FIRST STATE INVESTMENTS

Responsible Investment and Stewardship Event

Welcome Mark Lazberger, Chief Executive Officer

Progress Update and Key Deliverables for 2014 Will Oulton Global Head, Responsible Investments, First State Investments

RI Strategy – Our Approach

• RI Strategy has 3 key pillars –

Quality

–

Stewardship

–

Engagement

• Underpinned by a group-wide governance structure • Integration across the business is a key feature • Stewardship is central to our approach

In March 2013 we stated our goals for the year

1. Improve our data sources and analysis tools

In 2013 we focused our efforts on 4 key areas:

2. Improve our internal and external reporting and stakeholder engagement

4. Increase our thought leadership

3. Improve our RI governance, policies and investment processes

•

Information management

•

Reporting & engagement

•

Governance

•

Thought leadership/intellectual capital

“From data to knowledge and wisdom” The problem

Our solution

•

The range and complexity of ESG issues is difficult to capture and information quality can be variable

•

We have developed an ESG information management plan which will help investment professionals integrate data into their existing workflows.

•

Investment professionals have limited bandwidth and ability to filter information.

•

Our plan involves systems integration (e.g. Bloomberg), email alert services, structured intranet site, training, expert speakers, and support.

Integration of ESG data sources and analytic tools

1. Improve our data sources and analysis tools

2. Improve our internal and external reporting and stakeholder engagement

4. Increase our thought leadership

3. Improve our RI governance, policies and investment processes

•

Procured new services, GMI (Corporate Governance specialists) and Sustainalytics (Sustainability specialists)

•

The selection process was overseen by and involved the ESG Committee members

•

Both services are being combined onto Bloomberg who are facilitating the development of FSI specific areas on the system

•

Information from the new services will be used to report on portfolio ESG risk and quality from 2014

Internal and External Reporting and Stakeholder Engagement

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Annual RI Report published in new format, events to promote held in London, Paris, Stockholm, Sydney, Melbourne

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Annual Proxy Voting & Engagement Report published – November 2013

•

UK IFA and Wealth Management advisors roundtable held – September 2013 to inform retail client messaging

•

RI section on website enhanced

•

Global Responsible Investment Committee (GRIC) minutes published on company intranet

1. Improve our data sources and analysis tools

2. Improve our internal and external reporting and stakeholder engagement

4. Increase our thought leadership

3. Improve our RI governance, policies and investment processes

Governance, policies and investment processes

•

GRIC formed with members from across the globe and from multiple business functions, Chaired by CEO

•

ESG Committee formed from senior portfolio analysts from each investment team across all major asset classes

•

Global Cluster Munitions Policy introduced in October

•

Global Stewardship Principles introduced in November

1. Improve our data sources and analysis tools

2. Improve our internal and external reporting and stakeholder engagement

4. Increase our thought leadership

3. Improve our RI governance, policies and investment processes

Thought leadership activities

• 1. Improve our data sources and analysis tools

2. Improve our internal and external reporting and stakeholder engagement

4. Increase our thought leadership

3. Improve our RI governance, policies and investment processes

Founder member of the Investment Leaders Group supported by Cambridge University (UK), 2013 Activities: –

Evaluating the financial value of RI

–

Development of a reporting framework for ESG impacts

•

“Stranded Assets” working group formed by ESG Committee

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Contribution to UK Law Commission Review on Fiduciary Duty

•

Knowledge building via program of presentations from external subject experts

Investment Team ESG Activity and Collaborative Engagements: examples

Issue

Investment Teams

PRI led - ESG performance as a factor in executive compensation – Mining Sector

Global Resources Australian Equity - Growth

Team led engagement program on extractive companies strategies to deal with carbon risks

Global Resources

“Stranded Assets” working group – formed by ESG Committee

Global Resources Australian Equity – Growth Australian Equity - Core

PRI led - Sustainable Palm Oil

First State Stewart

State Government Engagement by FI&C team

Fixed Income and Credit

Priorities for 2014

Quality •

Incorporate RI principles into the new product development process.

•

Implement ESG information management plan which will include: –

–

Integration of ESG research services with Bloomberg, and other third party research systems. Development of an “ESG information” hub for our investment professionals.

Engagement •

Further develop our HR and Culture plan.

Priorities for 2014

Stewardship •

RI Policy review and update.

•

Enhance systems to capture company engagements from across equity teams.

•

Continue our support of the Cambridge Investment Leaders Programme. Lead work stream on investment timeframes and long-term mandates.

•

Complete a strategic review of current collaborative initiatives.

Keynote Address Dominic Barton, Global Managing Director, Mckinsey

Focusing Capital on the Long Term First State Investments Conference

Dominic Barton Global Managing Director, McKinsey & Company March 26, 2014 McKinsey & Company

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Topics for discussion

1▪ The rise of short-termism 2▪ The importance of long-term thinking 3▪ The role of boards 4▪ Practical changes for asset owners

McKinsey & Company

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Five mega-trends reshaping the global economy 1

The rise of emerging markets

4

2

Resource scarcity

Aging populations

3

The Digital Age

5

The market state McKinsey & Company

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A call to action

Capitalism for The Long Term March 2011

Focusing Capital on the Long Term January 2014 McKinsey & Company

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Short-term pressures are escalating

55% of CFOs will reject an NPV-positive investment if it means missing next quarter’s earnings targets Average duration of London Stock Exchange holdings fell from 5 years in 1966 to only 8 months in 20071 Average CEO tenure has dropped to < 7 years today from 10 years in 1995, and < 5 years for Fortune 500 CEOs Of 1,000+ surveyed C-suite executives and board members, 44% use a time horizon of less than 3 years in setting strategy 2011 2012 2013 2014

2013 2014

73% say that they should use a time horizon of more than 3 years

63% say that the pressure has increased over the past five years to generate short term to results 1 Similar trends exist in the US – average duration of NYSE stock holdings has fallen from 6 years in 1975 to only 7 months in 2009

McKinsey & Company

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Long-term thinking is essential for long-term success Intel abandoned manufacturing memory chips in 1985 to focus on microprocessors

It took P&G, Coca-Cola and Walmart 8-11 years to become profitable in China

70-90% of a company’s value is related to cash flows 3+ years out

Apple’s share price fell 25% the year the first iPod was released

86% executives agree that a longer time horizon for business decisions would improve corporate performance McKinsey & Company

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Practical changes for asset owners

1

Define long-term objectives and risk appetite (e.g., GIC maintains a 20-year time horizon for value creation)

2

Unlock value through engagement and active ownership (e.g., Larry Fink encourages companies to work directly with BlackRock and other shareholders, rather than focusing on winning over proxy advisory firms)

3

Demand long-term metrics (e.g., Puma developed environmental and social impact “P&Ls”, Natura publishes sales force satisfaction and turnover metrics)

4

Structure institutional governance to support a longterm approach (e.g., Norges Bank Investment Management maintained its long-term strategy through volatile equity markets) McKinsey & Company

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1. DEFINE LONG-TERM OBJECTIVES AND RISK APPETITE

Several large asset owners have taken steps towards setting longer horizons for their investments The Ontario Teachers’ Pension Plan has been a leader in allocating capital to illiquid long-term assets – today 23% of its portfolio is in real assets (e.g., water utilities, retail and office building) The Canadian Pension Plan Investment Board is experimenting with innovative ideas to encourage a longer-term outlook with its investment professionals (e.g., committing capital for 3 years, basing performance-based payments on long-term track records, rather than annually) GIC, Singapore’s sovereign wealth fund maintains a publicly-stated 20-year time horizon for value creation, deliberately investing up to a third of its portfolios in companies in volatile emerging Asian markets Berkshire Hathaway uses the rolling five-year average performance of the S&P 500 (rather than annual returns) as its benchmark to signal its longer-term focus (benchmark is less impacted by year-to-year volatility) McKinsey & Company

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2. UNLOCK VALUE THROUGH ENGAGEMENT AND ACTIVE OWNERSHIP

The Equity Engagement Spectrum Ownership stake in company

10%

Ongoing engagement

Active ownership

Relationship investing

▪ Works publicly or privately

▪ Works collaboratively with

to persuade the board and management to change long-term strategy

management on long-term strategy

▪ Continuously monitors companies – both reacting to performance and providing ongoing input

▪ May build micro-coalitions with other investors

▪ Tries to build micro-

▪ Often has board seats

coalitions with other investors

CalPERS screens its portfolio to identify companies that have underperformed and works with them to improve their strategy and governance McKinsey & Company

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3. DEMAND LONG-TERM METRICS

Asset owners should encourage companies to publish metrics that are truly material to long-term value creation

Unilever’s longterm plan for sustainable growth calls for doubling sales in 10 years while halving its environmental impact and enhancing the livelihoods of people along its value chain

Puma developed an “environmental P&L” in 2011 and is developing a “social impact P&L” to be included in its annual reports – to show investors that it understands and is managing the risks of its supply chain

Natura, a Brazilian cosmetics company, is scaling its doorto-door sales strategy while publishing metrics to show investors that it has not compromised on quality (e.g., sales force turnover, training hours, satisfaction) to help investors)

Philips issued its first sustainability report in 1998 and its first integrated financial, environmental and social report in 2008, including information like employee satisfaction and resource productivity

McKinsey & Company

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4. STRUCTURE INSTITUTIONAL GOVERNANCE TO SUPPORT A LONG-TERM APPROACH

Norges Bank Investment Management (NBIM)’s strong governance allowed it to continue on its long-term path despite volatile equity markets 2007 The Ministry of Finance in Norway and NBIM set a long-term goal to raise the equity content of the fund from 40% to 60%

2008 – 2009 NBIM lost 40% of the value of its global equity portfolio during the financial crisis and faced high external pressure not to buy back into the falling market

Its strong governance1 allowed NBIM to allocate all $61B of inflows in 2008 into buying equities, making a 34% return in 2009 and outperforming the equity rebound

2009 - Present Has employed a similar countercyclical strategy since – turning an equity loss of 9% in 2011 into an 18% return in 2012

1 Arms-length relationship between NBIM and the Treasury along with strong Board leadership allowed NBIM to stick to its investment principles McKinsey & Company

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The role of boards in shifting to a longer-term mindset Boards of directors need to … Spend more time (e.g., directors of public companies devote only 12-20 days per year to their duties, compared to 54 days for private equity-owned companies)

Focus more on longterm strategy (e.g., 7580% of directors’ time is spent on fiduciary issues, while only 4% of companies have a longterm strategy committee)

Have more relevant experience (4 of 5 non-executive directors of large companies lack industry knowledge)

46% of executives named their board as a significant source of increased pressure to demonstrate shortterm performance over the past 5 years

McKinsey & Company

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FOCUSING CAPITAL ON THE LONG TERM INITIATIVE

The Focusing Capital on the Long Term initiative is intended to generate practical recommendations for tackling short-termism The objectives of the Focusing Capital on the Long Term initiative are: 1

Identify practical recommendations to focus business and markets on the long term

2

Work together to encourage their adoption both within our organizations and others’

We will seek to differentiate our efforts, as compared to the work underway by other institutions/initiatives, by taking an action-oriented, pragmatic approach: 1

Bring together leaders from both the investment and corporate worlds to share and discuss perspectives from all parts of the investment value chain

2

Focus on practical ideas that can be implemented today

3

Generate broad awareness and debate around our ideas in the business and investment community through a strong advocacy and communications platform

McKinsey & Company

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FOCUSING CAPITAL ON THE LONG TERM INITIATIVE

Our working group is comprised of institutional investors, asset owners / managers, corporations and academics Angelien Kemna CIO, APG

Institutional Investors

Corporations

Henri de Castries CEO, AXA

Michael Sabia President and CEO, CDPQ

Lim Chow Kiat Group Chief Investment Officer, GIC

Danny Truell CIO, Wellcome Trust

Wayne Kozun SVP, Fixed Income and Alternative Investments, OTPP

Theresa Whitmarsh Executive Director, WSIB

Adrian Orr CEO, NZSF

Mark Wiseman, Co-Chair President & CEO, CPPIB

Dominic Barton, Co-Chair Global Managing Director, McKinsey

Paul Polman CEO, Unilever

Richard Edelman President and CEO, Edelman

Peter Sands Group CEO, Standard Chartered

Nitin Nohria Dean, Harvard Business School

Sir David Walker Chairman, Barclays

Larry Fink CEO, BlackRock Asset owners/ managers

Lynn Forester de Rothschild Chief Executive, EL Rothschild Euan Munro CEO, Aviva Investors Ronald O’Hanley Fmr. President, Asset Management and Corporate Services, Fidelity

Empirical academic team led by Josh Lerner, Harvard Business School Academics

We will also convene a group of Senior Experts to provide expertise in particular subject areas

Cyrus Mistry Chairman, Tata McKinsey & Company

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FOCUSING CAPITAL ON THE LONG TERM INITIATIVE

We will be pushing our members to explore a number of practical actions that can be taken as a group to tackle short-term thinking Board focus

▪ ▪

Pay non-executive directors for at least 40 days work per year Review the proportion of Board time spent on long-term issues, and explore whether a long-term health committee would help increase the amount

Reorient portfolio

▪

Use a portion of new asset manager mandates to pilot a range of longer-term incentives and evaluations

Investor-corporate dialogue

▪ ▪

Commit to highlight 5 long-term metrics that are material to the long-term health of the business model in earnings calls and annual reports Discontinue quarterly earning guidance by 2015

Engagement

▪

Set up a collaborative engagement platform and test it by engaging with companies on executives' long-term incentive plans

McKinsey & Company

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FOCUSING CAPITAL ON THE LONG TERM INITIATIVE

We have already developed a significant research base and have begun to speak and write publicly about the initiative and our insights

Conducted a McKinsey Quarterly Survey of over 1,000 global executives and board members on the causes of short-termism

Harvard Business Review article ‘Focusing Capital on the Long Term’ published in Jan/Feb 2014 edition

Conducted in-depth analysis on the causes of short-termism and potential solutions

Several public speeches including to the Canadian Institute of Corporate Directors

www.FCLT.org launched to communicate our thinking

McKinsey & Company

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Panel Session Martin Mannion Head of Trustee Services, John Lewis Partnership

Mike Clark Head of Responsible Investment, Russell Investments

Nick Edgerton Senior Investment Analyst, First State Stewart

Volker Häussermann Director, Infrastructure Asset Management, First State Investments

Final thought

“There are three steps in the revelation of any truth:

in the first, it is ridiculed; in the second, resisted; in the third, it is considered self-evident.” Arthur Schopenhauer Philosopher (1788-1860)

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