Our Approach to Sustainability & ESG

Incorporating Sustainability in the Infrastructure Investment Process

Since inception, the inclusion of sustainability and ESG factors has been a core part of our infrastructure investment process, and we have always approached the ownership of equity in listed infrastructure companies from a long-term and sustainability-driven perspective. We do not defer sustainability analysis to a dedicated ESG analyst, rather it is a responsibility of all investment team members. Our team believes that integrating sustainability into the investment process supports our responsibility to our clients in achieving their investment goals and acts in the best interests of future generations.

ClearBridge is a signatory to the United Nations Principles for Responsible Investment and reports annually on the implementation of those principles. ClearBridge also supports the principles of the UN Global Compact and does not seek to invest in companies that violate those principles. Our investment process also supports the Sustainable Development Goals (SDGs) by mapping issuers against each one of the SDGs as a proxy for determining a positive Environmental or Social contribution.

ClearBridge uses a fundamental bottom-up investment process to measure and analyse global listed infrastructure securities. Our investable universe selection process seeks to exclude companies where the assets are not predominantly infrastructure. We then assess ESG factors through a proprietary analytical framework that is applied to each potential investment via three main pillars:

• Valuation (cash flow forecasts)
• Risk pricing (required return adjustment)
• Engagement and proxy voting (active management)

Proprietary Sustainability Scorecard

We have developed a proprietary sustainability scorecard that combines:

• internal research and analysis
• supplementary information and data obtained from a variety of third-party research providers, including MSCI, Sustainalytics, ISS and Bloomberg
• engagement with company management and non-executive directors and other industry experts.

The proprietary scorecard assesses and scores sustainability risks and opportunities across a range of factors. Depending on the infrastructure subsector, these factors are weighted according to importance and broadly focus on:

• Environmental factors such as a GHG emissions, environmental practices and physical asset risk
• Social factors such as community relations, safety, and employee practices
• Governance risk and alignment with minority shareholders.

The Sustainability Committee is responsible for oversight of the sustainability process within the infrastructure investment team and ensuring that the process remains effective. 

Given the breadth and coverage of our global client base and regulatory licenses, we continue to factor in the rapid development of ESG-related laws, regulations, and proposals globally. For example, we have further streamlined our approach to accommodate the EU Sustainable Financial Disclosure Regulation specifically for the ClearBridge Global Infrastructure Value and Income strategies.  We continue to monitor other global developments as these arise across all our infrastructure strategies.

To construct our investment universe or opportunity set, we firstly screen the global universe of listed equity securities for infrastructure companies. The process aims to focus our research on companies where infrastructure is the primary driver of fundamental valuation, and the predictability and stability of cash flows meet investors expectation of core infrastructure. Assessing sustainability factors is an integral part of our investment process.  Our screening excludes companies for:

As previously noted, our infrastructure investment team incorporates sustainability analysis into the investment process and portfolio construction via three main pillars.

We perform our active ownership duties in three main ways:

Engagement with management, boards, and industry participants. When we determine to invest in a company, we expect to do so for some years, and our relationship with company management is an important part of our process. The investment team engages with company management on sustainability and related issues in regular meetings with key management and non-executive directors. These discussions seek to provide feedback to companies on issues including:

• Corporate strategy, encouraging consideration of long-term value creation and long-term risk management including sustainability issues
• Capital management and structure
• Executive remuneration and incentive schemes, ensuring that executive remuneration is both appropriate for the asset and incentives are aligned with the interest of long-term shareholders.
• In addition to executive management, the investment team engages with non-executive directors such as the chair, where this is separate, and the supervisory board in a two-tier structure. Discussion topics include, among other issues:
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  • Remuneration policy of the board, in particular decisions around incentive pay
  • Succession plans for the senior leadership team and the next level of executives
  • Governance structure
  • Sustainability strategy

We record any issues raised concerning the above in our company research database. To ensure we address and follow up on key sustainability issues consistently over time, we flag and track key areas for further engagement as part of our proprietary scorecard approach.

 

Voting at company meetings - In voting proxies, we are guided by general fiduciary principles and ClearBridge’s Proxy Voting Policy, which includes proxy guidelines for traditional governance, environmental and social proposals. Our goal is to act prudently and in the best interest of the beneficial owners of the accounts we manage. We attempt to provide for the consideration of all factors that could affect the value of the investment and will vote proxies in the manner that we believe will be consistent with efforts to maximise shareholder values. In addition, although each vote is assessed on a case-by-case basis, the portfolio managers generally support shareholder proposals that promote good governance, greater corporate transparency, accountability and ethical practices. We use the opportunity to engage with the management, boards and other shareholders on sustainability issues and actively use our voting rights (where practicable) to reinforce our and our client’s views on sustainability issues.

Incorporating alerts and controversy monitoring - Our investment team continually monitors the sustainability performance of companies and incorporates changes to our view of a company and its inclusion in portfolios. In this regard, our team actively monitors company alerts related to sustainability matters. Where alerts raise concerns or highlight opportunities, analysts engage with the management, revisit the company’s sustainability scorecard and communicate and discuss relevant changes at weekly meetings to ensure the latest information is included for portfolio construction decisions.

Alerts are particularly valuable for:

• Providing early indicators of potential risks or improvements in sustainability practices that can be incorporated into sustainability scores and portfolio construction
• Indicating broader issues, particularly where the alert frequency is elevated; this can indicate poor governance factors, even if alerts are low-level in terms of risk
• Offering a useful source of recent data with which to engage management and address sustainability matters

We maintain engagement records and report on a quarterly basis to our clients regarding proxy voting, engagements with companies on ESG and relevant stock examples.

Evolution of Sustainability Process

Our specialist infrastructure investment team has continually evolved the sustainability process. In particular, the incorporation of sustainability considerations into our risk pricing has developed as information sources and company disclosures have become more transparent. We have incorporated a governance factor since the inception of our infrastructure strategies in 2006, expanding this to broader ESG factors by engaging Sustainalytics’ (as their first Australian client) in 2012. We continue to evolve our approach to ESG through the current proprietary scorecard introduced in 2020.

The inclusion of sustainability as a core part of our investment process significantly contributes to our goal of delivering infrastructure-like returns to investors while mitigating investment risk. Additionally, it enhances investment support to companies with strong sustainability practices. As noted above, we believe that our approach not only meets the responsibility we have to our clients in achieving their investment goals but also acts in the best interests of future generations.