Maximising investment outcomes through …...Maximising investment outcomes through investment stewardship and ESG integration For Official Use Only / 2 of 26 1. NSW Treasury Corporation

12 September 2017

Stewart Brentnall

Maximising investment outcomes

through investment stewardship and

ESG integration

For Official Use Only / 2 of 26 Maximising investment outcomes through investment stewardship and ESG integration

1. NSW Treasury Corporation (TCorp), a corporatized entity with its own board and

infrastructure, was formed in 1983 as the NSW Government’s debt issuer. In 1988,

its capability was extended into basic investment management

2. In 2015, the NSW government issued Ministerial Orders that TCorp be awarded

contractual responsibility for managing the $35bn defined benefit assets of STC

(State Super) and $25bn for the NSW icare insurance business, incl. those of

Workcover

3. In 2017, TCorp was mandated for management of the NSW Infrastructure Future

Fund (NIFF) – privatisation proceeds of certain NSW electricity businesses and the

Land Titles Office. TCorp’s total FUM is currently just short of A$90bn;

4. The Investment Team is 35 (with operations and implementation another 25);

5. A new CIO role has been created and charged with the responsibility of an end to

end review of the investment governance and model. This is being undertaken with

the assistance of Willis Towers Watson.

6. All TCorp IM Funds are permitted investment under the Local Government Act

Ministerial Order.

TCorp – Overview and Investment Model Summary


1983 Establishment of TCorp as a corporation administered by NSW Treasury.

Central borrowing function was established.

1988 TCorp launches Hour-Glass Funds investments

1996 Establishment of SOCs for electricity, ports, water etc. saw significant growth

in TCorp’s debt management and advisory activities.

2009 TCorp survives the GFC without any credit losses (no Lehman or CDO

exposures on balance sheet, or in any client funds) and generates a record

dividend for Treasury and significant interest savings for clients.

2015 Funds management functions of STC and icare amalgamated within TCorp.

Funds management volumes increased to ~$70bn.

2016 TCorp’s “Best-in-Class” strategy launched

2017 TCorp supporting the NSW Government ALCO. Common Custodian migration

to JPM underway.

Brief History of TCorp


TCorp Manages Financial Assets and Liabilities

for the State of NSW

State of NSW:

Financial Assets

~$90bn funds

managed by TCorp

State of NSW:

Financial Liabilities

~$68bn* debt

managed by TCorp * Market value

Maximising financial management outcomes for the benefit of NSW

133 clients across the NSW Government family

Financial data as at 30 June 2017


TCorp – NSW’s Gateway to Financial Markets

Financial Institutions Fund managers, financial markets, banks, etc.

TCorp

Borrowing

Clients Electricity

companies,

water companies

Debt, investments and advice

Investing

Clients icare, STC, NSW

Treasury, local

governments/councils, hospitals


TCorp Board Members

Phil Chronican

(Chair)

Chief Executive NSW Treasury

Kerry Schott Rob Whitfield Peter Warne Susan Doyle

David Deverall

Michael Pratt

(Deputy Chair)

Director NAB

Former CEO ANZ Former CFO Westpac

Former CEO Sydney Water

Chair of Transgrid Director NBN

Chairman Macquarie Group

Director ASX Chairman OFX

Director Law Cover Insurance

Former CIO IAG Former guardian Future Fund

Director ANZ and Westfield

Chair elect Coca Cola Amatil

Former Director Suncorp

Non-Executives

Philip Gardner


TCorp Executive Committee Structure and

Functions

Note: This is a functional view of the organisation


TCorpIM Funds Overview


TCorpIM Core Funds

Cash

0 - 1.5 years

Strategic Cash

1.5 -3 years

Medium Term Growth

3 – 7 years

Long Term Growth

7 + years

Potential Risk

Pote

ntial R

etu

rns


TCorpIM Cash Fund

• Time Horizon

0-1.5 years

• Performance Benchmark

Bloomberg AusBond Bank Bill Index

• Notification Timeframe

Same day (provided requests are received before

1 12 pm on working days).

• Distribution Frequency

Monthly

• Estimated Indirect Cost Ratio (ICR)*

0.09% p.a.

• Buy/Sell Spread

+/- 0.00%

(*) ICR includes the TCorp Management Fee and Other costs, such as custody fees, investment management

fees and Expense Recovery Fee.

Strategic Asset Allocation as at 31 August 2017

Australian Cash and

Fixed Interest, 100%


TCorpIM Strategic Cash Fund

• Time Horizon

1.5-3 years

• Performance Benchmark

Bloomberg AusBond Bank Bill Index


Up to 5 business days before


Monthly


0.10% p.a.

• Buy/Sell Spread

+/- 0.02%




Australian Cash and

Fixed Interest, 100%


TCorpIM Medium Term Growth Fund




• Time Horizon

3 – 7 years

• Long Term Return Expectation

CPI + 2% p.a. over 7 years


Up to 5 business days


Annual

(in July - reinvested unless advised otherwise)


0.23% p.a.

• Buy/Sell Spread

+/- 0.09%

43.0%

10.0% 7.5%

9.5%

2.0%

3.0%

[VALUE]

4.0%

2.0%

4.0%

5.0%

5.0% 3.0%

Cash

Australian Bonds

Australian Shares

International Shares Unhedged

International Shares Hedged

Emerging Market Shares

Listed Property

Multi-Asset Class

Global Credit

Emerging Market Debt

Australian Inflation-linked Bonds

Bank Loans

High Yield

58% Defensive Assets

18% Alternatives

24% Shares


TCorpIM Long Term Growth Fund




20% Defensive Assets

14% Alternatives

66% Shares

• Time Horizon

7+ years

• Long Term Return Expectation

CPI + 3.5% p.a. over 10 years


Up to 5 business days


Annual

(in July - reinvested unless advised otherwise)

• Estimated Indirect Cost Ratio

0.30% p.a.

• Buy/Sell Spread

+/- 0.14%

13.0%

5.0%

22.0%

28.0%

2.0%

7.0%

2.0%

5.0%

2.0%

4.0%

2.0% 5.0%

3.0%

Cash

Australian Bonds

Australian Shares

International Shares Unhedged

International Shares Hedged

Emerging Market Shares

Listed Property

Multi-Asset Class

Global Credit

Emerging Market Debt

Australian Inflation-linked Bonds

Bank Loans

High Yield


TCorpIM Funds Performance cumulative returns as at 31 August 2017

1. Past performance is not an indicator or guarantee of future performance.

2. Prior to 17 June 2008, the Strategic Cash Fund was named the Bond Market Facility. The Bond Market Facility invested 60% in Australian Cash and 40% in Australian

Bonds

0%

100%

200%

300%

400%

500%

600%

700%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

TCorpIM - Cumulative returns from 1 July 1992 to 31 Aug 2017

TCorpIM Long Term Growth Fund

TCorpIM Medium Term Growth Fund

TCorpIM Strategic Cash Fund

TCorpIM Cash Fund


Investment Stewardship and ESG Integration


ESG integration is:

• Embedding the consideration of environmental, social or governance (ESG)

factors into an investment process in an effort to improve risk-adjusted

returns over time.

• Identifying and managing risks and opportunities that arise due to ESG

factors.

• About making better investment decisions leading to better financial

outcomes.

What is ESG integration?


Source: MSCI

MSCI ESG Key Issue Hierarchy

What’s captured by ESG?


Source: Friede, Busch, Bassen (December 2015)

Link between ESG & Corporate Financial Performance

Source: Friede, Busch, Bassen (December 2015)

E, S & G Categories & Corporate Finance Performance

Source: US SIF Foundation (July 2014)

AUM Linked to ESG Criteria in the US (AUM USD

trillion)

Why integrate ESG?

Strong growth in ESG integration has

been driven by growing evidence of

the positive link between ESG factors

and corporate financial performance.


TCorp’s approach to ESG

• The TCorp Board established a new Investment Stewardship Policy on 30

September 2016.

• Investment Stewardship includes ESG integration and active ownership.

• Based on the belief that good stewardship will lead to better risk-adjusted

returns over time.

• Advocates an integration-based approach over an exclusion-based

approach.

• Financially-driven NOT values-driven.


• TCorp believes that integrating ESG factors into the investment process can

lead to better risk-adjusted returns over time.

• TCorp’s belief on the benefits of ESG integration and active ownership is

evidence-based.

• TCorp believes in the integration of ESG factors across the entire portfolio.

• TCorp expects the investment managers we employ to demonstrate a

commitment to investment stewardship, ESG integration an active

ownership.

• TCorp believes that an integration-based approach to stewardship is likely

to lead to better investment outcomes over time than an exclusion-based

approach.

TCorp’s Stewardship Beliefs


TCorp’s Stewardship Pillars

Integration

Embedding good stewardship and ESG principles into investment decision making

processes, including the way

in which investment

managers are selected and monitored.

Engagement

Entering into communication with company

management to ensure that ESG

risks and opportunities are being identified and managed.

Proxy Voting

Exercising shareholder

rights to promote good corporate governance and management of

ESG factors within portfolio

companies.

Collaboration

Working together with like-minded investors to pool resources, share information and

enhance influence on ESG

matters.

Disclosure

Good stewardship starts with a

public commitment which is then

reported against on a regular

basis.

Resourcing

Measurement

Processes


Exclusion vs Integration based approach

Investment

Approach

Pros Cons

Exclusion/

Divestment

• Ethically defensible position

• Sends an easily interpretable

signal to companies and

stakeholders

• Reduced returns or increased risk if

exclusion/divestment not based on

economic assessment

• Lose ability to continue engagement

and influence ESG practices of a

company

Integration and

Engagement

• Potential to influence a

company’s ESG practices

through collaborative engagement

and policy discussion

• Potential to gain greater

disclosure of a company’s

operations and exposure to risk

• Unlikely to succeed in changing the

nature of the fundamental activity of

the company


TCorp Stewardship Program – how is it done?

ESG Integration

TCorp Stewardship Team

• Manager selection and monitoring

• Active Ownership: Company engagement and

voting

• Measuring impact, disclosure and reporting

• Industry collaboration

Via external investment managers

• Integration of ESG factors into investment

processes

• Active Ownership: Company engagement and

voting

• Proof of ESG integration: reporting via case

studies and quarterly updates

Long term value to NSW Government Family


TCorp is committed to establishing and maintaining a best-practice stewardship

framework.

Milestones

• Completed Baseline Assessment, including initial carbon footprint and ESG

ratings.

• Established internal resources, and completed first proxy voting exercise.

• Joined the Investor Group on Climate Change (IGCC).

• Became a signatory to the Carbon Disclosure Project (CDP).

• Joined the Australian Council of Superannuation Investors (ACSI).

Implementing Stewardship - Summary


Your Questions?

NSW Treasury Corporation (TCorp)

Level 22, Governor Phillip Tower

1 Farrer Place, Sydney NSW 2000, Australia

T: +61 2 9325 9325 F: +61 2 9325 9333

W: tcorp.nsw.gov.au ABN: 99 095 235 825

New South Wales Treasury Corporation ABN 99 095 235 825 (“TCorp”) is a statutory corporation of New South Wales. This information is correct as at May 2017. This

presentation is provided for information purposes only and should not be relied on for trading or other business purposes. The presentation does not constitute

investment advice and TCorp does not make any recommendation as to the suitability of any products or transactions mentioned. This presentation is not intended to

forecast or predict future events. Past performance is not a guarantee or indication of future results. Any forward looking information is predictive in nature and may be

affected by inaccurate assumptions or by known or unknown risks or uncertainties. Expected results may differ from results ultimately achieved. Any estimates,

opinions and assumptions constitute the judgment of TCorp or the relevant third party source cited by TCorp as at the report date and is subject to change without

notice. Any estimates and opinions contained in this presentation constitute TCorp’s judgment as at the date of the presentation and are subject to change without

notice. TCorp does not guarantee the accuracy, timeliness, reliability or completeness of the information or data and will not be liable for any errors or actions taken in

reliance on the information or data. TCorp does not provide tax advice.

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Maximising investment outcomes through …...Maximising investment outcomes through investment stewardship and ESG integration For Official Use Only / 2 of 26 1. NSW Treasury Corporation