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First State: making the hard SRI choices

First State: making the hard SRI choices

Investors in Asia are relatively agnostic about socially responsible investment (SRI), but anecdotal evidence suggests the tide is turning.

In their 2012 Global Sustainable Investment Review, the non-profit sustainable finance group Global Sustainable Investment Alliance writes: ‘For global investors headquartered in Asia, sustainable investing is still a relatively new practice. Due in part to ASrIA’s work over the past 10 years, there is considerable evidence that these investors are increasingly aware of the concepts of sustainable investment.’

Nonetheless, my meetings with industry participants have made it clear that SRI is viewed more as a ‘feel good factor’ than as a useful framework for investment returns. But there are signs that global investors are slowly realising SRI can have a positive impact on performance, and play an important part in guiding investment decisions.

First movers

Launched in 2006, the Principles of Responsible Investments (PRI) initiative sought to integrate environmental, social and corporate governance considerations into the investment and stewardship practices of participating institutions.

According to PRI, 783 signatories are investment managers, including First State Investments, where Will Oulton is global head of responsible investment.

‘We are a member of a number of global initiatives, with us being a signatory of the PRI initiative since 2007,’ Oulton says.

In 2013, First State Investments joined the Investment Leaders Group as part of a three-year project to promote understanding of how environmental and social factors affect returns.

Championed by the UK’s Prince Charles, the Cambridge Sustainability Programme brought together 12 leading asset managers to participate in the project. First State Investments then announced its global stewardship principles in December 2013.

The adoption of a set of principles across a firm as big as First State was never going to be easy, Oulton says. The most difficult task was to ensure the different levels of the organisation all understood the commitment to SRI, and communicated that to clients.

‘We conduct training programs and briefings to communicate our commitment to sustainable asset management, and we want people to buy into that. Day to day it’s a lot of interaction with colleagues from different parts of our organisation,’ he says.

Evidence of the firm’s commitment was seen in its 2012 Responsible Investment report, where the First State Stewart team, based in Edinburgh, Hong Kong and Singapore, actively engaged with companies such as Amore Pacific (Korea), Natura (Brazil) and Beiersdorf (Germany) on the issue of toxic chemicals in personal care products.

Natura responded positively, saying they had eliminated the use of toxic chemicals since 2008.

Another example came from the global resources team, headed by Joanne Warner. In October 2010, an Australian gold miner experienced three fatalities, which were not disclosed to the market. Management had deemed disclosure unnecessary as production targets were not affected.

During a subsequent site visit, poor safety standards were observed, and the decision was made to not invest in the miner until safety standards improved sufficiently.

One key challenge, Oulton admits, is to demonstrate that SRI contributes to superior performance.

‘The approach to SRI where you restrict the investment universe due to the nature of the activity naturally means you’ll get suboptimal returns. But when you integrate environmental, social and governance factors into your process, without restricting the investment universe, we’ve found strategies tend to perform well,’ he says.

And in this, First State Investments has shown its products have stayed ahead of its peers.

First State Asia Pacific Sustainability Fund was soft closed in 2012, while First State Global Emerging Markets Sustainability Fund soft closed in 2013.

In 2013, the First State Asia Pacific Sustainability fund returned 9.57% against the benchmark MSCI AC Asia Pacific ex Japan TR USD’s return of 3.65%. Over the same period, the First State Global Emerging Markets Sustainability fund returned 4.63% against the benchmark MSCI EM TR USD’s return of -2.27%.

David Gait has managed the First State Asia Pacific Sustainability fund since December 2005 and the First State Global Emerging Markets Sustainability fund since April 2009. At the end of 2013 Gait was rated AAA by Citywire.

Also managed by Gait is the First State Worldwide Sustainability fund, launched in November 2012. In 2013, the fund returned 22.2% against the MSCI AC World TR USD’s return of 23.44% in US dollar terms.

Of course, a fair question to ask is how much did SRI factors contribute to the investment process of First State Investments.

Oulton says SRI factors alone would not be responsible, but integrating SRI factors into the investment process adds an additional level of depth to the comprehensive due diligence process.

‘We believe unless we’ve given due consideration to the assessment of a company’s environmental risk, corporate governance, human capital management and shareholder responsibility, we’re ending up with a suboptimal position.’

This article originally appeared in the March issue of Citywire magazine

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