Investment of the Natural Disaster Fund

Responsible Investment Policy

Obligations and responsibilities

1. Obligations and responsibilities
The Earthquake Commission (the Commission) is a crown entity acting under the Earthquake Commission Act 1993. Under this Act the Commission has responsibility for the Natural Disaster Fund (the Fund).  The investments of the Fund are governed by the Earthquake Commission Act 1993, the Crown Entities Act 2004 and Ministerial Direction.

The Commission must invest the Fund on a prudent, commercial basis, and in doing so, must manage and administer the Fund in a manner consistent with:
a. best practice portfolio management;
b. maximising return without undue risk to the Fund as a whole; and
c. avoiding prejudice to New Zealand's reputation as a responsible member of the world community.

No one of these obligations has precedent over the others.

The Commission considers responsible investment to be part of evolving best practice. This policy outlines the principles of responsible investment that the Commission will follow in order to administer the Fund using best practice portfolio management, maximising return without undue risk to the Fund as a whole and avoiding prejudice to New Zealand’s reputation as a responsible member of the world community, by integrating environmental, social, and governance considerations into the investment process. 

In implementing this policy, the Commission is aware that maximising returns without undue risk implies diversifying across a range of assets.  The strategic asset allocation is set by a Ministerial direction. The Commission has appointed investment managers who are responsible for the day to day buying and selling of stock.  

This policy will be reviewed at regular intervals. 

This policy applies to all the Fund's assets under management.  However, the Commission’s operational practices and procedures may vary across the assets dependent on the nature of the investment (for example, segregated or pooled funds), investor’s rights, whether it is practical to implement and the cost of implementation.

If companies invested in by the Fund are found to have corporate practices that breach its responsible investment policy, the Commission will consider engaging with the company either directly or in conjunction with other investors, or taking other shareholder action.  The Commission believes that it can, in most instances, have a greater impact on company practices through dialogue with company management in conjunction with others, than through immediate divestment.  The Commission's actions are guided by the principles outlined in section 2 of this policy.

In developing this policy, the Commission is conscious of the boundaries of responsibility, and the degrees of influence, that exist between shareholders and companies.  While it is not the role of shareholders to interfere with the direct management of companies, they can seek to influence outcomes by raising concerns with company boards or management, or excluding investments from their portfolio for reasons of responsibility and ethics.

As a last resort the Commission may divest of investment in companies that are found to have corporate practices that breach its responsible investment policy.

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Principles

2.1 Responsible Investment
The Commission considers that responsible investment decision making that takes account of social, environmental, and governance considerations is part of evolving best practice. Responsible investment actions can include engagement, voting, exclusion of certain investments, and/or divestment.

The Commission, at its discretion, and provided that it is consistent with its obligation to invest the Fund on a prudent, commercial basis may consider other issues arising from the Fund’s investments.  In doing so, the Commission may take into account factors including whether the issue is contrary to New Zealand law and New Zealand’s international agreements, or is inconsistent with Crown actions.

The Commission is a signatory to the United Nations (UN) Principles for Responsible Investment, and acknowledges internationally agreed standards for responsible corporate behaviour and investment.  As such, the Commission aims to encourage companies in which it invests to meet internationally agreed standards for responsible corporate behaviour.

2.2 The UN Principles for Responsible Investment
The Commission acknowledges the UN Principles for Responsible Investment (UN PRI) as a component of emerging best practice in responsible investment. There is a growing view among investment professionals that environmental, social and corporate governance (ESG) can affect the performance of investment portfolios. The UN PRI provides a framework for investors, to give appropriate consideration to environmental, social, and corporate governance issues. These principles will be used to guide the investment decisions of the Commission (refer appendix 1). 

The UN PRI operates its own secretariat that helps international institutional investors collaborate in engaging with companies. The initiative encourages improvements in the inclusion of social, environmental and governance issues into investment analysis. The UN PRI provides tools to enable the Commission to benchmark its performance in the area of responsible investment.

2.3 Standards
The Commission recognises international agreements signed by New Zealand, the UN Global Compact, and other international codes or standards. The Commission may take these into account, where relevant, in its investment activities.
The UN Global Compact asks companies to embrace, support, and enact, within their sphere of influence, a set of core values in the areas of human rights, labour standards, the environment, and anti-corruption.

[1]  www.unpri.org and see appendix 1.

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Implementation

3.1 Shareholder Activities
The Commission or its investment managers (where delegated) may undertake shareholder activities consistent with best practice responsible investment, including, but not limited to:
• improving the Commission’s expertise in, and effectiveness of, its shareholder activities ;
• developing and maintaining in conjunction with other agencies a system for monitoring portfolio holdings against relevant standards;
• implementing an engagement programme in conjunction with other agencies  to encourage improvements in responsible corporate behaviour;
• encouraging disclosure by companies, of material social and environmental information to better understand the impact of these issues on long-term shareholder value; and
• exercising votes (including by proxy) at company meetings.

3.2 Monitoring
The Commission will (following development and implementation of processes) monitor portfolio holdings against relevant standards to ensure compliance with this policy. If the Commission receives valid reports of breaches of responsible investment standards by companies in the Fund, they may consider these issues on a case by case basis and undertake any of the actions outlined in this policy. 

3.3 Analysis
The Commission and its investment managers may undertake further analysis on key issues, or breaches of responsible investment standards, in order to assess the most appropriate shareholder response.  The analysis of investments will use the principles outlined in section 2 of this policy. The Commission’s analysis of responsible investment issues may include:

• the nature of involvement by the company and the Fund;
• the materiality of the issue or breach of responsible investment standards;
• the regulatory environment, including international conventions and New Zealand law;
• impact on long-term financial performance;
• the effectiveness of shareholder actions; and
• the impact on the Fund’s portfolio.
The Commission is aware that firms operate in different legal, cultural, and geographical contexts. Achieving certain standards (such as compliance with the UN Global Compact) may thus be work in progress. The Commission will endeavour to understand individual circumstances if breaches of standards occur. 

3.4 Engagement
The Commission or its investment managers may engage with companies in which the Fund invests. This engagement may occur unilaterally or with other investors. In most cases engagement will involve encouraging companies to address significant breaches of standards, and/or improve their policies and practices. The Commission may also take a more general approach to engagement in order to raise awareness of relevant standards amongst business and investors. 

3.5  Procedures in relation to investment managers
The Commission appoints external investment managers to manage portions of the fund. As part of the selection process the Commission assesses the overall investment management capabilities of candidate managers, including the ability to implement the Commission’s requirement to avoid prejudice to New Zealand’s reputation as a responsible member of the world community.

The Fund's investment managers are required to be vigilant against the effects on companies’ long-term performance prospects that could arise from any practices which alienate civilized society including socially and environmentally irresponsible behaviour. 

Maintaining open dialogue with investment managers, including in relation to the requirement to avoid prejudice to New Zealand’s reputation, is considered to be critical to the achievement of the Commission’s objectives.

In addition, consistent with the UN PRI, the Commission will encourage its investment managers to integrate ESG factors into evolving research and analysis and to undertake and report on ESG-related engagement. The investment managers will report to the Commission on their application of the responsible investment requirements, on a six monthly basis.

Investment managers will be formally instructed of any exclusion or divestment decisions by the Commission.

3.6 Voting
The Commission believes that good corporate governance should maintain a balance between the rights of shareholders on one hand and the needs of the corporate board and management to direct and manage the company’s affairs on the other. Responsible governance should reinforce a culture of integrity and transparency, contribute to the achievement of strategic goals, ensure board alignment with shareholder interests, reinforce and maintain good business ethics, and recognise environmental and social considerations.

The Commission believes that good corporate governance will also maximise return to the fund without undue risk.

Voting rights are important to the Fund for maintaining shareholder oversight of directors and company policies. The Commission will use its voting rights to encourage good corporate governance.

3.7 Sovereign Securities
If the Commission invests in securities issued by sovereign states, the Commission will be guided by United Nations (UN) standards and other similar international organisations. These standards include the Universal Declaration of Human Rights and UN sanctions. The Commission would also seek expert assessment of sovereigns’ records on human rights, labour standards, environmental standards, trans-national crime, evidence of reprehensible conduct, or other breaches of responsible investment standards.

Where a breach of responsible investment standards on sovereign securities was identified, the Commission may elect to divest from the sovereign securities of that country.

3.8 Exclusion and Divestment
The Commission may decide to exclude investment in or divest from certain securities. (Refer to appendix 2 for a list of currently excluded investments).

3.9 Transparency and Reporting
The Commission recognises that the New Zealand public has a legitimate interest in the Fund. The Commission will publish its responsible investment policy and communicate on its responsible investment activities in the annual report.

 

Approved by the Earthquake Commission Board of Commissioners on 6 December 2007

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Appendix one - The UN principles for Responsible Investment

As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, and asset classes and through time). We also recognise that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following six principles of the UN PRI:

1.  We will incorporate ESG issues into investment analysis and decision-making processes.
2.  We will be active owners and incorporate ESG issues into our ownership policies and practices.
3.  We will seek appropriate disclosure on ESG issues by the entities in which we invest.
4.  We will promote acceptance and implementation of the Principles within the investment industry.
5.  We will work together to enhance our effectiveness in implementing the Principles.
6.  We will each report on our activities and progress towards implementing the Principles.

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Appendix two - Excluded investments

In line with the obligations and responsibilities of the Responsible Investment Policy, the Commission and its investment managers will not invest the Fund in the following:

• Organisations engaged in the development, production, transfer, possession, acquisition, stockpiling or use of anti-personnel mines
• Manufacturers of cigarettes and tobacco


The Commission is not limited to the exclusion of these investments and may also exclude other investments or divest from securities at its discretion.

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