investment managers when it assists with their stewardship efforts.
12. Review
This policy will be reviewed annually or as required.
This policy has been altered from its internally published version in order to maintain the privacy of its policy managers and owners. The material contained in the version is not otherwise materially different from its internal publication.
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