Ethical and Socially Responsible Super

Simon O’Connor, CEO, Responsible Investment Association Australia

Arti Prasad-Naidu, Head of Responsible Investment, QIC

Lisa Domagala, ESG Analyst , Solaris Investment Management

RESPONSIBLE INVESTMENT AT QICArti Prasad-Naidu

Head of Responsible Investment

12th October 2016

BACKGROUND AND CONTEXT SETTING

Who is QIC?

What is Responsible Investment (RI)?

Investment benefits

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A GLOBAL DIVERSIFIED ALTERNATIVE ASSET MANAGER

Global Infrastructure

Global Real Estate

Global Liquid Strategies

Global Private Equity

GlobalMulti-Asset

Solutions

Established in 1991 by the

Queensland Government to

serve its long-term investment

responsibilities

Grown to over A$78 billion

in funds under management

We have over 90 clients including

government, pension plans, sovereign

wealth funds and insurance. Spanning

Australia, Europe, Asia, Middle East and US.

With over 500staff with offices in Brisbane,

Sydney, Melbourne, London,

Los Angeles, San Francisco and

Copenhagen & New York

As at 30 September 2014 [Please update each quarter]

A longstanding investor heritage…….

…with an established platform built to deliver predictable returns to institutional investors

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DEFINITION - WHAT IS RI?

• The integration of environmental, social and corporate governance (ESG) considerations into investment management processes and ownership practices in the belief that these factors can have an impact on financial performance.

• The UN backed Principles of Responsible Investment (UNPRI) is a network of international investors that have put together a set of six principles that give guidance on how to put the approach for responsible investment into practice.

• The UNPRI now has over 1500 global signatories; with assets under management of over US$60 trillion; it is the largest investor collaboration of its kind.

• QIC became a signatory to the UNPRI in 2008.

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EXAMPLES OF ESG FACTORS

Environmental Issues Social Issues Governance Issues

Waste management Labour standards /Human Rights Board Structure

Water management Health and Safety Executive compensation

Energy & Climate change Working conditions Audit Quality

Contaminated sites Supply chain management Gender, Diversity & skills of Boards

Air, waste and water pollution Stakeholder relations Bribery and Corruption

Loss of biodiversity and habitat Community impact Shareholder Rights

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COMMERCIAL & INVESTMENT BENEFITS OF ESG PRACTICES

• Good risk management – increased confidence in investments

• Managing reputational risks

• QIC clients are committed to it and value it

• Winning business (consultants and potential clients)

• Differentiator/competitive Advantage

• Idea generation

• Best practice portfolio management

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QIC’S INTERNAL IMPLEMENTATIONPolicies

Investment team activities

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WHAT DOES RI IMPLEMENTATION MEAN FOR QIC?

1. Policy

- Adopting a philosophy and approach

2. Governance

- How is the RI programme structured/governed/monitored and reviewed?

- How well are we promoting a culture to adopt RI practices

3. Resourcing

- What resourcing is committed? How co-ordinated are we in our delivery?

4. Implementation

- Frameworks, processes and decision-making across investments

- ESG service provider

5. Reporting

- Communication

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QIC’S RI POLICY & EXCLUSIONS

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The following has been implemented for QIC:

1. QIC’s RI policy:

- Commitment and belief on Responsible Investment

2. Exclusions

- Added provision to consider company exclusions based on:

• International conventions/treaties to which Australia is a signatory

• Australian, National or State law

• Significant policy positions of the Australian or State Government

• Legal status of the product or activity.

- QIC now excludes securities involved in the manufacture of cluster munitions, landmines and tobacco from our direct investment portfolios.

EMERGING THEMES Climate change

Health and Safety

Summary

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CLIMATE CHANGE FOSSIL FUEL

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Human activityLevels of Greenhouse Gas (GHG) particulates in the atmosphere continue to increase driven mainly by human activity such as manufacturing, transport and deforestation.

Paris Climate Change Agreement• Nations agreed to aim to limit global warming to

2°C above pre-industrial levels and to pursue a 1.5°C limit.

• Each country will introduce measures to implement its own contribution to the international effort, and the agreement covered a strengthening of pledges every five years.

HEALTH AND SAFETY

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• Focus on ESG is about risk and return - risk adjusted returns

• Management of ESG risks is Good risk management – gives us increased confidence in investments

SUMMARY

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Young Super Network

Lunch ‘n’ Learn Ethical and Socially Responsible Super

• Australian Equities Fund Manager

• Current Funds under Management AUD4.8bn

• 10 person team

• Clients include Institutional and Corporate Super Funds and Retail Investors

• We aim to integrate material Environmental, Social and Governance (ESG) factors into our mainstream investing practice

• Solaris manages two Socially Responsible mandates with bespoke exclusions eg alcohol, tobacco, thermal coal, etc*

* Subject to materiality thresholds

ESG factors are considered at 2 points in the investment process

• The Risk Screening stage

• Stock Research stage

How do we integrate ESG into our mainstream investment process?

• Communication of material ESG factors to the Solaris Analysts on a fortnightly basis (or more often if required)

• Follow-up meetings held on a regular basis to decide on course of action – company meeting/engagement, valuation adjustment, position adjustment

• Analyst will advise if ESG factor has caused a valuation adjustment and this is communicated quarterly to our clients

• The Solaris Analysts will incorporate the ESG factor into their valuation models in the appropriate manner depending on the type of valuation carried out

But how does the ESG data get incorporated into a valuation?

• 237 ESG alerts were generated in the 2015/2016 FY covering 69 stocks

• Notification Breakdown: 57 Environmental, 42 Social, 138 Governance

• For this FY, 16 items were discussed with 9 companies

• 9 stocks had their valuations adjusted due to ESG factors in 2015/2016 FY

2015/2016 Financial Year ESG Alerts

0

2

4

6

8

10

12

14

16

18

RIO

WES

WO

WA

GL

AN

ZB

HP

OR

GC

BA

MQ

GC

IM STO

WH

CG

NC

AZJ

TAH

NA

BFL

TIL

UC

CV

PR

YQ

AN

SGH

WB

CW

OR

TGA

TLS

BR

SU

GL

SIP

SPO

PM

VN

CM

ASX

BLD

AO

GA

NN

IPL

LLC

CTX

DM

PER

AFB

UC

WN

FMG

HV

NM

AH

MP

LM

TSM

YR

JHX

KC

NA

GI

ALL

ALQ AR

IA

STB

OQ

CP

UN

UF

OG

CQ

BE

QU

BR

RL

S32

SGM

SGP

TWE

TGR

SWM

ESG Alerts and Valuation Impacts for 1 July 2015 to 30 June 2016

Number of Company Specific Alerts Number that Affected Valuation