Responsible Investment Policy

2. Purpose

The purpose of this policy is to describe GESB’s responsible investing practices and how these are incorporated 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.

Furthermore,

• ESG factors could arise in any investment
• Where the investment pertains to a company, ESG factors can arise directly through the entity’s own operations, indirectly through 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 considering the risks and opportunities associated with different kinds of investments, in a way which is appropriate for the Fund.

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 guidance.

GESB’s approach to ESG and responsible investment is consistent with the State’s policy framework and regulatory requirements, including the Board’s role to act in the 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 responsible investing, 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. Roles and responsibilities

The Board

The Board is responsible for GESB’s overall governance, compliance and performance, which extends to setting the approach to managing ESG risks and opportunities. This includes approving changes to this policy, any responsible investment and/or climate-related objectives set and the climate change transition plan for the Fund.

Investment Committee

The Investment Committee is responsible for reviewing and providing input into the review of this policy. This includes oversight of ESG integration across the portfolio and monitoring progress against GESB’s climate change transition plan, through any interim targets set.

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 responsible investment objectives, asset class strategy, structure and policies as they relate to managing and monitoring ESG risks and opportunities; and maintaining relationships with responsible investment service providers.

Investments team

The Investments team is responsible for supporting the Head of Responsible Investing in the implementation of this policy. This includes incorporating responsible investment practices into asset allocation, portfolio construction and investment manager recommendations.

Investment Operations team

The Investment Operations team is responsible for monitoring and compliance of the underlying investment managers where expectations have been incorporated via a mandate, such as exclusions or investment restrictions.

Appointed investment managers, Asset Consultants and service providers

Investment managers, Asset Consultants and service providers support the implementation of this policy through integration of responsible investment 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 they manage on GESB’s behalf.

6. 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:

• Responsible investment can impact long term risk-adjusted returns. 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 investments that manage material ESG risks and opportunities effectively are expected to enhance the long-term value
• Effective stewardship can play a role in improving responsible investment 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 ongoing improvements in the information it discloses to members and key stakeholders, while balancing the reputational risk and regulatory considerations

Climate change

GESB recognises climate change is one of the high-priority ESG factors 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.

GESB has developed a climate change transition plan to outline the intended pathway to meet its net zero commitment, where they have been clearly identified. It currently includes interim reduction targets over the medium term for Listed Equities (including Listed Property and Listed Infrastructure), Unlisted Property and an approach to managing thermal coal investments. 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 GESB’s intention to include scope 3 emissions in line with the timeframe stated by any governing legislation and/or regulatory requirements.

GESB, through the Investments team, 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.

7. Approach

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 – incorporating ESG into the due diligence process to understand how appointed investment managers integrate ESG factors into their investment decisions, and monitoring whether they act in a manner consistent with their stated approach and the Board’s expectations
• 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 to understand the impact of material risks, such as ESG and climate change risk, on investment performance.

GESB undertakes stress testing and scenario analysis across our investment options. This 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).

Portfolio construction

GESB acknowledges the importance of understanding ESG risks and opportunities at the 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. The extent to which ESG factors can be integrated may differ across different asset classes and different investment strategies.

GESB aims to use tools to measure and monitor the portfolio from an ESG perspective.

Investment manager selection and monitoring

GESB expects its appointed investment managers to identify, assess and manage material ESG risks and opportunities impacting the portfolio. Understanding these risks and opportunities helps them evaluate an investment, as well as engage with investee company management to ensure ESG issues are appropriately managed and sound ESG practices are employed.

GESB accepts that appointed investment managers may have different methods to integrate ESG factors into investment decisions, especially across different asset classes.

When selecting and appointing investment managers, GESB’s Investments team and the appointed Asset Consultant(s) will assess the investment manager’s responsible investment capabilities.

While these are often nuanced across each asset class, the assessment will broadly consider:

• The philosophy and policies adopted and how they align with GESB’s philosophy and beliefs
• The integration of ESG factors into its investment process, including the manager’s approach to climate risk
• The extent to which ESG related risks and opportunities are considered and factored into investment decisions, supported with investment examples
• The use of stewardship practices to understand ESG issues affecting the investment and to encourage good ESG practices (if applicable)
• The level of accountability and transparency, demonstrated through regular monitoring and reporting of ESG risks and opportunities
• Resourcing to support responsible investment activities undertaken by the investment manager
• Any affiliations and/or memberships to responsible investment initiatives

Appointed investment managers are encouraged to be signatories to the Principles for Responsible Investment (PRI) or to adopt comparable principles as part of their investment processes. This however is not a sole determining factor in relation to assessing the investment manager’s responsible investment capabilities.

The investment manager’s approach to responsible investment is an element of the formal manager evaluation process, together with other investment considerations. Appointed investment managers whose investment process demonstrates insufficient or inadequate consideration of ESG related issues will not be considered for a GESB mandate and could lead to the divestment of a mandate with an existing manager, if improvement is not demonstrated over an agreed timeframe.

The responsible investing practices adopted by GESB’s appointed investment managers' is reviewed and assessed regularly to ensure portfolios are managed in accordance with GESB’s expectations and requirements. GESB may request its appointed investment managers to complete a questionnaire to help gather further insights into a manager’s approach to responsible investing and/or a specific ESG issue, such as modern slavery. As part of this process, GESB may encourage its appointed investment managers to make improvements to responsible investment practices.

The Investments team and/or Asset Consultant(s) will discuss ESG matters with appointed investment managers to understand the degree of 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. The Investments team may 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 for GESB’s appointed investment managers to 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 sound ESG practices and to better understand ESG risks and opportunities within the portfolio(s) they manage. The Investments team requests its appointed investment managers engage with companies directly, via a collaborative approach or using third party providers.

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 its appointed investment managers to promote sound ESG practices with the aim of improved valuation of the investment over the long term. This may be through dialogue with the board and/or management of investee companies, or by exercising voting rights.

GESB oversees the active stewardship undertaken by its appointed investment managers by requesting annual reporting from its appointed investment managers investing in Listed Equities. 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 team.

Voting shares

Investing in Equities provides investors with ownership and in most cases, voting rights. GESB exercises its voting rights in accordance with GESB’s Proxy Voting Policy.

Asset Consultant(s)

GESB expects that its Asset Consultant(s):

• Have suitable expertise and capacity to evaluate investment managers’ responsible investment practices
• Apply this policy when researching and monitoring managers
• Carry out investment due diligence in relation to the GESB portfolio

8. Exclusions

To determine whether a company or industry is considered for exclusion from the portfolio, the following factors will be considered:

• Any impact on portfolio returns, including the ability to meet the best financial interest of members and the materiality of the exclusion
• Breaches in law, international standards, treaties or convention, including modern slavery legislation, 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 reputational 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 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. As a result, GESB may have indirect exposure to these industries and/or companies.

9. Sustainable Balanced plan

The Sustainable Balanced plan invests across a range of asset classes that are selected based on sustainability characteristics and applies additional exclusions to those mentioned above.

Any investment manager appointed to invest assets of the Sustainable Balanced plan will be expected to adhere to this policy.

10. 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 efforts undertaken by its appointed investment managers when it assists with their stewardship efforts and advocacy activities.

11. Reporting and disclosure

GESB expects 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, responsible investment portfolio metrics including carbon-related metrics or portfolio activities such as research, company engagement and proxy voting actions.

Regular reporting on responsible investment activities is provided to the Board via the Investment Committee on a quarterly basis.

GESB endeavours to disclose meaningful and useful ESG related information to its members. We provide updates on our website including disclosures related to GESB’s climate change transition plan and portfolio holdings.

12. Review

This policy will be reviewed biennially or as required due to developments including significant changes to legislation, unforeseen reputational risk and/or rapid advancements on ESG issues.