Realindex Investments
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- Realindex Investments - Responsible Investment
Approach to Responsible Investment
Stewardship and ESG integration
As part of our stewardship responsibilities, Realindex excludes specific companies involved in controversial munitions and armaments across all of our portfolios. We also apply screens to exclude tobacco and other “ESG red flag” companies for certain clients and manage a portfolio to the MSCI ACWI Socially Responsible Index ex Fossil Fuels. Further, we believe that voting on company resolutions is an important responsibility of any equity holder, and we vote on company resolutions utilising proxy research from CGI Glass Lewis, Ownership Matters and other research where relevant. Joanna Nash, Senior Quantitative Portfolio Manager, and Andrew Sinclair, Senior Quantitative Analyst are the Realindex ESG leads and are responsible for coordinating our approach to proxy voting.
ESG research has been and continues to be a strategic initiative for Realindex. Given our focus on systematic investment strategies, the degree to which ESG is explicitly incorporated varies across strategies. Across our accounting measures weighted portfolios, governance is considered indirectly through the quality component of our enhancements process. Within our Australian smaller companies strategy, we have incorporated a specific governance factor into our overall enhancements score. This factor penalises firms with below average governance and also includes a weighting to change in overall governance quality, to capture currently unfolding information, credit firms with improving governance and penalise those that are getting worse. Other areas of ongoing research include low carbon strategies and ESG aware strategies.
We have an extensive database of ESG data and metrics licensed from third parties which we use in our research and in some cases as part of our investment process, or customised client solutions. As at 30 June 2018 these providers include:
- CGI Glass Lewis – They are our preferred provider for proxy voting analysis and they provide specific recommendations which we follow in most, but not all, cases
- MSCI – Carbon emissions data and governance metrics; our preferred provider for carbon, and for governance outside Australia
- Ownership Matters – A specialist firm which provides governance scores for Australian firms, also proxy voting advice for Australian firms
- Regnan – ESG data for Australian firms
- RepRisk – ESG incidents data
- Sustainalytics – ESG and incidents data; our preferred provider for Environmental & Social scores
ESG Research
ESG research has been and continues to be a strategic initiative for Realindex. We have an extensive database of ESG data and metrics licensed from third parties which we use in our research and in some cases as part of our investment process, or customised client solutions.
We have conducted a significant amount of ESG research, including:
- Constructing and back-testing an ESG-tilted portfolio relative to the ASX 200 using a combination of ESG and quantitative alpha factors
- Tilting various benchmark weights with the objective of maximising the reduction in carbon emissions
- Investigating the cross-sectional stock performance across 96 key metrics provided by MSCI Governance Metrics in both global and Australian companies;
- Using ESG scores to predict stock level volatility 12-months ahead
- We have incorporated governance into our overall enhancements score within Australian smaller companies, penalising firms with below-average governance. We have also included a weighting towards change in governance within this, to reflect currently unfolding information, and to upweight firms that are improving their governance and penalise those that are getting worse
- Separately we have investigated underweighting firms which have had recent negative environmental or social incidents
Case studies
We believe that a strong commitment to stewardship is an essential component of a strong approach to responsible investment (RI), and that embedding RI into the core of our investment activities is in the best long-term interests of our clients. For more than a decade we have systematically and progressively improved our practices and processes across our investment capabilities globally.
Team Climate Change Statement
Realindex manages a variety of strategies including market cap index portfolios, value weighted funds and market cap aware active funds. Across all these funds, there are different climate related risks that impact the team’s portfolios.
Key climate-related risks in our team’s portfolio
Given the nature of the value weighted portfolios, these funds tend to have a higher exposure to the transition and regulatory risks of climate change. These will be an ongoing risk if left unaddressed in the investment strategy.
In relation to transition risk, the higher exposure to fossil fuel companies presents a market risk which may lead to increased costs and decreased revenues. Added to this is the potential of stranded asset risk with high exposure to fossil fuel reserves over the next decade and beyond.
The regulatory risk over the short and medium term is associated with the reliance on fossil fuels for power generation. Without clear revenue diversification plans these companies could be impacted by factors such as higher carbon pricing or potential carbon border tariffs.
There is also increased reputational risk for any portfolio companies with exposure to fracking, oil sands and shale oil which are all considered to be controversial energy extraction methods.
Our exposure to agriculture, mining, oil and gas companies provide a particular risk of financial impact from extreme weather events including floods, droughts, cyclones and wildfires. This provides additional financial risk from the capital expenditures that are required to build resilience for these assets.
How we identify these risks
The climate related risks in the portfolios are identified in a number of different ways. We consider carbon foot-printing and the carbon intensity of our portfolios. We conduct scenario analysis which looks at not only how the portfolios are tracking against science based targets but also the exposure to different fossil fuels and renewables. This helps us identify many of the transitional, reputational, regulatory and physical impacts risks that the portfolios face.
We assess company’s alignment to net zero to see how the portfolio is tracking in relation to, and its overall alignment to, net zero. We also consider transition metrics to see in which areas – product, operations and assets that the fund is transitioning to a low carbon economy and where those transitional risks may lie. We conduct climate risk analysis to understand which climate hazards present the greatest financial risks.
How we address these risks
The risks are addressed in a number of different ways depending on the type of portfolio.
In a number of our portfolios, we have excluded controversial energy extraction methods such as oil sands, as well as revenue limits on thermal coal mining and power generation.
For all our active funds (value weighted and market cap aware) we incorporate a number of signals into the model that address some of these risks. We consider the carbon intensity and changes in the carbon intensity of companies. This ESG integration results in a tilt away from more highly carbon intense companies. We also consider reputational risks by monitoring company controversies and tilting away from companies that have had severe reputational risk issues previously.
For all of our portfolios, engagement and voting is used to delve further with companies as to how they are assessing their climate related risks and opportunities and what they are doing to address these risk and opportunities. We discuss their alignment to net zero and the strategy they are undertaking to achieve this. This engagement is for all companies, not just those that we have assessed as high emitters. Our voting is aligned with improved climate disclosure and tends to favour shareholder proposals on climate especially those that are looking for improved climate disclosures and a clear climate strategy. We look at management ‘say on climate’ proposals making sure they have a clear strategy, strong governance around that strategy and a clear transition path. We will vote against directors of companies that have not been responsive to any of our engagements in relation to climate over a three year period.
The targets and objectives we have set
We have set a number of different targets based on the portfolio.
All funds will have a focus on engagement. For our market cap weighted index funds, engagement is our primary focus. We commit to discuss net zero with all companies that we engage with at least yearly. We encourage them to move up the scale of the NZIFIG i.e. from not aligned to commit to aligning etc. We encourage companies to disclose scope 1, 2 and 3 emissions and encourage companies to set science-based short, medium and long term targets on their path to net zero.
For our Value weighed active funds, in addition to engagement, we commit to reducing the carbon intensity of the fund by 30% by 2025 (AUM adjusted for the 2020 baseline). We will look to increase this to a 50% reduction by 2030.
For our market cap aware active funds, in additional to engagement, we commit to reducing carbon intensity by at least 20% relative to the benchmark. We look to reassess this target in 2025 and 2030 depending on how the benchmark has evolved.
Carbon footprint
For more information, see our Carbon Footprint explainer
The dashboard is best viewed in full screen. Click on the icon on the dashboard bottom right
Proxy voting
The team believes that voting on company resolutions is an important responsibility of any equity holder and votes on company resolutions using the services of CGI Glass Lewis. The team votes in line with CGI Glass Lewis recommendations, which have been formulated to promote high standards of corporate governance. In certain circumstances the team may override CGI Glass Lewis' recommendations where they believe it is in their clients’ interest to do so. Due to the systematic nature of their investment approach, the team maintains a separate proxy voting policy which is available on our website.
Australian Equity
Proxy voting history by type of resolution
The table below contains the proxy voting history for the team by issue type. The chart provides the same information for FY2019.
Voting Independence
The chart below shows the number of times the team have voted in each region.
Global Equity
Proxy voting history by type of resolution
The table below contains the proxy voting history for the team by issue type. The chart provides the same information for FY2019.
Voting Independence
The chart below shows the number of times the team have voted in each region.
Proxy voting by region
The chart below shows the number of times the team voted in each reason and the percentage of votes against management recommendations, against our proxy advisors' recommendation, or against both. The purpose of this table is to show the regional difference in voting patterns and governance concerns.
Proxy voting information is as at 31/12/2019
Source: First Sentier Investors / CGI Glass Lewis
(Source: First Sentier Investors Responsible Investment & Stewardship Report 2019)
More information
View First Sentier Investors proxy voting record and statistics
Responsible Investment
For over a decade, responsible investment has been integrated into every investment process.
First Sentier Investors became a Certified B Corporation in November 2022 with a score = 107.2, noting that the passing score is 80. Please visit the B Corp Directory here to view our report and for additional information regarding the assessment process.