2010 ESG update for members

The United Nations Principles for Responsible Investment (UNPRI) reflect the view that environmental, social and corporate governance (ESG) issues can affect the performance of investment portfolios. Because our aim is to always act in the best interest of our members, and because we believe that applying these Principles can help align investors with the broader objectives of society, we became a signatory of the UNPRI in 2006. Since that time we have adopted these Principles in our investment practices and this report provides an update on our ESG activities in 2010.

The UN Principles for Responsible Investment are:

PRI1: We will incorporate ESG issues into investment analysis and decision-making processes.
PRI2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
PRI3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
PRI4: We will promote acceptance and implementation of the Principles within the investment industry.
PRI5: We will work together to enhance our effectiveness in implementing the Principles.
PRI6: We will each report on our activities and progress towards implementing the Principles.

UNPRI activity

The UNPRI conducts a comprehensive annual assessment rating the performance of each of the UNPRI signatories against each other based on their adherence to the Principles and their investment governance, policy and strategic (GPS) frameworks.

As indicated in the chart below, in 2010 our rankings have improved and we now rate in either the first or second quartile in 6 out of the 7 categories of superannuation funds globally.

Figure 1: ARIA's UNPRI ranking by quartile vs all asset owners

	2007	2008	2009	2010
Overall	n/a	Quartile 2	Quartile 2	Quartile 1
Governance, Policy and Strategy	n/a	n/a	Quartile 2	Quartile 2
Principle 1	Quartile 3	Quartile 3	Quartile 4	Quartile 3
Principle 2	Quartile 2	Quartile 2	Quartile 1	Quartile 1
Principle 3	Quartile 4	Quartile 3	Quartile 3	Quartile 2
Principle 4	Quartile 3	Quartile 1	Quartile 2	Quartile 1
Principle 5	Quartile 1	Quartile 2	Quartile 1	Quartile 1
Principle 6	Quartile 2	Quartile 2	Quartile 2	Quartile 2

Quartile 1 = Top Quartile Quartile 4 = Bottom Quartile

Note: Scores have been calculated based on signatories’ self assessment and using the scoring methodology approved by the PRI Assessment Group. Although a limited verification exercise was undertaken with a proportion of signatories, responses have not been independently audited by the PRI Secretariat, PRI Assessment Group, or any other third party. Individual results including comparisons to the overall results (quartiles) are indicative and do not imply an endorsement of signatory activity. While this information is believed to be reliable, no representations or warranties are made as to the accuracy of information presented, and no responsibility or liability can be accepted for any error, omission or inaccuracy in this information.

The following is a list of activities we have engaged in during 2010 as part of our commitment to integrating the Principles into our investment practices.

UNPRI	Actions
PRI1 We will incorporate ESG issues into investment analysis and decision-making processes.	Ongoing Maintain and publish our ESG policy. Incorporate ESG into manager selection process. Train ARIA investment staff on ESG issues. Measure ESG exposure of investments where practicable and incorporate in risk process. Encourage managers and advisors to maintain ESG policies. Encourage service providers to include ESG factors as part of broader risk analyses. Planned Include ESG risk analysis as part of real asset class reviews. Incorporate ESG reporting requirements into investment management agreements.
PRI2 We will be active owners and incorporate ESG issues into our ownership policies and practices.	Ongoing Maintain and publish our proxy voting policy. Exercise voting rights where practicable. Work with advisors on shareholder engagement. Where possible and appropriate, collaborate with other shareholders. Encourage companies to disclose ESG policies, practices and performance. Encourage managers, advisors and service providers to maintain ESG policies and report on ESG activity.
PRI3 We will seek appropriate disclosure on ESG issues by the entities in which we invest.	Ongoing Encourage companies to disclose ESG policies, practices and performance. Work with key ESG relationships and collaborate with other investors to request ESG information from companies. Encourage managers and advisors to maintain ESG policies and publicly publish ESG activity. Planned Incorporate ESG reporting requirements into investment management agreements.
PRI4 We will promote acceptance and implementation of the Principles within the investment industry.	Ongoing Work with key ESG relationships and collaborate with other investors to include ESG principles in regulatory or policy reviews. Encourage managers, advisors and service providers to maintain ESG policies and report on ESG activity. Incorporate ESG reporting requirements into investment management agreements.
PRI5 We will work together to enhance our effectiveness in implementing the Principles.	Ongoing Work with key ESG relationships and collaborate with other investors to request ESG information from companies. Work with key ESG relationships and collaborate with other investors to include ESG principles in regulatory or policy reviews.
PRI6 We will each report on our activities and progress towards implementing the Principles.	Ongoing Publish ESG and proxy voting policies. Publish ESG activity reports annually. Publish proxy voting activity statements semi-annually. Inform members of ESG and proxy voting activity. Planned Inform managers, advisors and other service providers of ARIA’s ESG policies and practices.

Collaborative relationships

ARIA has developed collaborative relationships with other domestic and international investor groups in order to:

engage with investee companies to increase advocacy and participation in the public policy debate
initiate and advance the ESG research agenda
promote increased corporate governance standards worldwide
address the risks and opportunities associated with climate change and monitor the public policy response to it.

These engagements are taken into account in the UNPRI assessments and influenced our high ranking in 2010.

The table below details these collaborative relationships and outlines the purpose for our engagement.

Industry collaboration	Aim
United Nations Principles for Responsible Investment (UNPRIs)	To provide a web-based clearinghouse for collaborative initiatives. To facilitate networking among members through educational and information sharing activities. To support members in meeting their commitments to the UNPRIs.
Australian Council of Superannuation Investors (ACSI)	To assist members in the practical management of ESG risk. To support engagement with investee companies facilitating advocacy and participation in the public policy debate. To maintain a research agenda on key governance related matters, ensuring that industry views and positions are soundly based on fact. Areas they research include: executive remuneration risk management management of extra-financial risk, including material ESG risk such as climate change board succession planning board and director performance disclosure of performance issues.
Regnan Governance Research and Engagement	To support sustainable long-term performance of S&P/ASX 200 companies. To improve market conditions in Australia.
International Corporate Governance Network (ICGN)	To raise corporate governance standards worldwide by encouraging cross-border dialogue and participation in public policy debate.
Investor Group on Climate Change (IGCC)	To promote research and participation in the development and support of public policy. To promote standardised reporting on ESG issues To promote collaborative engagement across the industry by facilitating shared resources and collectively addressing emerging issues.
Carbon Disclosure Project (CDP)	To develop and maintain the largest database of primary corporate climate change information in the world.
Carbon Disclosure Project Water Disclosure	To conduct research on CDP Water Disclosure of the FTSE Global Equity Index Series companies, focusing on sectors that are water-intensive or are exposed to particular water-related challenges.
ESG Research Australia (ESGRA)	To increase the amount and quality of stock broker research in Australia and promote the consideration of environmental, social and governance issues.

Regnan and RiskMetrics/Innovest benchmarking

We analyse the ESG risk exposure of our investments to enable us to develop and maintain an appropriate risk management process that is in line with our long-term investment goals. What is unique about our approach is that our analysis is across our entire portfolio, giving us a broad-spectrum perspective.

We use two data sources to analyse ESG risk on our portfolio. Regnan covers the top 200 Australian listed equities with three sub-scores to measure the environmental, social and corporate governance exposure of our invested companies. We also compute a blended average of those three scores giving an aggregate score. Additionally, we use RiskMetrics/Innovest scores to measure four facets of our international equity portfolio and RiskMetrics/Innovest also computes an aggregate ESG score.

The charts below show the ESG exposure of our equity portfolios. The first chart shows the ESG exposure of our Australian equity portfolio using Regnan data. Additionally we show the same analysis for the S&P/ASX 300 benchmark on this first chart.

The second chart shows the ESG exposure of our international equity portfolio using RiskMetrics/Innovest data and compares the ARIA portfolio to a common broad-equity benchmark for the asset class.

In both instances our investments are predominantly lower (meaning they bear less risk) than the benchmarks.

Chart - Regnan Ratings - Aggregate

Note: As Regnan data covers the S&P/ASX 200, but our portfolio is a) actively managed and b) is benchmarked to the broader S&P/ASX 300, some of our investments have not been scored by Regnan. These are indicated in the ‘unrated’ columns.

Chart - Innovest Ratings - Aggregate IVA

Climate change

We have also given explicit consideration to the impact of climate change on ARIA’s portfolio and concluded that climate change, and energy, food and water security present an element of very long-term risk (50-100 years) to asset values, although most estimates of the direct impact on ARIA’s portfolio are small.

ARIA believes that over our investment horizon, an increasingly fragmented policy response is likely to alter prospective returns-for-risk across assets, industries, regions and corporations. The impact on volatility will be critical because policy responses to climate change will bring costs and opportunities forward and increase investment uncertainty. Increased uncertainty can have a much larger impact on investment valuations than simply the direct return implications.

Enhancing the sustainability of our properties

Our investment managers for our seven directly-owned properties have incorporated sustainability principles and initiatives into their investment processes and day-to-day property management. Sustainability initiatives have materially reduced the energy and water consumption of these properties.

Examples include:

Installing sub-metering within buildings in order to accurately measure energy and water usage across base building services and individual tenants.
Obtaining National Australian Built Environment Rating System (NABERS) energy and water ratings for each of our office investment properties. NABERS measures a building’s operational impact on the environment. The ratings provide a simple indication of how well these impacts are being managed.
Appointing a specialist environmental sustainability consultant to assess each building and identify measures that can reduce energy and water usage and increase NABERS Energy and Water ratings. The consultant report forms the framework for improving the environmental sustainability performance and rating of each building.
Actively exploring government funding initiatives/grants to reduce the cost of sustainability initiatives. In September 2009, 101 Collins St received the maximum grant available ($0.5m) from the Australian Government Green Building Fund to help fund sustainability initiatives.

17 January 2011