UOBAM’s Sustainable Investment and Active Ownership Approach

UOB Group is a participant of the UN Global Compact (UNGC), incorporating responsible business sense in the areas of human rights, labour environment, and anti corruption. In alignment, UOBAM supports the Ten Principles of the UNGC, committing to ensure companies similarly incorporate the UNGC and its principles in their operations and strategies.

We recognise that climate change is one of the most complex and defining issues of our time. Climate change poses a risk to our environment and is a pressing challenge for our society and economy. Increasing frequency of severe extreme weather conditions will not only lead to physical damage in the form of flooding and wildfires, but also has economic and financial impact when property, infrastructure, and assets become impaired.

There is a need for accelerated move toward a low carbon and climate resilient future which significantly increases transition risk for companies. Transition risk can arise from legal and regulatory actions, reputational issues, and technological advancement which then increases the risk of stranded assets.

It is paramount that companies are well positioned to manage climate-related risks and opportunities. We believe that companies should treat climate-related risks as material to their businesses and align their disclosures with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

As a wholly owned subsidiary of UOB, UOBAM is aligned with UOB's commitments and support of TCFD. We recognise the importance of understanding our climate-related risks and opportunities. We are in the midst of gradually adopting the recommendations of the TCFD to assess, measure, and to manage our climate change-related risk and look to disclose our progress in the near future.

At UOBAM, we take into account a company’s greenhouse gas emissions as part of our Environmental, Social, and Governance (ESG) analysis and scoring process. To do so, we have subscribed to a variety of third party data providers such as MSCI and S&P Trucost for ESG and climate-related monitoring of our portfolio. We also have in place, an ongoing process to detect and monitor controversies of our portfolio holdings to ensure that our investments are not tied to severe climate change controversies. Our proxy voting, through ISS, also references internationally recognised sustainability-related initiatives, and supports resolutions that advance the fight against climate change. The topic surrounding climate change is a potential starting point for our company engagements moving forward.

There is increasing water-related risks as more groundwater gets withdrawn, increasing weather unpredictability, and continuous melting of glaciers. Associated water-related risks include the worsening of water security, deteriorating water quality, physical disasters linked to drought and floods, and overall damage to the natural ecosystem.

Water is inherently, an essential resource to all businesses and should form part of their considerations in mitigating exposures to water-related risks. Companies should demonstrate efforts in reducing their water use through employing water efficient processes, the use of alternative water sources, and water recycling efforts. Water scarcity is particularly crucial to companies that operate in water-stressed regions. Hence, to prevent the risk of operational disruption stemming from water shortages, companies should put in place mitigation efforts to prevent water shortages.

We recognise adverse impacts from water stress and hence considers water risk as material for companies that operates in regions with high exposure to water risk and companies. Water risks is factored into UOBAM’s ESG scoring in the investment process for exposed sectors. Our controversy system considers companies with negative impact on water supply.

The loss of biodiversity is one of the largest global ecological challenges that pose severe risks to companies and portfolio holdings. Land use change from deforestation and climate change are amongst the major contributors to biodiversity loss. This can lead to increased operational costs stemming lack of resource availability, supply chain disruption, and increased cost of raw materials.

The preservation and protection of our natural environment and biodiversity is crucial to companies and is something they should acknowledge as material. To do so, they can commit to conducting biodiversity and community impact assessments, engage in the sustainable management of natural resources, and strive to meet sustainability standards set out by organisations such as the Roundtable on Sustainable Palm Oil (RSPO) and Forest Stewardship Council (FSC), where applicable.

Risks associated with biodiversity loss and land use change are considered as part of our ESG analysis and scoring process of companies. We also have an ongoing process to detect and monitor controversies of companies in our portfolios in place to ensure that our investments are not tied to deforestation biodiversity loss. The preservation of natural capital – pertaining to deforestation and biodiversity – is a potential starting point for our company engagements in future.

UOBAM recognises the importance of ocean preservation. Overfishing, overexploitation, and unsustainable practices that deplete marine resources exert severe pressure on ocean health and biodiversity. Ocean acidification as a result of global warming presents environmental challenges, putting marine life and organisms at risk.

Companies should recognise the importance of ocean sustainability by demonstrating active efforts to reduce disruption to the marine ecosystem. Wherever applicable, companies should conduct impact assessments and support ocean protection initiatives. Companies should also strive to adopt industry best practices and sustainability standards set out by organisations such as the Marine Stewardship Council (MSC) and Aquaculture Stewardship Council (ASC).

Risks associated with ocean sustainability are considered as part of our ESG analysis and scoring process of companies. We also have an ongoing process to detect and monitor controversies of companies in our portfolios in place to ensure that our investments are not tied to the deterioration of ocean health. Ocean sustainability and protection is a potential starting point for future company engagements.

In accordance with the standards set out by the International Labour Organization (ILO), companies involved in labour exploitation such as through forced labour and child labour, violate labour and human rights. Such exploitation inadvertently deprives the opportunity for societies to develop and educate children and grow its human capital of tomorrow.

Poor and inadequate management of labour rights will exacerbate social inequality and undermine economic progress. Production delays, business and supply chain disruptions from labour unrest, and reputational damage are some of the potential issues faced as a result of poor management and lack of mitigation of risks related to labour rights.

UOBAM believes that it is crucial that companies comply with labour standards and commit to increasing diversity at all levels of management. We incorporate factors such as labour management, standards, and worker protection in our ESG analysis and scoring process as part of our investment decision making process. We also have in place, an ongoing process to detect and monitor controversies such as those pertaining to employee discrimination. Our proxy voting, through ISS, also references internationally recognised sustainability-related initiatives, and supports resolutions that resolve and improve labour-related issues.

We recognise the importance of human right protection and the need for companies to support and respect human rights. Companies whose business practices result in adverse impact on human rights, potentially face reputational risk. Such risks pose potential legal liability and run the risk of them losing their license to operate.

Companies should ensure their adherence to the UNGC principles on Human Rights and consider taking voluntary action toward the protection of human rights through social investment or advocacy efforts.

We continue to actively monitor the business activities of our portfolio holdings through our ESG controversy system to detect controversies pertaining to human rights issues.

UOBAM does not apply ESG exclusion policies and exclusion list on most of its investment strategies. While we do not systematically exclude industries across our portfolios, we avoid many controversial sectors and companies by integrating material ESG issues into our analysis of companies and investment processes; this is done by taking into account the inherent material ESG issues these high risk sectors pose.

On a bespoke mandate basis, UOBAM excludes sectors as directed by our clients. This include, but is not limited to, the exclusion of traditional 'sin sectors' such as alcohol, tobacco, adult entertainment, gambling, and non compliance to international conventions such as the UNGC.

Environmental risk arises from the potential adverse impact of changes in the environment on economic activities and human well-being. Climate change has been under the spotlight in recent years, with a push for urgent collective action as environmental risks have the potential to drastically impact funds/mandates managed by asset managers, through physical and transition risk channels.

Physical risk arises from the impact of weather events and long-term or widespread environmental changes. Direct impact is through impairment of the value of assets due to the rising frequency and severity of extreme weather events. Indirect impact is felt through supply chains which ultimately affect companies’ operations and profitability, and potentially, viability.

Transition risk arises from the shift towards an environmentally sustainable economy. The transition includes the implementation of regulatory policies, disruptive technological developments, and shifts in consumer and investor preferences which can impair the profitability of companies.

Reputational risk is another important aspect to consider in addition to physical and transition risks. Such risk can arise at the firm level when asset managers invest into companies that carry out business activities that negatively impact the environment. Negative perception of asset managers’ business practices can also adversely affect their abilities to maintain or even grow their assets under management.

Environmental risk considerations are incorporated in UOBAM’s investment decision making process. This is done through our Sustainable Investment Framework and Active Ownership Approach (“AOP”).

UOBAM’s Sustainable Investment Framework also includes our Environmental Policy due to our recognition of the double materiality of environmental and climate risks within the thermal coal industry. The thermal coal industry presents significant environmental risk to the world and as the world transitions to a lower carbon economy, driver of environmental risk will translate to financially material economic risk. One such consideration is the exclusion of thermal coal. However, being an Asian fund house with a regional footprint throughout Asia, we are cognisant that many Asian countries continue to rely heavily on conventional sources of energy, including thermal coal, and the transition away requires both time and money. Hence, the Environmental Policy includes a provision to support companies committed to transition toward cleaner energy sources (“Energy Transition”).

Components of the Environmental Policy include:

• Exclusion of companies that derive ≥20% of their revenue from thermal coal mining and/or power generation;
• Energy Transition provision to include companies that while, currently derive ≥20% of their revenue from thermal coal mining and/or power generation, have initiatives and policies to transition towards cleaner energy sources and;
• Limitation of companies allowed under Energy Transition provision to 10% of total portfolio weight to ensure that only high quality names committed to energy transition is held within our portfolios.

Environmental Risk management, identification, assessment and monitoring on individual investments and portfolios are conducted on a regular basis, with the climate related data from a third-party data provider. Various metrics are used for risk identification and assessment which may include, but not limited to, measuring carbon emissions and intensity and climate risk related scenario analysis. This is conducted in line with the Guidelines set out by the Monetary Authority of Singapore (“MAS”) and the Recommendations of the TCFD.

Scenario Analysis is conducted on a periodic basis as part of climate stress testing to further assess UOBAM’s portfolios’ environmental risk profile. The approach is based on climate scenarios provided by the International Energy Agency (IEA) in their report World Energy Outlook 2019, which simulate various carbon budget trajectories and alignment to a net zero world.

Capacity Building to raise awareness and equip staff with the necessary skillsets on environmental risk management will be conducted through relevant training sessions via a combination of internal and external courses.

UOBAM’s stewardship is conducted through the AOP and Environmental Policy.

UOBAM’s AOP includes Engagement and Proxy Voting. Engagement is conducted directly, by UOBAM, or collaboratively with other Asset Managers/Investors through investor group coalitions. Investee companies are engaged on their key material ESG issues and/or pertinent topics. Proxy voting is conducted through our third-party vendor on ESG issues that include other environmental issues.

UOBAM’s Environmental Policy targets engagements with companies who are undergoing Energy Transition, taking into account climate-related risks and seeking opportunities in moving towards a lower carbon economy.

UOBAM believes in the value of engagement and aim to enhance risk-adjusted returns of our investments and shareholders’ value in the long run. We identify a range of thematic and material ESG issues that can affect our investee companies in the long run and engage them to ensure that they are well prepared to mitigate these issues.

Throughout the engagement process, we gain valuable insights into our investee companies’ propensity deal with ESG issues and whether they will take the appropriate measures to manage these issues. Engagement acts as an important information source to aid our investment decision.

By engaging with companies, we can also encourage improvement in their ESG disclosure, identify the need to advocate positive change, communicate our concerns and improve its practices on ESG issues, where necessary.

We prioritise our engagement based on geography of companies and size of holdings, severity of identified material ESG issue, potential to generate long-term value following a successful engagement, and specific client request(s).

UOBAM engages with companies through a variety of channels and also considers collaborative engagement with other stakeholders in the event we believe that the efficacy and chance of success of the engagement can be enhanced.

Escalation Strategy

Over the course of the engagement process, UOBAM would pursue a number of courses of action should the company constantly fails to meet the standards expected.

UOBAM will vote against management at the annual company meetings if we are not satisfied with managements’ response to the ESG issues raised and ability to mitigate the identified risks. UOBAM may also consider voting for shareholder resolutions initiated in response to the ESG issues.

Ultimately, if the company still continuously fails to meet the standards expected after the engagement timeline, UOBAM will decide to reduce our exposure to investment holdings size or divest our investment in the company.

UOBAM aims to vote on the vast majority of proposals raised at every company meeting in a timely manner. UOBAM has engaged the services of proxy voting agent, Institutional Shareholder Services Inc. (“ISS”) to provide us with proxy voting services and proxy voting research and recommendations. Proxy voting by ISS also references, internationally recognised sustainability-related initiatives, and supports ESG resolutions.

While UOBAM has authorised ISS to vote on its behalf, UOBAM retains full discretion over all voting decisions and reserves the right to vote contrary to the recommendations of ISS. This can occur when UOBAM have a differing view that these vote recommendations are not in the best interest of its clients, after taking into account relevant information in its decision e.g. engagement outcome, internal research, etc.

There may be situations where UOBAM may choose not to vote or abstain from voting:

(a) where administrative or other procedures result in the costs of voting outweighing the benefits;

(b) the voting securities are part of a securities lending program and UOBAM is unable to vote securities that are out on loan;

(c) a meeting notice is delivered close to the meeting date and UOBAM has insufficient time to adequately assess the issues being tabled at the shareholders’ meeting and / or process the vote;

(d) UOBAM sells shares prior to a company's meeting date and decides not to vote those shares, on the basis that UOBAM shall not be restricted from trading in a security due to an upcoming shareholder meeting; and

(e) voting securities have been blocked from trading in order to be tendered for voting purposes and UOBAM believes that preserving the ability to trade the security is in the best interest of the beneficiaries;

(f) in event of a situation where regulatory obligations and rulings of the SIC imposed on UOB Group that also apply to UOBAM, may prohibit UOBAM from voting on securities due to its deemed affiliation for a corporate action.

UOBAM has in place a sustainability balanced scorecard to monitor and assess the progression of sustainability-related developments across four key pillars on investment, business, corporate sustainability stewardship and staff education. The scorecard sets short-term targets and milestones for each of the four key pillars.