Investment quality and sustainability

We have been pioneers in considering non-financial Environmental, Social, and Governance (ESG) issues for many years.

We engage with industry participants, specialist managers and service providers to increase the disclosure, transparency and availability of quality data to price and quantify these emerging risks.

We apply a wide view of risks that can potentially impact your savings in the long-term. We believe that the most successful companies are those that consider all strategic influences on the long-term sustainability of their business, not just the short-term drivers of current profitability.

We assess the ecosystems that businesses operate in, because they can create substantial benefits or costs over time, sometimes dramatically and suddenly. These include environmental and social factors such as:

• carbon footprint
• pollution
• modern slavery
• supply chains
• occupational health and safety
• pandemic and other global shocks
• geo-political tensions
• changes in economic, regulatory and financial market conditions.

We believe in being active owners of our underlying assets where it is impactful and cost-effective. We use a variety of mechanisms to determine whether we engage, and how. For example, we may engage with businesses directly, via third parties, or not at all.

This ‘prioritised engagement framework’ depends on a variety of factors including:

• The type of investment
• The size of the investment
• Our ‘share’ or ownership in the investment
• Our ability to drive and track the changes we seek—being clear about what is impactful for the company or asset, and whether is likely to result in additional impacts in the world in which that company or asset operates
• The costs of the engagement

For example, in the case of minority-owned public companies, we are more likely to actively engage when our shares are held via an active strategy, which enables relevant in-depth insight. We are less likely to use engagement with a minority-owned public company whose shares we hold via a passive equity market strategy.

In general terms, our approach under this prioritised engagement framework may involve the following steps:

• Raising issues with select investee companies
• Enabling time for companies to acknowledge and respond to those the concerns
• Engaging individually or collaboratively, or escalating via voting—depending on the companies’ responses
• Divesting only in specific cases where engagement is not viable and the financial risks to our customers cannot be mitigated.

Consistent with the United Nations guidelines, CSC uses a set of principles to assess how our active investment managers identify, report, and manage the potential consequences of portfolio companies’ operations on natural (environmental) and human (social) capital. We believe that the capacity to strategically and proactively manage environmental and social considerations will be reflected in long-term value. These principles are set with reference to evolving international standards of responsible investing; our own internal standards; and developments across regulatory bodies.

Divestment is a last resort

We view divestment as a useful tool for portfolio risk management; but not for causing change at the company. For this reason, CSC’s divestment focuses on entities we believe have structural vulnerabilities to loss of value that cannot be addressed through use of ownership rights. Of course, we do not invest in companies which we know to be involved in activities contrary to Australian government regulations. Examples of divestment include tobacco manufacturers, cluster munitions, or undiversified companies that derive 70% or more of their revenue from thermal coal production/extraction.

We do not use divestment as a way to renounce or rebuke companies that cause or contribute to the risks. Divestment by long term investors such as CSC leaves companies in the hands of shorter-term investors. Shorter-horizon investors are generally less likely to prioritise sustainable earnings into the future relative to nearer term results. This philosophy is now widely acknowledged as an important responsibility for long-term investors by the following global best practice initiatives*:

• World Economic Forum’s blueprint for institutional investors
• UN-supported Principles for Responsible Investing (PRI) global responsible investment standards
• OECD guidelines for multinational enterprises.

Members and investors have increasingly shown interest in environmental, social, and corporate governance issues. In order to communicate responsible investing practices accurately, succinctly, and consistently, global standard setters (the CFA Institute, PRI and Global Sustainable Investment Alliance), have published a guide to bring greater clarity and harmony to definitions of different investment approaches: screening, ESG integration, thematic investing, stewardship and impact investing.

*CSC’s Chief Investment Officer (CIO) was the co-Chair of the World Economic Forum Global Future Council on Long-term Investing for 2016-2020—a role reflecting CSC’s proactive, thought leader approach to responsible investing and including ESG risks in our whole of portfolio risk assessment. She is also a member of the Chartered Financial Analysts Institute (CFA) Future of Finance Advisory Council. She continues to contribute to global thought leadership through publications including the London School of Economics and Political Science library. Read her article about why organisational success depends on valuing higher quality, rather than simply lowest-cost routes to economic growth.