2024 ESG AND SUSTAINABILITY REPORT

Transition risk exists not only in company operations but also in their supply chains. Supply chain decarbonisation targets can help manage these risks, serving to mitigate the impacts of potential carbon regulations, enhance energy efficiency and improve reliability where grid instability is an issue. However, this can also come with challenges such as higher procurement costs or unreasonable pressures placed on suppliers, especially those in emerging markets. This was revealed on a garment supply chain trip to Bangladesh and Vietnam in 2023, where factories were struggling to decarbonise due to financial constraints and technology availability.

In 2024, we continued engaging companies to learn how they implement transition risk assessments with their suppliers. This case study highlights two portfolio companies, CSL and Schneider Electric, as good practice examples:

• CSL, an Australian healthcare company, has more than 60% of its direct tier 1 suppliers with emissions targets validated by the Science-Based-Targets-Initiative. Its approach to integrate supplier transition risk is mature and involves collaborating with smaller suppliers on available frameworks to measure and manage emissions. Transition risks are being integrated into its tender process and assessed as a condition of supplier onboarding.

• Schneider Electric has a strong program around energy efficiency and automation to support its suppliers. It leverages its own products and services for customers, such as power purchase agreements and renewable energy certificates, and offers these to its suppliers. This collaborative approach has resulted in a 27% reduction in emissions from its top 1000 suppliers to date.

These company engagements have provided us with valuable insights into how businesses can tackle the task of scope 3 decarbonisation. Typically, they prioritise major suppliers first, and focus on collaboration to advance decarbonisation strategies and encourage measurement of emissions. As investors, we encourage companies to report on supplier progress in order to inform our own view of supplier transition risks. With the disclosure of scope 3 emissions still quite varied across the market, a focus in 2025 is to benchmark how companies disclose and manage different upstream and downstream emissions categories

In 2024, Woolworths and Coles received their first shareholder proposals related to nature. These proposals were submitted alongside a special resolution to amend the company constitutions to allow non-binding shareholder proposals. Prior to finalising our voting positions we participated in one-on-one meetings with Board Directors of both companies.

In both cases, we voted:

• Against the resolution to change the company constitutions: In our experience, there is ample opportunity under Corporations Law for legitimate shareholders to bring issues before directors or at a company meeting. We generally do not support a change in company constitutions however, we do recognise that shareholder proposals are useful in some cases and we consider our voting position on specific proposals on a case by case basis.
• For the resolution to increase reporting on farmed seafood: This proposal supports greater transparency to shareholders on the risks across the farmed seafood value chain. We agree that greater analysis and disclosure on this topic helps supermarkets to identify and mitigate supply chain risks, manage regulatory exposures, and address community or customer concerns
• Against the resolution to limit farmed salmon sourcing: This proposal called for the supermarkets to stop sourcing salmon from the Macquarie Harbour immediately. Given the specific nature of these proposal, and the potential detrimental impact to its sourcing practices, we did not vote in favour of this proposal. We also felt that the previous resolution addressed the underlying issue of farming risk within this region.

TMO is a global supplier of analytical instruments, clinical development solutions, specialty diagnostics, laboratory, pharmaceutical and biotechnology services. In 2019 and 2022, TMO was involved in two different reports which stated that the company’s DNA tests were being used by the Chinese Governments and the Tibetan Police respectively to collect DNA data from citizens. This is a unique situation where a company’s products may have resulted in a breach of human rights.

Before investing in TMO, we conducted due diligence through company engagement, expert calls, and desktop research to confirm the background of this issue and the steps that were subsequently taken by the company. Through our engagement, the company stated that it conducted thorough due diligence into these claims but determined that the risk of misuse was limited. An important clarification with the company was that the DNA kits sold cannot determine ethnicity, but provide binary matching results and partial matches through familial lines. Additionally, sales to China represent a very small portion of the business.

Regardless, TMO have implemented restrictions on the sales of DNA kits in these regions, which include additional contractual clauses with distributors and in-sales monitoring. TMO also established a bioethics committee in 2019, comprising senior leadership, which collaborates with NGOs to elevate ethical considerations in the industry, particularly concerning genetic data.

Overall, we concluded that it is unlikely a similar controversy will arise. Because the management response was satisfactory, we confirmed TMO was investible and assigned a Level 2 ESG risk under our ESG Framework.

In July 2024, our Head of ESG and Sustainability joined a small group of ESG analysts on a research trip to Western Australia where they met with a range of companies in Perth including six listed mining and energy companies, such as Fortescue Metals Group and Woodside Energy, and five Traditional Owner groups in the Karratha and wider Pilbara region, such as the Robe River Kuruma Aboriginal Corporation and the Banjima Native Title Aboriginal Corporation.

The Robe River Kuruma Aboriginal Corporation are traditional owners of land in the Pilbara which Rio Tinto mines under the name Robe Valley (Mesa A and Mesa J). As part of the research trip, the investors spent two days with management representatives of the corporation and elders of the traditional owner group. The elders shared their views on the impact of mining, both good and bad, and expressed specific concerns about the negative impact on a critical waterbody called the Bungaroo.

This research trip gave us unique access to an important stakeholder group in the Pilbara and has allowed us to better understand both their influence and the ongoing permitting risks in the region. As a result, we identified four priority areas for engagement and issued a letter to Rio Tinto with our feedback.

Life360 is a family social networking app with more than 60 million monthly active users. Securityconscious families use the Life360 app to track each other’s whereabouts and to track the location of their pets and personal belongings. Life360 also offers a suite of additional security features, such as driver safety monitoring, roadside assistance, and emergency response dispatching.

Life360’s goal is to help families and friends stay connected and improve safety, but this also means that it collects and stores lots of sensitive data such as children’s location information. It also means that people could use the app and hardware to illegally track partners. To maintain its trust with its customers it is therefore important that Life360 applies a high degree of ethics over its data privacy practices and controls its cyber-crime risks. It is also important that it provides features that allow people to control their own privacy and manage how and when others can track their locations.

Before investing in Life360 in our Australian Sustainable Share Fund we initiated an ESG and sustainability review to confirm the material ESG risks and considerations, the ESG risk level, and the SDG alignment outcome and score to determine the suitability for our Australian Sustainable Share Fund.

This review identified two positive and two negative alignments with the SDGs.

• Positive: SDG3.6 for the road safety and crash detection benefits of the app and SDG16.1 for protecting people against violence and criminal activity
• Negative: SDG5.2 for the risk of coercive control and illegal monitoring with the app and SDG16.4 for risk related to misuse of sensitive data (child location data) and criminal activity

To confirm the risk related to the negative alignments, we engaged with the company and reviewed relevant disclosures. We confirmed that the company had a suitable approach to data privacy and risk management and has also built in features into the app to mitigate coercive control risks.

A requirement of the Australian Sustainable Share Fund is that the company must have a net positive alignment to the UN Sustainable Development Goals. The outcome of the assessment for Life360 was a net positive SDG score of 70. This reflects the conclusion that the positive widespread benefit to family and child safety well outweighs the less likely occurrence of coercive control, illegal monitoring, and criminal activity from data breaches.

This company was approved by the Sustainable Compliance Committee and subsequently added to the Australian Sustainable Share Fund. This review also set a precedent for our analysis for companies like Life360 which create unique risks around data privacy and safety.

In 2022 we established an engagement objective for Marsh McLennon related to the implementation of its client engagement principles and exposure to controversial projects or customers. Along with other large financial institutions, Marsh has been called out by non-Government organisations and community groups for its involvement with projects such as the East African Crude Oil Pipeline. Whilst the company cannot confirm its involvement due to client confidentiality, we have been engaging to improve its reporting and improve our understanding the implementation of its client engagement principles. Given the size and geographic reach of the company’s various businesses, being exposed to one sensitive project is not likely to pose a material investment risk to the business. However, we believe that aggregating high-risk decisions across the firm over the medium-term could result in significant reputational damage.

Starting in September 2024, Steadfast faced two significant governance, ethics and reputation-related controversies which ultimately led to our divestment in December 2024. Firstly, the company was accused of misleading its customers in relation to strata insurance and fees. This began with an ABC Four Corners investigation but also involved the Australian Competition and Consumer Commission (ACCC). Secondly, two employees were placed under investigation in December by the corporate regulator for potential insider trading. We engaged with the company following both incidents and were satisfied that the company was undertaking appropriate due diligence. We decided to divest the position in December given the risk of an investigation by the regulator, governance implications of the two issues, and the financial concerned about the commercial rate environment in 2025.