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Responsible investing

MLC Asset Management Services Limited Responsible Investment Policy

1 Purpose of this policy

Our purpose as the MLC Asset Management Services Limited (MSL) investment team is to manage portfolios in a responsible manner with the aim of meeting investors’ goals with the most attractive risk-return outcomes possible.

We recognise that a sustainable economy and healthy society are key drivers of long-term wealth creation for our clients. We believe that investing responsibly and taking into account Environmental, Social and Governance (ESG) risks are strongly aligned with our purpose as investors.

This MSL Responsible Investment Policy (‘Policy’) describes how we do this. It covers:

  • Section 2 - Background: What is Responsible Investment?
  • Section 3 - Our approach to managing ESG risks:
    • ESG beliefs and principles
    • How ESG is incorporated in our investment process
    • Corporate engagement and proxy voting
    • Our approach to negative screens
    • Our approach to managing climate change risks
    • Our approach to managing modern slavery risks
  • Section 4 - Our governance process for responsible investing and ESG.

2 Background: what is Responsible Investment?

Responsible Investment, also known as sustainable investment, is a broad-based approach to investing which factors in long-term impacts on people, society and the environment, along with financial performance, when making and managing investments. In this section, we outline some of the ways in which industry practitioners approach these issues, before describing MSLs approach in section 3.

2.1 ESG integration

ESG integration is another sub-set of Responsible Investment. ESG integration involves ensuring that material Environment (E), Social (S) and Governance (G) risks are appropriately analysed and considered in any investment decision. It matters from an investment perspective because if a company isn’t taking into account physical risks such as pollution risks (E), does not manage its human capital by (for example) underpaying workers (S), or has weak oversight of key management functions (G), then it will likely experience adverse economic consequences at some point, which in turn will negatively impact its value and share price.

Examples of ESG risks include:


Social Governance
Climate change Human rights Board independence
Water supply Supply chains Remuneration
Energy use Health and safety Bribery and corruption
Pollution Indigenous rights Shareholder rights
Biodiversity Modern slavery Human capital management

Some of the ways in which an investment manager can manage ESG risks that they are uncomfortable with include:

  • Avoiding an investment or reducing the position size.
  • Engagement with the company to influence positive change.
  • As a last resort, divestment or exclusion.

At MSL, we regard ESG integration as essential to ensuring that material risks are incorporated into any investment process.

2.2 Corporate engagement

This is often applied in combination with ESG integration and involves engaging with company boards and management to understand and, where necessary, influence improvement in their practices in relation to issues that are important to long-term investor outcomes. This can include, but isn’t limited to, issues relating to business strategy, environmental impact, human capital management, board composition and remuneration policy. For the Responsible Entity (RE), it also includes exercising on behalf of shareholder’s rights via voting on resolutions.

2.3 Screening

Screening involves constraining the universe of investments by excluding or divesting from certain industries or sectors that are deemed to have negative externalities from a social perspective, generally to reflect a particular ethical view (which is necessarily subjective) or to cater to client preferences or to reflect an investment view. There are three main types of screening:

  • Exclusionary/Negative screening: Screens out a portion of the investable universe (e.g. companies or sectors relating to tobacco manufacturing, fossil fuels, gambling, munitions) not aligned with an investor’s interests and preferences.
  • Positive screening: Seeks to invest only in sectors or industries that contribute positively to the environment, social causes, humans’ health and well-being and other ESG matters.
  • Best in class screening: Intentional tilts towards companies that are deemed to have more positive ESG characteristics (including within sectors that may be considered to have more negative ESG characteristics than the broader market).

MSL’s position on screening is outlined in section 3.4.

2.4 Sustainability or impact investing

This involves investing with the goal of achieving attractive risk-adjusted returns, and also achieving a sustainability-related goal that typically has an environmental, social or ethical intent. Examples include supporting the growth of renewable energy, social/affordable housing, more sustainable agriculture, or reduction in plastic waste.

3 Our approach to Responsible Investing

3.1 ESG beliefs and key principles

As an investment manager, our primary purpose is to design portfolios that aim to meet our clients’ goals with the most attractive return for the risk taken that’s possible. We primarily implement our portfolios using specialist investment managers within each asset class. This informs how we approach ESG risks – in that a key part of our approach is assessing the ESG policies and processes of our investment managers.

Our key beliefs are:

  • Integrating ESG factors into our investment process helps to manage risks and identify opportunities for our investors. Consideration of these factors needs to be an integral aspect of any investment process. Failing to consider material ESG issues means being oblivious to important business and investment risks.
  • Given our goal of optimising investment outcomes for our clients – it is important to recognise that sometimes ESG risks within a company can be overpriced and sometimes underpriced by the market. The job of the active specialist investment managers we employ is to understand the risks and take them where they are well compensated and avoid them when they are not.
  • Actively and effectively engaging with companies – whether directly or via our specialist investment managers – to ensure they are appropriately managing ESG risks (along with all business risks) can reduce risk and improve performance over the long term.
  • That we have a responsibility to invest in a manner that supports sustainable capitalism for the benefit of all investors. This means working with other investors via forums such as the Responsible Investment Association of Australasia (RIAA), and the Investor Group on Climate Change (IGCC).

Consistent with the above, we adhere to the following three principles, each of which is aligned with the United Nations Principles for Responsible Investment (UNPRI):

  • Principle 1: We will incorporate material ESG issues into investment analysis and decision-making processes.
  • Principle 2: We will be active owners and incorporate material ESG issues into our ownership policies and practices.
  • Principle 3: We will seek appropriate disclosure on material ESG issues by the entities in which we invest.

3.2 How ESG is incorporated in our investment process

a) Manager research:

  • An integral part of our approach for evaluating specialist investment managers is to understand how they identify opportunities and manage risk. ESG integration is an important aspect of this and we focus on how it is embedded within their investment process.
  • If the approach to ESG is considered inadequate we will not appoint an investment manager.

b) Ongoing monitoring:

  • We review our managers’ ESG management processes as part of our regular due diligence process.
  • In addition to regular meetings, we require each manager to provide a quarterly report detailing their approach to ESG integration and their activities and outcomes in relation to active ownership and engagement. This is designed to track how their processes are evolving, ensure the reality is aligned with the espoused approach (e.g. uncover greenwashing), and explore examples of where ESG risks have been identified, manifested or avoided.
  • We undertake an annual review of each manager’s ESG policy and the incorporation of ESG risk factors into their processes.
  • If we no longer consider the approach of a manager to the assessment of ESG risk appropriate, this can be a contributing factor to their termination.

3.3 Corporate engagement and proxy voting

Corporate engagement

Our view is that effective engagement with companies can lead to better long-term outcomes for shareholders. This can derive from requiring high standards of transparency, corporate governance, business strategy and social responsibility from the companies in which we invest via our managers.

MSL endeavours to be active owners and incorporates ESG issues into our voting practices. In most situations, we believe our specialist investment managers, who ultimately choose which investments to buy, are best placed to engage with company boards and management on an ongoing basis. Hence corporate engagement for the most part is delegated to our managers, who are encouraged to engage with relevant companies on material ESG issues. In certain situations, MSL may also engage directly with companies.

Proxy voting

Shareholder voting is a means by which shareholders can influence a company's operations, its corporate governance and activities of social responsibility. Proxy voting is where a vote is cast on behalf of a shareholder.

MSL works closely with MLC Investments Limited, the Responsible Entity that determines how proxy voting is conducted for our portfolios. The process is designed to protect and enhance the investment value of our portfolios’ share investments, recognising the strong link between good corporate governance and investment value. MLC applies the Financial Service Council (FSC) Standard and Guidelines on proxy voting to its operational processes where applicable.

MLC’s Proxy Voting Policy can be found on

3.4 Our approach to negative screens

The MSL investment team believes that the effectiveness of negative screens needs to be considered very carefully. This is because divesting from or excluding companies:

  • Can reduce the ability to engage and influence companies’ corporate behaviour for the better, and so inhibit the enhancement of long-term financial and societal outcomes.
  • Means that the negatively screened securities cannot be bought, regardless of their price i.e. even if the negative ESG downside risks are more than priced in.
  • Reduces diversification – although as long as the negatively screened universe remains a small proportion of the opportunity set, this is likely to be immaterial.

At the same time, we recognise that there can be occasions when a negative screen is appropriate – for example, to reflect a client’s explicit preferences and in situations where engagement is unlikely to have any impact.

Absent an explicit client preference, our framework for assessing the merits of screening out an entire sector or cohort of stocks focuses on the following questions:

  • Does MSL’s investment team have a strong view and understanding that the adverse ESG risks in a sector are not priced in, and will continue to not be priced in?
  • Will negative screening reduce MSL’s ability – usually via our specialist managers – to engage with the management of these companies to enhance long-term value?
  • Does negative screening adversely impact the diversification characteristics of the portfolio or is it relatively immaterial?
  • Are there risks from not negatively screening a sector – from a social license, member concern, or peer norm perspective – that could adversely impact the financial best interests of clients?

3.5 Climate change risks

Within our Policy, climate change is considered as part of the ‘E’ for environmental risks. Given it represents a material risk for the entire portfolio, and is a critical issue for society, we believe it justifies explicit recognition.

We recognise the science regarding the reality of climate change. We also recognise and support the global shift to targeting net zero emissions by 2050 in support of the Paris Agreement. These factors are likely to lead to significant investment impacts via:

  • Regulation and government policy.
  • Technology changes that will disrupt existing businesses and create new industries.
  • Physical climate risks that will impact different regions in different ways.
  • Changes in consumer behaviours and societal expectations of companies.
  • Measurement to enable the tracking and management of carbon emissions.

At a high level, we approach climate change risk from two perspectives.

Firstly, from a manager research perspective, we incorporate this risk into our broader ESG risk assessment. Given its importance, we include an explicit climate change section in the regular reporting we require from our underlying managers. We expect our managers to analyse these risks proactively and engage with companies on aligning their emissions with the targets established in the Paris Agreement. We also assess how managers are analysing climate change risks as part of our ongoing interactions and assessment of their capabilities.

Secondly, from an asset allocation perspective, we consider how different types of assets could be impacted in various climate change scenarios. This incorporates an assessment of how climate change risk may differ between regions and markets. For example, we may attach a higher risk premium to regions with a higher exposure to carbon-intensive industries to reflect the increased climate change risk.

Climate change is a rapidly developing field in terms of both the science and community expectations and we will continually evolve our approach to managing this risk.

3.6 Modern slavery risks

Within our Policy, modern slavery is considered as part of the ‘S’ for social risks. However, given it represents an important risk for the entire portfolio, both from an investment and regulatory point of view, we believe it justifies explicit acknowledgment.

Modern slavery describes situations where offenders use coercion, threats or deception to exploit victims and undermine their freedom. Practices that constitute modern slavery can include human trafficking, slavery, servitude, forced labour, debt bondage, forced marriage and child labour.

Modern slavery can occur in every country, industry and sector and as global investors we need to understand, at a minimum, the impacts of these practices on the companies that we invest in. We approach investment risks arising from modern slavery in a similar way to other ESG investment risks, that is, through manager research and ongoing monitoring (as detailed in section 3.2). This includes:

  • Explicit reporting from our managers on how they are assessing modern slavery risks in companies they invest in.
  • Monitoring the proportion of our assets that are allocated to countries and sectors that are considered at higher risk of modern slavery.

Modern slavery can also give rise to regulatory risks, mainly in the form of the obligations contained with the Modern Slavery Act 2018 (Cth). This Act requires MSL to report annually on the risks of modern slavery in their operations and supply chains (for MSL, that is the underlying investment managers that it allocates funds to) and actions to address those risks.

4 Governance processes

The MSL Investment Committee (MIC) is responsible for the investment related governance of all MSL portfolios. This includes:

  • Ensuring that ESG issues are appropriately considered throughout the investment process.
  • Ensuring that this Policy is implemented.
  • Undertaking a six-monthly MIC review to ensure that:
    • ESG issues (where applicable) within portfolios have been managed in accordance with the principles in this Policy, and
    • ESG risk factors within portfolios have been balanced with other risk factors consistent with achieving investment objectives.
  • Reviewing the Policy annually.

The Chief Investment Officer and Head of Listed Sector Portfolios are responsible for the implementation and continued evolution of the Policy.