2023 UK
Stewardship
Code Report

October 2023

From Our Leadership
Morgan Stanley Investment Management Ltd (MSIM Ltd) has been a signatory of the Stewardship
Code since 2021 and continues to be a long-term supporter of its principles.
MSIM refers to the collective subsidiaries of Morgan Stanley in its Investment Management
division. MSIM’s stewardship activities are driven by our investment teams, who are guided by,
and operate in accordance with, the broader stewardship, sustainability, risk management andoperating framework that MSIM has established at an organisational level. We will continue todevelop our approach in line with the evolving regulatory and industry landscape, as we believe
it is fundamental to the long-term success of our organisation and our ability to deliver value forour clients.
MSIM recognises that the strength of our stewardship lies in the approach of our independent
investment teams and asset class platforms. Our investment teams utilise their skill and judgment
in assessing the materiality of Environmental, Social and Governance (ESG)-related risks andopportunities, where appropriate to their investment strategy, to deliver consistent performancefor our clients over the long term.
In 2022/23 MSIM will continue to evolve our strategic vision:

Established a new governance framework through the creation of a MSIM ESG Committee tofacilitate and guide MSIM’s support for the sustainable investment strategies of each investment
business. The MSIM ESG Committee is co-chaired by the division’s Co-Head and Chief Investment
Officer of the Solutions and Multi-Asset Group and the division’s Global Head of Risk and Analysis.
As part of the MSIM’s continued integration of Eaton Vance Management (EVM) and its affiliates,
we have continued to look for opportunities to consolidate our stewardship approach. To that end,
MSIM’s Global Stewardship Team (GST) will take responsibility in 2024 for proxy voting on behalfof the EVM family of funds.

MSIM recognises the need to continue evolving and enhancing our approach to stewardship in theface of significant challenges, such as the continued impact of climate change and the increasing
global scrutiny around investment strategies that incorporate ESG. Stewardship continues to be an
ongoing journey, and we acknowledge that there is still much work to be done.
This report highlights how MSIM generally approaches and drives stewardship at both anorganisational and investment team level, and our progress on that journey as we continue tointegrate stewardship activities within our investment processes and workplace. It provides in-depth
examples of how our investment teams aspire to act as good stewards of clients’ capital. We arepleased to share our 2023 UK Stewardship Report and look forward to continuing to deliver thisvalue to our clients in the remainder of 2023 and beyond.

Ruairi O’Healai
EMEA COO at Morgan Stanley Investment Management andCEO at Morgan Stanley Investment Management Ltd.

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Contents
Scope of Report.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 3Section 1: Purpose and Governance.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 4Principle 1: Purpose, Strategy and Culture .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 5Principle 2: Governance, Resources and Incentives.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 13
Principle 3: Conflicts of Interest.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 20
Principle 4: Promoting Well-Functioning Markets.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 23
Principle 5: Review and Assurance .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 34
Section 2: Investment Approach.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 37
Principle 6: Client and Beneficiary Needs .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 38
Principle 7: Stewardship, Investment and ESG Integration.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 44
Principle 8: Monitoring Managers and Service Providers.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 59
Section 3: Engagement.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 63
Principle 9: Engagement.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 64
Principle 10: Collaboration.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 90
Principle 11: Escalation. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 95
Section 4: Exercising Rights and Responsibilities.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 102
Principle 12: Exercising Rights and Responsibilities.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 103
Appendices .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 113

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Scope of ReportMorgan Stanley Investment Management (MSIM) refers to the investment management businesssegment of Morgan Stanley, a global financial services firm. MSIM is composed of a number wholly
owned subsidiaries of Morgan Stanley, including Morgan Stanley Investment Management Limited(MSIM Ltd). MSIM Ltd is a private limited company established in England and Wales, authorised
and regulated by the FCA to provide investment management and investment advisory services
to clients.
This report sets out how MSIM generally approaches and drives stewardship at both anorganisational and investment team levels. MSIM has a decentralised approach towards investment
management, consisting of independent public and private markets investment teams and asset
class platforms. Accordingly, reporting on each Principle in this Report has been limited to themost relevant investment team and may not be applicable to each investment team, strategy orasset class. Further, certain MSIM entities1 including Calvert Research and Management, ParametricPortfolio Associates LLC, and Atlanta Capital Management Company, LLC, operate independently
with regard to stewardship activities based on distinct proxy voting policies and engagement
principles, and are not included within the scope of this report. 2 An overview of their respective
approaches is provided in the Appendices. MSIM may also leverage or be a part of its parent
company’s policies and processes, therefore references to the “Firm” herein refer to Morgan Stanley.
This report relates to the reporting period of 1 July 2022 - 30 June 2023 only. The organisational
structures, governance, policies and practices described in this report may evolve and changeover time as MSIM continues to enhance its approach to stewardship and sustainability, as wellas its control framework generally (having regard to considerations such as changing regulatory
expectations, best practice, stewardship priorities and client feedback, among others).

Morgan Stanley completed its acquisition of Eaton Vance Corp. and its affiliates on March 1, 2021.
For the purposes of AUM consolidation, Eaton Vance AUM (including its four investment brands – EV Management, Calvert Research and Management,
Parametric Portfolio Associates and Atlanta Capital) has been included within our asset class categories.
1

2

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SECTION 1

Purpose andGovernance

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PURPOSE AND GOVERNANCE

Principle 1

Purpose, Strategy
and Culture
Signatories’ purpose, investment
beliefs, strategy and culture enablestewardship that creates long-termvalue for clients and beneficiaries,
leading to sustainable benefits forthe economy, the environmentand society
Overview
MSIM offers clients personalised investment solutions
with $1.4 trillion3 in assets under management (AUM).
MSIM delivers innovative investment solutions acrosspublic and private markets worldwide. MSIM has beencreating value for its clients for more than 45 years.

Comprising 1,248 investment professionals worldwide,and 54 offices in 25 countries (as of 30 June 2023), MSIM
is able to provide in-depth local knowledge and expertise
while channelling the strength of Morgan Stanley’s global
presence and resources.
MSIM has a decentralised approach towards investment
management, consisting of independent public and private
markets investment teams and asset class platforms. Eachinvestment team has a distinct talent pool of experienced
professionals, and dedicated resources focused on a
specific investment discipline, including corresponding
sustainability, stewardship and engagement approaches.
A number of investment teams manage strategies that sit
within the asset classes below.

Our Culture and Business Principles
Built on Morgan Stanley’s core values—Put ClientsFirst, Do the Right Thing, Lead With Exceptional Ideas,
Commit to Diversity and Inclusion, and Give Back—theFirm’s culture sets us apart. Over 82,000 dedicatedcolleagues globally embrace the Firm’s core values toseek to deliver first-class service to its stakeholders
and to the communities where its employees live and

FIGURE 1.1

MSIM Investment Capabilities
High-Conviction Equities

Fixed Income & Liquidity

International Equity
Counterpoint Global
Global Opportunity
Emerging Markets Equity








Alternative Investments

Private Credit and Equity– Private Market Solutions– European Private Credit– Capital Partners– Next Level Fund
Morgan Stanley Real Assets– Private Global Real Assets group• Private Real Estate: Morgan Stanley Real Estate Investing• Private Infrastructure: Morgan Stanley Infrastructure Partners• Private Real Estate Credit– Global Listed Real Assets• Global Listed Real Estate• Global Listed Infrastructure

Agency MBS
Broad Markets Fixed Income
Emerging Markets
Floating-Rate Loans
High Yield
Liquidity
Municipals
Securitized

Customised Solutions
Global Balanced Risk Control

Assets under management includes all discretionary and non-discretionary assets of MSIM and all advisory affiliates. MSIM Fund of Fund assets
represent assets under management and assets under supervision. MSIM direct private investing assets represents the basis on which the firm earns
management fees, not the market value of the assets owned. Alternatives Investments includes fee-earning assets under management, unfunded
commitments, and fund leverage, representing the total investible capital for the platform.
3

52023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

PURPOSE AND GOVERNANCE

work. Morgan Stanley operates globally, with offices
in 41 countries around the world. Leadership, including
Morgan Stanley’s Board, sets the tone for the Firm, andthe executive teams drive a culture that is central to
how the Firm serves clients, how the Firm advances anddevelops its workforce, and how the Firm supports thecommunities around us.
The fair treatment of customers is central to the Firm
Code of Conduct, which demands that we put clientsfirst—that we act in our clients’ best, long-term interestsand build their trust while we build our franchise.
Morgan Stanley maintains a Code of Conduct thatis central to this programme. The Code of Conduct
establishes standards of behaviour and ethical codes ofconduct that all new hires, and employees annually, arerequired to certify that they understand and will follow.
Maintaining a strong employee culture is the focus of theFirm Culture, Values and Conduct Committee, which ismade up of senior managers from across the Firm withoversight from its board of directors. Please see Principles
2, 5, 6, 7 and 9 in particular for details on how MSIM
has embedded these core values in the resourcing of
our stewardship function, our engagement priorities andactions during the reporting period.
We believe that a supportive and entrepreneurial
environment, combined with the Firm’s global resources,
makes employment at MSIM an attractive long-term
choice for our employees—which, ultimately, makes MSIMan attractive long-term choice for clients as well. MSIM
provides support and mentoring for development throughvarious means, including classroom and online training
sessions, learning lunches with prominent internal andexternal business leaders, guest speaker presentations,networking, and diversity groups.

MSIM Investment Beliefs
Due to the nature of MSIM’s independent investment teams,
each investment team is responsible for determining its own
investment philosophies and processes for managing client
assets. We believe in individuality and encourage diverse
investment opinions, hence our stewardship strategies andimplementation are not homogenous. As noted previously,
we believe that this approach drives better outcomes forour clients, as the investment teams directly responsible formanaging their assets and strategies are able to set, follow
and deliver on investment beliefs that are appropriately
tailored to corresponding client interests, strategies and thecapital they manage.
MSIM investment teams’ beliefs are guided by the Firm’s
core values (as outlined above), as well as MSIM’s clients’best interests and their stewardship needs (please see
Principle 6). While our decentralised investment teams
are responsible for determining their own investment
philosophies and processes, they generally share certain
overarching investment beliefs, including the following:










Risks are necessary to achieve returns but must be
appropriately managed, hedged or diversified
Investing responsibly and engaging as long-term owners
reduces risks and may positively impact returns over time
Engagement is generally more effective in driving change
and delivering better outcomes than divestment
Collaboration, where appropriate and consistent withfiduciary duty, with targeted objectives is more impactful
in delivering meaningful outcomesThoughtful consideration of material ESG factors andrisks (as appropriate to specific MSIM investment
strategies and asset classes) is an important aspect ofactive investment management

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PURPOSE AND GOVERNANCE

FIGURE 1.2

MSIM Purpose Statement
Client-CentricInnovative Investment Solutions

Deliver long-term value for clients andshareholders

Creative and original solutions, throughindependent, unique investment teams

Fulfilling our purpose and effectively
addressing client needs
MSIM continues to focus on serving our clients’ bestinterests, supported by our commitment to advancing oursustainable investment and stewardship practices, as well as
our client offerings, reporting and disclosures to meet clientneeds and demands. Highlights from the reporting period andforward-looking intentions are outlined in the table below.
In assessing the effectiveness of how MSIM has served
the best interests of our clients during the reporting
period, we have taken into account inputs such as directclient feedback on our approach, the alignment of ourstewardship and ESG priorities with client and investor
priorities (based on client feedback), relevant regulatory
reporting and disclosure requirements, and the scale andgrowth of our diverse investment platforms.

MSIM’s Approach to Stewardship, Engagement
and Sustainable Investing
MSIM’s investment teams are responsible for developing
their individual approaches to sustainable investing.
However, MSIM investment teams are, guided by, andoperate in accordance with, the broader stewardship,sustainability, risk management and operating frameworkthat MSIM has established at an organisational level (inparticular, MSIM’s Sustainable Investing Policy).

Commitment to Sustainability
Expressed through: Stewardship and engagement
 Sustainable expertise in investment
management
 Sustainable investing solutions

MSIM believes that ESG factors can present investment
risks and opportunities. Understanding and managing
these risks and opportunities may therefore contributeto both risk mitigation and long-term investment returns.
Engagement and stewardship are a key part of this.
Investment teams engage with the assets or companies theyown, seeking to deliver long-term value and align with our
objective to be responsible stewards of our clients’ capital.
The meaning/definition of sustainable investing canvary from investment team to investment team. MSIM
is characterised by its global reach, experience, andreputation for providing customised solutions to clients.
MSIM has a decentralised approach towards investment
management, consisting of independent public and private
markets investment teams and asset class platforms. This
decentralised investment approach allows investment
teams to tailor their approach to sustainability using
multiple factors, including, but not limited to, the objectivesof the product, asset class and investment time horizon,
as well as the specific research and portfolio construction,philosophy and process used by each team. Investment
teams deploy their skill and judgment in assessing themateriality of ESG-related risks and opportunities asappropriate for each investment strategy.4
We aim to create a culture that fosters independent
thought, including diverse investment and innovation. This is

TABLE 1.1

Highlights of key achievements in 2023 and next steps
HIGHLIGHT AREA

ENHANCEMENTS DURING REPORTING PERIODNEXT STEPS AND FUTURE ASPIRATIONSESG Committee
Formation

Established the MSIM ESG Committee (seePrinciple 2)

The MSIM ESG Committee will continue to provide oversight of MSIM
ESG-related goals, strategy and regulatory risk, such as “greenwashing”.

Engagement
ApproachUpdated MSIM’s engagement themes to include
Natural Capital & Biodiversity (see Principle 9)

MSIM Sustainability team to work alongside investment teams toempower them to develop this theme, (where appropriate) as part oftheir engagement processes and assessment of financial materiality.

Proxy Voting

Reviewed and updated language within MSIM’s
Implement online voting disclosure to incorporate SEC’s amendments toEquity Proxy Voting Policy and Procedures toForm N-PX for 13F say-on-pay disclosure rule for US Securities.
highlight decision-making on the environmental
and social shareholder proposals (see Principle 5)Some investment strategies may not consider ESG factors where it is not currently feasible or appropriate to do so, e.g., passive investment strategies,
certain asset allocation strategies, or where requested by clients.
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PURPOSE AND GOVERNANCE

demonstrated by our investment offerings that range acrossvarious geographies, investment styles, asset classes andapproaches to sustainability.

MSIM Investment Teams
Examples of MSIM investment teams’ diverse beliefs
and competitive edge, including their approaches to ESG
integration, are set out below:
HIGH-CONVICTION EQUITIESInternational Equity
The International Equity (IE) team’s investment philosophy
is to own high-quality companies with the potential
to successfully compound over the long term. These
companies compound by steadily growing while sustaining
their high returns on operating capital. The team believes
that understanding and addressing financially material
long-term ESG risks and opportunities is important forsuccessful long-term compounding.
The team uses a proprietary approach (described in moredetail in Principle 4) to identify financially material ESG risks
and opportunities and assess how companies manage them.
This analysis is directly integrated within the investment
process. As active owners, the team engages and votes toencourage the companies they own to address financiallymaterial issues that could affect long-term returns. They
believe engagement should be treated as a marathon, not asprint. Their long-term approach to engagement is alignedwith their long-term approach to investing.
Counterpoint Global
The Counterpoint Global team’s key investment belief
continues to be that investing for the long term aligns
with interests of long-term shareholders, which often
means focusing on disruption and sustainability themes.
Accordingly, the team takes a long-term oriented approach
to investing, which focuses on identifying differentiatedinsights on multi-year opportunities.
Environmental awareness and social responsibility
underpin this investment philosophy, and the teambelieves that innovative companies can use sustainability
initiatives and programmes to differentiate their franchises
in the marketplace. The team’s Sustainability Researchers,
together with Disruptive Change Researchers, Consilient
Researchers and investors within the Counterpoint Global
team that cover different companies, are responsible
for sustainability research for respective investments.
In this way, the team is able to leverage each member’s
expertise to identify opportunities and risks presented byenvironmental and social trends.

In addition to qualitative aspects of the team’s
sustainability research process, the team has built
quantitative proprietary systems to evaluate sustainability
factors, including, but not limited to, a system thatcompares the long-term orientation and the culture ofadaptability of companies. For example, they designed avisualisation and ranking system to evaluate the durationof deferred compensation vesting schedules for the top
five named executive officers at a given company. The
team believes executive teams that are compensatedfor the long term will act in alignment with long-term
shareholders, which often means operationally focusing on
disruption and sustainability themes.
Global Opportunity
The Global Opportunity team believes that by applying
a price discipline to investments in high-quality
companies—e.g., companies the investment teamconsiders demonstrate competitive advantages andlong-term growth that creates value—it can best capture
opportunities and manage risk for clients.
The team believes that strong stock selection is derived
from long-term investments purchased at a large discountto intrinsic value. These long-term investments are bestprotected when they are sustainable with respect todisruption, financial strength and ESG externalities, andbest enhanced when the underlying company has strong
competitive advantages and growth that creates value.
The Global Opportunity team’s stock selection focuses onfinding high-quality companies, developing insights aroundcompetitive advantage and uniqueness that can makethem successful over time, and having the perspective
to hold them when there are short-term disruptions, aslong as those disruptions do not affect the thesis, which it
believes will deliver outperformance over the next three
to five years. Furthermore, concentrating the portfolio in
the best ideas while maintaining reasonable diversification
is a way to maximise the reward while reducing the risk of
unknown variables.
Each Global Opportunity team investor is responsiblefor integrating ESG by applying the Health, Environment,
Liberty and Productivity (HELP) and Agency, Culture andTrust (ACT) framework within their quality assessment,
proxy voting and engaging with portfolio companies.
The team’s investors primarily source information fromdiscussions with company management and public
disclosures, supplemented by various research resources.

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PURPOSE AND GOVERNANCE

Emerging Markets Equity
The Emerging Markets Equity (EME) team manages
multiple equity investment strategies with distinct
investment philosophies and processes, and a range of
ESG and sustainability integration.
Overall, the team’s investors seek company management
teams in quality businesses that understand long-term
environmental, social and governmental trends, and canintegrate these considerations into their strategies. Whenthe EME team evaluates companies, their investors placea great deal of emphasis on the quality of leadership andsustainable drivers of growth.
The EME team’s global investment platform has a dedicatedSustainability Research team that supports the investment
teams with data, monitoring and engagements. Sustainablemandates rely on this information and data, while otherstrategies utilise it as a resource.
For strategies with sustainable commitments, investors
evaluate sustainability and ESG risks through directcompany engagement, company reported data andthird-party data. The team focuses on transparency andreporting, the identification and analysis of material factors,
and the demonstration of progress on ESG factors.
FIXED INCOME & LIQUIDITY

Fixed Income
The Fixed Income organisation is a global platform withinvestment capabilities spanning the full spectrum ofactive fixed income, managing a total of US$185 billionof assets (as of June 30, 2023). It is composed of sevenhighly specialised investment teams, centred around acollaborative culture: Agency MBS, Broad Markets Fixed
Income (covering Investment-Grade Corporate and MultiSector investments), Emerging Markets, Floating-Rate
Loans, High Yield, Municipals and Securitized.
Each of the seven Fixed Income investment teams is
research-focused and dedicated to uncovering value forclients. The autonomy and specialisation of each teamenable them to leverage their unique capabilities, while
the collaborative culture allows for the cross-pollinationof market views. Starting from these shared values, each
investment team within the platform operates based on
their investment beliefs and approaches.
The Fixed Income organisation partners with Calvert
Research and Management (“Calvert”), MSIM’s specialised
responsible investment affiliate, to integrate the
proprietary research conducted by ESG analysts in theinvestment process. Fixed Income portfolio managers
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full breadth of research produced by Calvert, at thesector level, issuer level, and, where applicable, at the
security level. This process supplements traditional credit
analysis by providing additional, more granular, insights
into material ESG risks to be integrated in the investment
process. The outputs of in-house ESG research, in theform of ESG scores, sector, issuer and security evaluations,
are used as inputs both before making investments andthen updated regularly to aid with the monitoring of ESG
credentials of portfolio holdings.
The Fixed Income organisation conducts engagement
meetings with bond issuers as part of its regular course ofbusiness, as well as in a more targeted manner in relation to
specific ESG issues. Engagement, on one hand, supplements
desk research with additional insights directly from investee
entities’ management and representatives, and, on the other
hand, aims at encouraging improvements in sustainability
practices across the fixed income market. In 2022-23, theFixed Income organisation joined a number of external
collaborative engagement initiatives, led by the PRI. Pleaserefer to Principle 9 for more details on engagement.
The Calvert Fixed Income ESG Strategy and Researchteam is a dedicated resource working alongside the Fixed
Income investment teams in integrating Calvert’s researchand expanding its coverage within fixed income asset
classes, engaging with bond issuers, and developing new
ESG frameworks and models. The team also supports themonitoring of portfolios and the development of analytics
and reporting tools, collaborating with ESG data andtechnology experts across MSIM and Calvert.
Liquidity
The Liquidity team manages c.US$350 billion of assets (asof June 30, 2023), and takes a conservative investment
approach, balancing the desire for capital preservation withattractive levels of income, allowing investors to realise an
efficient cash investment portfolio. This approach involves
active management of interest rate risk and opportunistic,
but defensive, portfolio management strategy andstructure. The team’s liquidity solutions are underpinned bya rigorous and independent credit and risk process, focusing
on high levels of weekly liquidity and structuring portfolios
to minimise interest rate risk that could arise from futureinterest rate movements. As a result of this, the Liquidity
team has a short-term investment horizon of around one
year. The focus on capital preservation is implemented
through a rigorous approach to managing and mitigating
headline and tail risk, which includes sustainability-relatedrisks, and which therefore may imply that the Liquidity team
may not invest in certain sectors.

PURPOSE AND GOVERNANCE

The Liquidity team works closely with the Fixed Income
organisation. In particular, the Liquidity team relies on
the research conducted by analysts on the Broad Markets
Fixed Income investment team and shares the ESG data
and resources available to them. In Q2 2023, the Liquidity
team also started to integrate Calvert’s proprietary ESG
research into their investment process, replacing theirprevious approach to ESG integration, which was largely
based on third-party data.
Unless stated otherwise, the processes and activities
described in this report for Fixed Income’s credit and ESG
research apply, where relevant, in terms of the investment
universe in scope, to the Liquidity team.
ALTERNATIVE INVESTMENTS

Private Credit and Equity
The Private Credit and Equity (PC&E) business focuses onproviding private capital predominantly to middle-market
companies. Equity strategies include:








Majority control of mature companies (Cap Partners,
Energy Partners)
Minority non-control growth/venture investments(1GT, Expansion Equity, PE Asia, Next Level)
Non-control equity co-investments and fund of funds(PECO, PMF) andGP-led transformational secondaries (Ashbridge)

Debt strategies include:First-lien, second-lien, mezzanine and uni-tranche loans
to sponsor-backed and non-sponsor-backed companies(NA/EU Direct Lending, Credit Partners)
An opportunistic strategy with a flexible mandate
investing in structured debt, asset-backed loans andpreferred equity (Tactical Value)
Growth credit (Expansion Credit)

In general, PC&E’s investment philosophy is to makeinvestments in high-quality businesses that are leading
players in their industries and have significant growthpotential. The team believes in the value of working withfounders and management teams that are looking to growto the next level of size and sophistication.
A key investment belief across the PC&E teams’ strategies
is that ESG risks and opportunities should be consideredthroughout the investment life cycle starting from theinvestment due diligence phase, where investment teams
seek to identify ESG risks and value drivers, and continuing
through to the post-investment phase, where investment
teams seek to partner with investees to maximise ESG

opportunities and value drivers where possible. Given
the range of private equity and credit products on theplatform, the varying levels of control, and different
industries and sectors of focus, teams take a tailoredapproach in considering ESG factors during the investment
and ongoing monitoring process. The varying ways inwhich strategies consider ESG are illustrated in theexamples below.
Private Equity Solutions: The Private Equity Solutions
team manages an Impact Investing platform that was
launched in 2014 in partnership with the Morgan Stanley
Institute for Sustainable Investing. The platform seeks
to drive positive social and environmental impact byproviding access to a diversified portfolio of private equity
investments and innovative client solutions within lessefficient areas of the private markets, which, becauseof size, complexity or time-sensitive nature, may beoverlooked or avoided by other market participants.
Capital Partners: The Morgan Stanley Capital Partners(MSCP) team makes control investments in middle-market
companies across consumer services, business and industrials
services, and health care sectors, and partners with portfolio
company management teams to drive value creation andgrowth supported by a comprehensive operational approach.
ESG risks and opportunities are integrated as appropriate
into the Value Creation Plans for each company, leadership
responsibility is assigned to a member of the company’s
executive leadership team to champion ESG activities, andrelevant metrics and KPIs are periodically reviewed during
portfolio company board meetings.
European Private Credit: The European Private Credit teamhas an investment philosophy underwritten by a strong
conviction that the ESG characteristics of a potential
investment are essential to the credit process. The strategy
integrates ESG considerations into the investment process
throughout the life cycle, including the use of ESG-linked
margin ratchets for borrowers where suitable.
MORGAN STANLEY REAL ASSETS

Morgan Stanley Real Assets (MSRA) is the global real
assets investment management arm of Morgan Stanley.
MSRA comprises five investment teams focused on realestate and infrastructure equity and credit strategies, bothprivate and listed.
Private Real Estate: Morgan Stanley Real Estate Investing(MSRE) has been one of the most active property
investors in the world for three decades, employing apatient and disciplined approach through global value-add/
opportunistic and regional core real estate investment
strategies in the US, Europe and Asia.
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2023 UK STE WARDSHIP CODE REPORT10PURPOSE AND GOVERNANCE

MSREI believes that appropriately evaluating andintegrating ESG factors in the investment process
may contribute to better risk mitigation and long-term
investment returns. MSREI manages assets within its
funds with the goal of enhancing value and reducing
environmental impact. Therefore, the team endeavours to
optimise the value of its funds while making decisions andinvestments that can have positive impacts for communities,businesses, governments and the environment. Select
MSREI funds have set 2050 net-zero aspirations and interim
Scope 1 and 2 carbon-reduction targets.
Private Infrastructure: Morgan Stanley InfrastructurePartners (MSIP) is a global leader in private infrastructure
equity investing, targeting assets that provide essential
public goods and services primarily located in OECD
countries, with the potential for value creation throughactive management.
MSIP believes that ESG integration throughout MSIP’s
investment life cycle reduces long-term investment risk
and increases the attractiveness of its portfolio companies.
The MSIP investment teams believe in employing
sustainability through an approach that calls for active
management of ESG considerations throughout theinvestment life cycle for each asset. These considerations
are incorporated into due diligence, acquisition and postclose strategies, where applicable, as well as monitoringand improvement. MSIP also seeks to support portfolio
companies in their preparation for exit.
Private Real Estate Credit: With teams in both the US andEurope, the Private Real Estate Credit teams are leading
real estate debt fund managers and portfolio lenders.
The teams strive to identify ESG risks and opportunities
throughout the investment life cycle of each loan, where
feasible. This is essential to reduce financial, regulatory
and reputational risk. ESG factors may be considered
at each stage of the investment process, including due
diligence, investment decision and asset management,
where possible. As a private real estate credit lender,
teams are limited in ability to apply ESG practices acrosstheir investments (in contrast to that of the borrower/
owner of the underlying real estate).
GLOBAL LISTED REAL ASSETSThe Global Listed Real Assets business comprises Global
Listed Real Estate and Global Listed Infrastructure.
Global Listed Real Estate: The team’s investment process
utilises internal proprietary research to invest in public realestate companies the team believes offer the best value
relative to the companies’ underlying assets and earnings.
Strategies combine a bottom-up approach, assessing the112023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

intrinsic value, equity multiples and growth prospects ofeach security, with top-down considerations that seek
exposure across regions, countries and/or sectors, andintegrate forecasted fundamental inflections, macroeconomic
considerations, geopolitical and country risk assessments,
among other factors. Analysts assess real estate specificfactors, broader equity factors, as well as ESG factors, intheir fundamental bottom-up analysis. These factors aresynthesised into valuation models to arrive at an NAV, andequity multiple and forward growth rate for each issuer.
The team undertakes a mosaic approach to sustainability
research, using both quantitative and qualitative datafrom multiple sources. The team’s internal researchcomplements and enhances data from company
sustainability reports and third-party providers. The
proprietary research process ranks the relative strengths
and weaknesses of each company in the investment
universe on ESG factors. The team then adjusts valuations
to account for these ESG risks and opportunities, and theimpact they may have on a company’s net asset value andcash flow forecasts in both the near and intermediate
term; ultimately, the team seeks to identify the real estate
securities with the best total expected returns for clients,
inclusive of adjustments for ESG risks and opportunities.
Global Listed Infrastructure: The team implements avalue-oriented, bottom-up-driven investment process
focused on obtaining infrastructure exposure at the most
attractive relative valuations and has regard for ESG
issues. The team’s fundamental analysis includes review ofpublic filings, with consideration of financial strength andprospects, strategy, market potential, risks and liabilities,
management quality, corporate governance, and ESGspecific considerations.
The team’s investment perspective is that over the medium
and long term, the key factor in determining the performanceof infrastructure securities will be underlying infrastructure
values. In aiming to achieve core infrastructure exposure ina cost-effective manner, the team invests in equity securitiesof publicly listed infrastructure companies it believes offer
the best value relative to underlying infrastructure value. Key
considerations in constructing and managing the portfolio
include valuation of the underlying portfolio holdings,
diversification and liquidity.
On the ESG side, the team has specific areas ofengagement that help to make investment decisions. On
Environmental, the team looks at emissions, resource
intensity, energy efficiency and environmental regulations;on Social, at labour conditions, community impact, supply
chain management, access to health care, and product

PURPOSE AND GOVERNANCE

safety; on Governance, at quality of management,
governance and regulatory risks, minority shareholderalignment, business ethics and ownership.
CUSTOM SOLUTIONSThe Custom Solutions group comprises a number ofinvestment teams, including Global Balanced Risk Control,
who provide customised investment strategies to meettheir clients’ needs.
GLOBAL BALANCED RISK CONTROL (GBaR)

The GBaR team’s strategy follows a top-down global asset
allocation approach, managed within a clearly defined,risk-controlled framework. The team seeks not only toparticipate in rising markets, but also to mitigate thedownside in more volatile markets. The team believes awell-diversified global portfolio—investing across equities,

fixed income commodity-linked instruments and cash, andfocused on systematic risks that the team expects to be
rewarded—is the most suitable method to achieve positive
long-term risk-adjusted financial returns for their clients.
The team’s stewardship approach is backed by thesame intensive top-down analysis of global risk thatcharacterises their asset allocation strategy. This, in turn,is complemented with focused, in-depth bottom-up ESG
research on select investee companies. The team believes
this is the ideal approach for the strategy, as researchingrisks to the global economy and global markets is central
to their asset allocation process. Sustainability concerns
such as climate change definitively fall into the team’s
definition of potential “risk events.” Their approach
therefore ensures that stewardship is a natural extensionof the team’s philosophy around risk control.

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2023 UK STE WARDSHIP CODE REPORT12

GOVERNANCE, RESOURCES AND INCENTIVES

Principle 2

Governance, Resources
and Incentives
Signatories’ governance, resources
and incentives support stewardship
Governance Structures and Processes
During 2023 as set out below, MSIM has made (or is in theprocess of implementing) certain key enhancements in its
resourcing of stewardship activities oversight and assurance
framework to further strengthen governance in this area.
MSIM’s governance approach reflects business structure as
the investment management division of a global financial
services firm, which comprises multiple legal entities indifferent jurisdictions, with respective boards of directors
and governance structures, that leverage MSIM’s processes
relating to investment and climate risk management. MSIM
Ltd is an appointed investment manager within the EMEA
region with several committees and teams across the MSIM
division supporting its board in performing its responsibility
for establishing appropriate governance systems.
MSIM has established governance systems, risk
management and controls to support its advisors witheffective management of sustainability issues as outlined in
the Key Division-wide ESG-Specific Groups (see Figure 2.2).
BOARD REVIEWThis report has been reviewed and approved by theboard of directors (the “Board”) of MSIM Ltd and signed
by Ruairi O’Healai, Chief Executive Officer of MSIM Ltd
and EMEA Chief Operating Officer of MSIM. The Board
is composed of seven members. The Chair of the Board

13

2023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

is an Independent Non-Executive Director; there are four
Executive Directors (including the CEO) and three NonExecutive Directors.
The Board receives updates periodically at its Board
meetings from the central MSIM Sustainability teamand other functional stakeholders on ESG/sustainabilityrelated regulatory, business, product and strategic
initiatives, including developments in the UK Financial
Reporting Council’s (FRC) stewardship and reporting
requirements, internal progress on the UK Stewardship
Code report, and ongoing stewardship activities.
MSIM’S SUSTAINABILITY GOVERNANCE STRUCTURE

We continue to view effective management of stewardshipand sustainability issues as an important component of ourbusiness strategy and continue to evolve our philosophy
as we believe it is fundamental to the long-term successof our organisation and our ability to deliver value forour clients. We believe that a successful stewardshipframework requires committed leadership, a clear
strategy, and appropriate checks and balances to ensure
overall accountability and transparency. To that end, we
have established governance systems, risk management
and controls to support our stewardship and sustainability
agenda, outlined in our Key Division-wide ESG-SpecificGroups (Figure 2.2) below.
MSIM GLOBAL HEAD OF SUSTAINABILITY

The Global Head of Sustainability for Investment
Management leads MSIM’s sustainability strategy andgovernance, and the centralised Sustainability team(please see Figure 2.2 below, under MSIM Sustainability
Expertise) that supports MSIM’s global investment teams.
The MSIM Global Head of Sustainability has 19 years ofindustry experience and was previously the Head of Greenand Sustainability Bond Origination for Morgan Stanley’s
Global Capital Markets group.

GOVERNANCE, RESOURCES AND INCENTIVESFIGURE 2.1

MSIM Sustainability Expertise
NAVINDU KATUGAMPOLA

Global Head of Sustainability for
Investment Management (London)

ZENABU LABRI

Executive
Director, Headof Sustainability
Regulation and
Policy (London)

SOFIA NALAKNIGHTLEY

Vice President,
Head of Sustainable
Strategy andSolutions (London)

ROBERT WALKER

VARUN MEHTA

Executive Director,
Global Head of
Stewardship(London)Executive Director,
Head of
Sustainability
Data & Technology(New York)ED CHAMBERS

ANSON CHAN

GAUTAM KAPOORGABY CORNEJO

Analyst,Sustainability
Regulation and
Policy (London)

Vice President,
GlobalStewardship(New York)

Executive
Director, Global
Stewardship(Bengaluru)

Quantitative
Analyst,Sustainability
Data & Technology(New York)

Incoming
Associate,
Sustainability
Regulation
and Policy(London)GRAFILAJAIN

MAMTA L.
SHARMARAJAT
BHARGAVANAVEEN
SINGH

Vice
President,
Proxy
Voting(Mumbai)

Proxy
Voting(Mumbai)

Proxy
Voting(Bengaluru)

Proxy
Voting(Bengaluru)

MSIM Sustainability Team Chart, as of July 2023, including incoming Associate, Sustainability Regulation and Policy
MSIM SUSTAINABILITY TEAM

Led by MSIM’s Global Head of Sustainability, theMSIM Sustainability team supports MSIM’s collective
sustainable-related processes and governance. The
MSIM Sustainability team works with the sustainability
leads from our investment teams to coordinate global
sustainable investing and stewardship initiatives. These
activities include supporting investment teams in relation
to sustainability-related reporting and regulatory disclosure
requirements, incorporating ESG considerations into theirinvestment approaches, developing sustainable products
and supporting sustainability data utilization, developmentof tools, and sustainability research, as appropriate.
MSIM’s Global Stewardship function, as part of the
MSIM Sustainability team, supports and helps investment
teams coordinate MSIM proxy voting and investee
engagement activities.
Four verticals enhance the team’s centralised function
across MSIM by providing:Efficient coordination of specific sustainability issues,
functions and tools that have utility across MSIM







Sustainability expertise that seeks to ensure quality,
consistency and integrity across asset classes and products,
supporting investment teams in achieving their objectives
Collaboration across Morgan Stanley businesses toleverage internal synergies, delivering the best of the
combined Firm into MSIM and
Further support to MSIM-level reporting, policies andcommunications

MSIM’s Sustainability Team is split into four verticals:1. 	 Head of Sustainability Regulation and Policy – leads

projects to support MSIM’s work in this area, including
implementing key regulatory and industry ESG frameworks,
representing MSIM in ESG-focused industry forums, anddeveloping MSIM’s approach to key sustainability themes.
2. 	 Head of Sustainability Strategy and Solutions – focuses

on strategic implementation, regulatory and productrelated sustainability initiatives, including new products
and existing strategies, supporting investment teams on
product positioning, ESG labels, developing frameworks
and content generation.

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2023 UK STE WARDSHIP CODE REPORT14

GOVERNANCE, RESOURCES AND INCENTIVES

3. 	 Head of Global Stewardship – leads MSIM’s

Stewardship team (further details provided later in thissection), oversees MSIM’s proxy voting and stewardshiprelated activities, supporting investment teams.
Responsibilities also include corporate governanceresearch and analysis, and monitoring and developing
MSIM stewardship strategies.

are appropriately resourced at different levels in terms ofhead count and seniority.


4. 	 Head of Sustainability Data and Technology – leads

sustainability data due diligence and selection,
quantitative analysis of portfolios and technology
innovation to address use case in research, portfolio
construction, and regulatory and client reporting. The
Head of Sustainability Data and Technology also chairs
the Sustainability Tech and Data Oversight Council.
The MSIM Sustainability Team (including the Global
Stewardship Team) is overseen by the MSIM ESG Committee.

How Our Governance Structure Promotes
Effective Oversight and Accountability of
Stewardship
Enhancements made to our governance structure thisyear have been in response to our regular assessment ofstewardship and sustainable investing capabilities andneeds, resources and alignment with our products, andcommitments to clients, taking into account regulatory
requirements and market developments. In this regard,
we have also taken steps to ensure that stewardship
activities and corresponding governance and oversight

Investment Teams: It is the MSIM investment teams’
responsibility to define their approach to consideration of
ESG factors. Many of MSIM’s investment teams or asset
class platforms have appointed at least one dedicatedSustainable Investing/ESG specialist to coordinate andsupport the sustainable investing approaches for the
relevant teams’ work. A key responsibility of these
specialists is to work with their respective investment
teams to help encourage incorporation of ESG factors
where relevant, in line with each team’s investment
philosophy and strategy. Other elements of the role may
include supporting investment staff to enhanceincorporation of ESG factors in investment processes
through research, training, knowledge-sharing, engagementwith companies, and representing their asset class/team in
relevant ESG-related forums and groups as necessary.
MSIM Sustainability Team and MSIM ESG Committee:
The MSIM Sustainability team (including our Stewardshipteam) is led by the MSIM Global Head of Sustainability,
and overseen by the MSIM ESG Committee (the“Committee”).
Sustainability Oversight and Accountability: The below
provides an overview of the management-levelcommittees, working groups and teams that have
responsibility for overseeing and monitoring broader
ESG- and climate-related issues.

FIGURE 2.2

MSIM Key Division-wide ESG-Specific Groups Summary
MSIM ESG
Committee

Key topics overseen by this Committee include: ESG-related goals, ESG-related product development and marketing
frameworks, MSIM’s investment teams’ ESG-related engagement programme, ESG-related training, and ESG-related
technology and data initiatives. The Committee is co-chaired by the MSIM Co-Head and Chief Investment Officer of the
Solutions and Multi-Asset Group and MSIM’s Global Head of Risk and Analysis.
Key members include MSIM’s Head of Sustainability and MSIM’s Chief Operating Officer, as well as senior members of Risk,
Legal and Compliance divisions. The Committee consists of senior representatives from MSIM’s Sustainability team, Officeof the Chief Operating Officer, and other advisory and related functions who oversee and guide MSIM’s support for thesustainable investment strategies of each investment business.

Sustainability
Tech andData Council

Supports business and client needs for ESG data governance and technological controls, and advises on high-level ESG data
and tech operational priorities, including selection and sourcing of third-party ESG data; ESG data governance framework;
promoting continued innovation of ESG data and applications. Key members include Head of Data and Analytics MSIM, Heads
of Operations and Technology.

EMEA ESG
Regulatory
SteercoOversees implementation of EMEA ESG regulations and responses to EMEA ESG-related supervisory exams, regulatory,
audit or testing findings. Key members include MSIM’s Head of Sustainability, EMEA Chief Operating Officer, as well as senior
members of EMEA Risk, Legal and Compliance divisions.

Proxy Review
Committee

Oversees implementation and coordination of MSIM’s proxy voting policy. The Committee consists of investment professionals
who represent the different investment disciplines and geographic locations of MSIM, and is chaired by the Head of the Global
Stewardship Team.

Sustainability
Forum for consultation and coordination amongst investment teams on substantive ESG matters. Chaired by Head of Sustainability
Team Leads Call Strategy and Solutions, and dedicated Sustainable Investing/ESG research specialists in each investment team are invited.

152023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

GOVERNANCE, RESOURCES AND INCENTIVESFIGURE 2.3

MSIM Three Lines of Defence

1st Line

2nd Line

3rd Line

Investment teams, the MSIM riskfunction (“Global Risk and Analysis”)
and various other control and oversightfunctions form the first line wheremost risks are identified

Morgan Stanley Firm Risk
Management and MSIM
Compliance form the secondline providing independent
monitoring of risks

Morgan Stanley Internal
audit performing a range ofassurance activities in linewith risk exposure

EXAMPLES OF MSIM’S GOVERNANCE AND CONTROLS IN PRACTICE
1. 	 ESG Checklist: MSIM’s internal ESG Checklist, is partof the new product development and review process.
The Checklist documents the proposed new product’s
ESG characteristics/objectives and methodologies
used to attain these characteristics/objectives. It
also covers existing products that seek to revise ESG
characteristics/objectives and methodologies. This
Checklist is owned by the MSIM Sustainability team andhas been further expanded, requiring investment teams
to document specifically how their proposed or revised
ESG characteristics/objectives/methodologies align with
relevant regulatory classifications and requirements,
e.g., the Sustainable Finance Disclosure Regulation(SFDR) (EU 2019/2088) and, where relevant, therationale for any regulatory classification conversions.

streams: Reach, Retain, Recruit and Relay, the DFC isunderpinned by the themes of allyship and inclusion
to create initiatives focussing on different diversity
dimensions: race and ethnicity, gender, LGBTQ+, andsocioeconomic diversity and inclusion.
In 2023, the DFC has been running over 10 initiatives acrossits four workstreams, some of which are detailed below:

2. 	 Pathway for Internal Review of MSIM ESG-Related

Proposals: To provide increased governance over our
non-product ESG commitments, we have established aninternal process to review certain regulatory consultation
responses and other industry-related proposals from an
MSIM and/or investment team perspective.
3. 	 Three Lines of Defence: MSIM operates a ‘three lines ofdefence’ model to provide independent, objective andtimely assurance about the effectiveness of the Firm’s
risk, governance and internal controls. In 2023, MSIM hascontinued to enhance the three-lines-of-defence model
to update responsibilities across functions involved insupporting, controlling and overseeing ESG investing
activities, as well as updating MSIM’s overarching ESG
governance framework under the ESG Committee.

MSIM’s Focus on Diversity and Inclusion
In addition to the MSIM Diversity Council, MSIM EMEA
has a dedicated D&I committee—the Diversity Focus
Committee (DFC). The DFC works on diversity andinclusion efforts in MSIM EMEA. Structured across four

VP Voices: bringing together the MSIM EMEA Vice
President (VP) cohort through networking, buddy
groups, internal events and skills training to increase
visibility and connectivity across teams and geographies.
This initiative is VP-led to empower and engage thecohort to elevate their own career paths with thesupport of HR and senior sponsorship.
4Ps Programme: a multiyear programme engaging senior
managers to support female VPs in creating individual
developmental plans and share best practices, and in sodoing, increase the VPs’ visibility. Action plans are
discussed at a biannual roundtable comprising senior
stakeholders to uncover further ideas. The purpose ofthis is to increase senior stakeholder involvement infemale VPs’ careers, in order to increase inclusion andretention of diverse talent.
Mentoring Programme: a nine-month programme thatpairs approximately 20 diverse Executive Directors
and Vice Presidents with senior mentors to support
personal progress, career development and growparticipants’ network.
DFC Roadshows: informative sessions about the ‘what,
who and how’ of the DFC to target groups to increase
engagement with diversity-related activities in
MSIM EMEA.

Examples of engagement and collaboration with externalindustry organisations to further our commitment toDiversity and Inclusion can also be found in Principle 10.

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2023 UK STE WARDSHIP CODE REPORT16

GOVERNANCE, RESOURCES AND INCENTIVES

Resourcing Stewardship Activities: Investment
in Systems, Processes, Research and Analysis
In addition to the governance structure, processes
and resources we have outlined earlier in this Principle,
we continue to build upon our existing systems(where appropriate and feasible) to support our
stewardship activities.
Furthermore, many of MSIM’s investment teams or
asset class platforms have appointed at least one
dedicated Sustainable Investing/ESG research specialist
to coordinate and support the sustainable investing
approaches for the relevant team (please see Principle 1
for further details with respect to specific investment
teams). MSIM believes that this model helps drive
accountability for stewardship and ESG integration at theinvestment team level, and ensures that each investment
team is appropriately resourced and equipped to further
its stewardship priorities and efforts, in a manner that it
considers would best serve its clients’ interests.
The decision to introduce additional sustainability
expertise and coverage is taken at the individual
investment team level as appropriate, as part of headcountmanagement. As a Firm, we feel that sufficient staffing
and a robust infrastructure are the most importantfactors in maintaining our ability to provide excellent
investment results and service to our clients. MSIM is
fully committed to hiring the best people, not only withregard to sustainability and portfolio management, butalso in all the trading, client servicing, risk management,compliance and operational services that accompany it.
Please see below and Principle 7 for specific investment
team examples within the reporting period.
A key responsibility of these specialists is to work with
their respective investment teams to help encourage
incorporation of ESG factors where relevant, in line witheach team’s investment philosophy and strategy. These
specialists may support the investment staff in suchincorporation of ESG factors in the investment processes
through research, training, knowledge-sharing, engagementwith companies, and representing their asset class/team in
relevant ESG-related forums and groups as necessary.
STEWARDSHIP RESOURCES
1. 	 MSIM’S GLOBAL STEWARDSHIP TEAMThe MSIM Global Stewardship Team (the “Global
Stewardship Team”) co-ordinates MSIM’s stewardshipand investee engagement agenda and activities alongside
our investment teams, with help from our proxyadvisors (please see Principle 8 for further details).
The Global Stewardship Team (GST) is responsible for172023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

ensuring shareholder meetings are voted and supporting
investment teams to vote in the best interest of theclient, consistently applying the MSIM Proxy Voting
Policy and Procedures. Prior to engagement, investment
teams may work closely with the MSIM Global
Stewardship Team to assist in structuring engagement
dialogues. The majority of engagements led by the Global
Stewardship Team focus on shareholder meetings.
During 2023, the Global Stewardship Team began to
conduct annual updates in Q1 of each year, as opposed to
Q3, to ensure the MSIM proxy voting policy is updated
ahead of each proxy season. Please see Principle 5 forfurther details. In addition, the GST team also hired an
additional analyst focused on ESG to provide greater
support to MSIM’s Stewardship team in Mumbai. The teamalso initiated discussions to gain a better understanding on
potential options of combining internal voting platforms
and, as a next step, has commenced work on onboarding
EVM’s voting process onto MSIM internal voting platform,
Provosys, in the short term. This will enable us to reduce
dependence on third-party solutions and provide in-housesupport to our investment teams and clients. We willreport on our progress in our 2024 report.
2. 	 ENGAGEMENT TRACKING

The majority of MSIM engagements are tracked at theinvestment team level. Investment teams may utilise
various systems to assist with tracking, such as Provosys
and Aladdin Research. Through tracking engagements,
investment teams are able to evaluate the successand progress of their interactions, in addition to
identifying areas for further engagement or escalation,consequently pushing for better sustainability outcomes.
Examples of fields tracked in engagement systems
include: geography; issuer type; sector; engagement
theme and summary; whether it was a satisfactory
engagement; outcome of engagement on investment
strategy and type of sustainable bond (for Fixed
Income only).
In 2023, we established an engagement leads call,comprising investment teams and others from MSIM
and its affiliates. The objective of the call is to discussand share best practices regarding engagement practices
utilised by MSIM investment teams.
3. 	 INTERNAL VOTING PLATFORM

MSIM’s internal voting platform notifies portfolio
managers when there is a meeting for one of theirholdings, and they are given the opportunity to input
on the Global Stewardship team’s analysis and votingGOVERNANCE, RESOURCES AND INCENTIVES

recommendations prior to finalising the investment
team’s voting decision. This interactive process facilitates
ongoing discussion between the Global StewardshipTeam and portfolio teams about a holding’s material
ESG and related stewardship issues. The platform alsoenables a semiautomated control process to ensure
eligible holdings are voted at shareholder meetings.
ESG DATA AND TECHNOLOGY RESOURCES

Investment teams may supplement proprietary ESG
research and analysis with third-party ESG data. ESG
data is utilised in various ways; for example, someinvestment teams use it to inform their own fundamental
research, while other teams integrate third-party data into
proprietary models and scoring frameworks.
Third-party ESG data providers are generally selectedbased on how effectively they will meet our stewardshipneeds, and particularly on the depth and breadth ofcoverage required for regulatory reporting and disclosures.
For example, when evaluating an ESG data provider, wetake into consideration the applicability of the data of aparticular topic (e.g., climate, biodiversity) and use case (e.g.,
research, reporting), breadth of coverage, robustness of thevendor’s methodology and feasibility of implementation.
Once sourced and onboarded, MSIM’s investment teams
can use this data as required to support ESG integration andclient reporting. Driven by strong internal demands, increased
volume of client interests and changing regulations, MSIM
has been further enhancing its ESG analytics dashboards thisyear to enable investment teams to view ex-post portfolio
exposure to a broad spectrum of ESG metrics, in areas suchas climate, screening and controversies, corporate ESG
ratings and sustainable revenues.
For more information on how individual investment teams
incorporate third-party ESG data into their investment
process, please see Principle 7. For more information on how
we monitor our service providers, and activities and progress
during the reporting year, please refer to Principle 8.
USE OF SERVICE PROVIDERS

MSIM views proxy voting as one of the key stewardship
activities, and obtains information on corporate governance,
proxy voting, issuer research and selected environmental
and social issues from its investment teams’ own research,
as well as two independent advisors, Institutional
Shareholder Services (ISS) and Glass Lewis, who provide
vote execution, reporting and recordkeeping services.
Further information relating to our use of service providers
can be found under Principle 7 and Principle 8.

Performance Management and
Reward Programmes
MSIM remains an employer of choice by offering
competitive compensation programmes to our employees.
A primary objective in designing compensation
programmes for MSIM employees is to ensure thatcompensation incentives are aligned with our businessstrategy of driving performance and adding value forclients, shareholders and other employees. Moreover,
MSIM has a Global Incentive Compensation Discretion(GICD) Policy, which is reviewed at least once a year andamended, as needed, in advance of the annual incentive

SPOTLIGHT #1

Progress on the Development of Our Proprietary ESG Database/System
The centralisation of the ESG data stack (consisting of data sets
across the ESG spectrum of approaches, across asset classes and data
providers) at Morgan Stanley has allowed for product innovation andapplications. MSIM believes that assessing a portfolio on ESG risks andopportunities relies on using multiple sources of information, and, inmost cases, from different third-party providers to allow for crosscomparability. These include, and are not limited to:
1. CLIMATE ANALYTICS

MSIM analytics have a heavy focus on climate, where we engage
clients and internal teams around carbon emissions, portfolio earnings
at risk from carbon price scenarios, corporate science-based target
analysis, power generation mix, exposure to stranded assets andphysical risk.
2. ESG SCREENING AND ANALYTICSOn the ESG side, MSIM focuses our analytics on portfolio exposures
to a range of more than 50 screening criteria; an assessment of
performance across ESG ratings providers; an analysis of impactalignment to a range of sustainability themes from a corporate
revenue perspective; and additional proprietary analysis, including
an increased focus on diversity, equity and inclusion. These tools andanalytics deployed across a range of platforms, both internally andwith clients.
In the last 12 months, there has been an increased focus on creating
data-driven tools for portfolio analysis and reporting on EU
regulations. In particular, MSIM acquired third-party data sets forregulatory reporting and created internal tools for monitoring the
SFDR’s Principal Adverse Sustainability Indicators. MSIM is also
expanding the solution to address reporting requirements for the
SFDR more broadly. Client requests for TCFD metrics are also
becoming increasingly common, and MSIM is actively building solutions
to address client reporting needs in this area.
There is a steady pipeline to develop more ESG analytics modules.
MSIM plans to gradually shift the focus towards ex-ante portfolio
ESG modelling and issuer-level ESG analysis, as we progress in our
proprietary ESG database/system build-out.
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GOVERNANCE, RESOURCES AND INCENTIVES

compensation decision-making process. The GICD Policy
requires and directs compensation managers to consider
only legitimate, business-related factors when exercising
discretion in determining incentive compensation. Suchfactors include adherence to Morgan Stanley’s core values,
conduct, disciplinary actions in the current performance
year, risk management and risk outcomes.
The GICD Policy also requires and directs compensation
managers to escalate circumstances that may warrant
cancellation or clawback of previously awarded
compensation for further investigation. Compensation

19

2023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

managers are required to certify their compliance with
the GICD Policy in advance of exercising discretion in
determining incentive compensation, and Morgan Stanley’s
Human Resources (HR) coverage team works directly withcompensation managers to ensure that they understandtheir responsibilities.
MSIM’s local entities have implemented remuneration
policies to promote sound and effective risk managementof sustainability risks, including discouraging excessive risktaking with respect to sustainability risks.

CONFLICTS OF INTEREST

Principle 3

Conflicts of Interest
Signatories manage conflicts ofinterest to put the best interests ofclients and beneficiaries first
MSIM Conflicts Management Framework
As part of a diversified global financial services firmthat engages in a broad spectrum of activities, MSIM
may encounter potential or actual conflicts of interest,
including: (i) between MSIM (including connected persons
such as our affiliates and employees) and our clients; and(ii) between different MSIM clients.
MSIM employees must comply with Morgan Stanley’s
established Firmwide policies and procedures, such as: theFirm Code of Conduct, Global Conflicts of Interest Policy,
Global Gifts, Entertainment & Charitable Giving Policy,
Global Employee Trading and Outside Business Activities
Policy, and the Global Confidential and Material Non-PublicInformation Policy (covering information barriers). MSIM
employees receive appropriate training to ensure that they
are fully aware of their responsibilities and obligations.
MSIM has also established procedures intended to identify
and mitigate conflicts of interest related to business activities
on a worldwide basis. As part of the conflicts management
framework, MSIM EMEA has a Conflicts of Interest
Committee, chaired by a Conflicts Management Officer, witha remit that includes reviewing and evaluating transactions
and business practices identified as posing conflicts ofinterest; evaluating, in aggregate, matters brought to theCommittee to assess consistency of resolution and potential
themes or trends; and maintaining the MSIM EMEA conflictsof interest register. MSIM also has in place an escalation
process, both to senior management within the business
unit and/or to the Firm management, or the Firm’s franchisecommittees, for potentially material conflicts.

in the context of stewardship. Such conflicts may arise, forinstance, as a result of MSIM’s commercial relationships
with clients or third parties who may be issuers of securities
held on behalf of accounts managed by MSIM, or fromcross-directorships of MSIM staff. MSIM is also part ofMorgan Stanley, a global financial services group, and, assuch, MSIM faces potential conflicts due to the role ofother Morgan Stanley divisions, which may have commercial
relationships with companies in which MSIM may invest.
In addition to the above, our approach to identifying,
managing and mitigating other potential stewardship-related
conflicts are as follows:
PROXY VOTING

Material Conflict Management
MSIM pre-identifies conflicts of interest as part of thevoting process. This targeted approach in conflict ofinterest identification involves specific meeting levelmonitoring for potential conflicts of interest. The MSIM
Proxy Voting Policy (See Principle 5) provides guidance for
identifying actual or potential material conflicts of interestin voting situations, a process maintained by the MSIM
Global Stewardship Team.
A potential material conflict of interest could exist in thefollowing situations, among others:
1. 	 The issuer soliciting the vote is a client of MSIM oran affiliate of MSIM and the vote is on a matter thatmaterially affects the issuer;
2. 	 The proxy relates to Morgan Stanley common stockor any other security issued by Morgan Stanley or its
affiliates except if echo voting is used;3. 	 One of Morgan Stanley’s independent directors or oneof MSIM Funds’ directors also serves on the boardof directors or is a nominee for election to the boardof directors of a company held by a MSIM Fund oraffiliate; or4. 	 Morgan Stanley has a material pecuniary interest in thematter submitted for a vote (e.g., acting as a financial
advisor to a party to a merger or acquisition for which
Morgan Stanley will be paid a success fee if completed).

GIFTS AND ENTERTAINMENT

Additionally, employees engaging in engagement andstewardship activities are subject to MSIM’s Global
Gifts, Entertainment and Charitable Giving Policy, andrelated controls.

Approach to and Examples of Stewardship
Conflicts and Outcomes
MSIM’s conflict management framework enables us to
identify and manage actual and potential conflicts of interest

If the Global Stewardship Team determines that anissue raises a potential material conflict of interest, thefollowing process will be followed as deemed appropriate:

If the matter relates to a topic covered by the MSIM Proxy
Voting Policy, the proposal will be voted as per the Policy;
If the matter is not covered by the MSIM Proxy Voting
Policy or the Policy indicates that the issue is to be
decided on a case-by-case basis, the proposal will be voted
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CONFLICTS OF INTEREST

in a manner consistent with the recommendations of the
Research Providers,5 provided a) that the Research
Providers consulted have the same recommendation, b)
no portfolio manager objects to that vote, and c) the voteis consistent with the objective of maximising long-term
investment returns;
If the Research Providers’ recommendations differ, theMSIM Global Stewardship Team will refer the matter tothe PRC to vote on the proposal, as appropriate;Where it serves the best interest of our clients, MSIM will
vote against management;Echo voting6 may be used where shares are instructed to
be voted in the same proportion as the vote of the otherholders of the fund’s or company’s shares, where
feasible; andWhere Morgan Stanley or MSIM hold shares in MSIMmanaged funds, MSIM may use the voting rights conferredby those shares to vote at the General Meetings of those
funds provided its votes are in line with therecommendations of at least two research providers.



The MSIM Proxy Review Committee has overall
responsibility for the Policy. The Committee consists ofinvestment professionals who represent the different
investment disciplines and geographic locations of MSIM,
and is chaired by MSIM’s Head of Global Stewardship.

The MSIM Global Stewardship Team tracks actual andpotential conflicts of interest arising in a proxy voting context,
and how these issues are handled. Where appropriate, such
issues are also reported to the Proxy Review Committee,
and on a quarterly basis to public fund boards for relevant
portfolio companies. MSIM memorialises conflict of interest
issues in the minutes of MSIM Proxy Review Committee
meetings and will disclose them to clients who hold theaffected securities in their accounts if requested.
The EMEA IM Conflicts of Interest Committee monitors
quarterly metrics on exceptions to the MSIM Proxy Voting
Policy and procedures across these four conflicts categories.
In the period 1 July 2022 to 30 June 2023, all identified
potential conflicts of interest related to proxy voting
were considered and resolved with either a vote against
a management recommendation or application of voting
policy. There were no policy overrides at meetings
identified with a potential conflict of interest.
Arm’s-Length Approach
In addition to the controls and mitigants set out above, MSIM
deals with other business units within the Morgan StanleyGroup at arm’s length. By doing so, we minimise the risk that
we will act towards our portfolio companies in line with
the interests of other divisions, e.g., Institutional Securities
rather than the interest of our clients. Further, trading in
Morgan Stanley securities by accounts managed by MSIM is
generally prohibited by MSIM’s policy and procedures.

CASE STUDY 3.1

Proxy Relating to Security Issued by Morgan Stanley or its Affiliates
CONFLICTCONFLICTDESCRIPTIONMSIM voting on an M&A transaction where Morgan Stanley’s Investment Banking Division is an advisor to a party
to the transaction

In 2023, MSIM voted in favour of the merger of two companies, for which Morgan Stanley Investment Banking
Division (IBD) was serving as financial advisor to one of the merger parties.
Situations of this nature represent a potential conflict between the IBD’s interests in receiving fees from theirclient upon completion of the merger, and MSIM voting against the merger if it deemed the merger not to be in
the interests of MSIM’s clients.
The resolution was identified as part of the standard Shareholder Meeting review process.



MANAGEMENT

MSIM managed this risk by (among other things) following the vote recommendations of independent research
providers, in this case, ISS, who recommended in favour of the transaction.
This was done in compliance with the MSIM Proxy Voting Policy.
MSIM took further actions to manage this potential conflict:
MSIM assessed the merits of the transaction objectively. MSIM considered this approval vote to beconsistent with the objective of maximising long-term investment returns since the merger consideration
was fair and provided both liquidity and certainty of value.
MSIM and IBD operated on an arm’s-length basis with respect to this transaction (as further described
below), and MSIM’s voting decision was not influenced by IBD’s separate role in the transaction.

––

CONFLICT OWNER(S)56MSIM Global Stewardship Team and MSIM Conflicts Officer

ISS and Glass Lewis
Echo voting refers to a practice when one votes shares in the same proportion as the vote of all of the other holders of the fund’s shares.

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CONFLICTS OF INTERESTINVESTMENT TEAMS – SPLIT VOTINGAs a result of MSIM’s independent investment teamstructure, a situation may emerge in which different
investment teams have different views on a particular votefor a company. We also aim to stay true to our stewardshipphilosophy in seeking to maximise long-term investment
returns for each client. Under these circumstances, different
views on a particular vote will result in a conflict, which
we seek to manage through split votes. For example, whendifferent clients have varying economic interests in theoutcome of a particular voting matter (such as a case inwhich varied ownership interests in two companies involvedin a merger result in different stakes in the outcome), thevotes will be cast on a split basis (in proportion to the votes
held by the relevant clients).
We also may split votes at times based on differing
views of portfolio managers (e.g., based on what they
consider would generate better value for their investment
strategies). These generally apply to cases where the policy
item is determined on a case-by-case basis. Where policy
guidelines are clear on the voting matter, the policy is
generally followed, and hence a split vote should not arise.
EMPLOYEE PERSONAL TRADING AND OUTSIDE
BUSINESS ACTIVITIESMSIM has also put in place processes to identify andmanage situations where an employee’s personal
relationships and outside business interests might
compromise MSIM’s duty to act in the clients’ best interests.
Employees are subject to the Firm’s Global Employee
Trading and Outside Business Activities Policy, which
establishes a duty to declare and seek prior approval forin-scope outside business interests and dealing on personalaccounts. MSIM conducts e-communications surveillance todetect undeclared outside business interests. MSIM requires
employees to confirm personal dealing accounts annually.
PORTFOLIO MANAGEMENT

As our portfolio managers are involved in stewardship andengagement efforts, we are mindful of the risk of themacquiring inside information in the process or undertaking
personal account dealing that would conflict with clientinterests and result in potential client detriment.
Additionally, when an investment team manages multiple
portfolios (“side-by-side management”) with different
structures (e.g., registered funds and unregistered funds)
and/or fee structures (e.g., performance-based fees versus
asset-based management fees), certain perceived or actual
conflicts may arise. Potential conflicts include favouring one
account over another in investment decisions or the exercise

of investor rights; taking conflicting positions in the same
security for different portfolios; or favouring an accountwhere performance fees are awarded over an accountthat is charged an asset-based fee. To minimise potential
conflicts and protect the interests of all MSIM clients, theGlobal Side-by-Side Management Policy and Procedures(the “Policy and Procedures”): (i) provide that allocation
decisions are not influenced by fee arrangements or otherincentives; and (ii) allocate investment opportunities in amanner that treats clients fairly and equitably over time.
The Policy and Procedures set out specific guidelines tomitigate potential conflicts that may arise in connection
with side-by-side management, including conflicts aroundtrading practices, performance fees, security selection,
investment in MSIM funds and consistent investment
viewpoint (e.g., long/short).
All portfolios actively managed by the same investment
team (e.g., the same portfolio manager exercising ultimate
discretion over an account) must generally take the same
directional viewpoint (e.g., short or overweight) in aparticular security (e.g., a consistent investment viewpoint).
Within the same investment team, opposite direction
investment decisions are not permissible except where theyfall within a consistent investment viewpoint, as delineatedin the Policy and Procedures.
MSIM has established the Side-by-Side Subcommittee, whichmeets on a regular basis and comprises representatives frombusiness areas and control functions, including Compliance,and has overall governance responsibility for helping toensure adherence to the Policy and Procedures.
DIFFERENCES IN ENGAGEMENT ON THE SAME SECURITIESIn some cases, there may be differences in opinion andpriorities in engagement approaches between investment
teams across asset classes for the same security (e.g., Fixed
Income vs. Equities).
For example, the Fixed Income organisation may be
more focused on governance issues or controversies that
could impact the price or liquidity of bonds in the nearterm, whereas Equity investors may be more focusedon sustainability issues that might have longer-term
implications for valuation. Accordingly, any such divergences
will be appropriately escalated, considered and resolved.
MSIM investment teams work closely with each other(where relevant and where circumstances permit) with thesupport of the MSIM Global Stewardship Team to pursue
our engagement themes.

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PROMOTING WELL-FUNCTIONING MARKETS

Principle 4

The MSIM and Firm Risk Committees serve to oversee,manage and address risks that are escalated from First andSecond Lines of Defence. Our Entity Boards (please see
Principle 2) provide Board-level oversight and Firm leadershipwith input from our business heads who have responsibility
for the identification and management of such risks. These
include, but are not limited to, Investment, Enterprise and
ESG risk report updates, which are provided periodicallyto boards.

Promoting WellFunctioning Markets
Signatories identify and respondto marketwide and systemic risks
to promote a well-functioning
financial system

The types of marketwide and systemic risks we work to
mitigate include, but are not limited to, macroeconomic,
market, credit and currency risks—but most importantlywith respect to sustainability—e.g., climate change, physical/
transition risk, social and governance risks. This year, in
response to the evolving industry trends and regulatory
developments, we have also enhanced our internal ESG
governance framework to minimise greenwashing andstewardship-washing risks. Internally amongst our employees,
upholding our Firm’s core values (Principle 1) is critical in
addressing marketwide and systemic risks. We provide
further details in the sections below.

Overview
Identifying and responding to marketwide and systemicrisks is a priority for Morgan Stanley. As such, the Firm
has staffed governance and controls, escalation protocols,
and management and remediation processes to ensure
our business and stewardship activities not only meetclients’ interests and requirements but help promotea well-functioning financial system. We take a globally
harmonised approach across MSIM and the Firm, adoptinga three-lines-of-defence model—risks are owned andmanaged at the business level (First Line), risks are
independently monitored by Firm Risk Management
and Compliance (Second Line) and Internal Audit (Third
Line), which performs a range of assurance activities
commensurate with the risk exposure across the Audit
Universe, and assesses whether the first-and second-linefunctions are operating effectively.

Marketwide and Systemic Risks
CLIMATE CHANGE – INCLUDING TRANSITION AND PHYSICAL RISKS

At a Firm level, Morgan Stanley is committed toconsidering climate change throughout our business,
operational and risk management activities. To support
this work, we have a four-pillar climate strategy,
with the overall goal of achieving net-zero financed
emissions7 by 2050.

FIGURE 4.1

Morgan Stanley’s Climate Change Strategy and Progress

1

2

SUPPORT THE TRANSITION
TO A LOW-CARBON AND
GREEN ECONOMYCommitment to mobilize$750Bn to support low-carbon
and green solutions by 2030
Launched Climate Strategy
Assessment Framework (CSAF)
to understand our clients’transition plans andcommitments

3

MANAGE CLIMATE RISKClimate change considerations
integrated into the Firm’s risk
management and governanceprocesses under the Chief
Risk Officer
Climate risks overseen by the
Risk Committee of the Boardof Directors

4

PROVIDE RELEVANT,
ENHANCE THE CLIMATE
TRANSPARENT AND USEFULRESILIENCE OF OUR
CLIMATE-RELATED DISCLOSURES OPERATIONS

Launched integrated ESG
Report, combining our Diversity& Inclusion, Climate andSustainability reports into one
Only major US-headquarteredglobal financials services firm on
the Partnership for Carbon
Accounting Financials (PCAF)
Steering CommitteeBennington Wind Farm is
accounting for approximately
50% of Morgan Stanley’s global
energy consumption
Renewable electricity attributes
account for 100% global
operational electricity in 2022

Net zero reflects a state in which the amount of greenhouse gas (GHG) emissions being released into the atmosphere is matched by the amount ofgreenhouse gases being removed from the atmosphere via natural “sinks.” Financed emissions are the absolute greenhouse gas emissions attributed
to banks through their loans and investments.
7232023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

PROMOTING WELL-FUNCTIONING MARKETSAt MSIM, we continue to believe that climate changerelated transition and physical risks are systemic risks.
Sustainable investing risk, which includes climate changerelated transition and physical risks, is one of the principal
risk categories monitored under our Global Investment
Management Risk Management Policy. Principal risks areformalised risk categories managed in a manner consistent
with the framework established under this policy.
The risk committees across MSIM oversee, address andprioritise risks, including climate risks, taking into accountthe Risk Appetite Statement, as well as emerging regulatory
and external events. MSIM has implemented systems,
controls and procedures to identify, track and ultimately
manage climate-related risks at security, portfolio andentity level. Our investment teams are the primary riskowners, and identify these risks and manage them, together
with other risks, as part of their investment process.
MSIM Ltd Risk Appetite Statement was updated in 2022
to incorporate climate risk as a driver of existing risks
within the overarching risk framework. Specifically, climate
risk was established as a driver of Strategic Risk fromregional regulations and disclosure requirements related
to sustainable investments and a driver of Reputational
Risk related to an idiosyncratic event that could negatively
impact MSIM Ltd’s standing to clients and employees.
This section provides an overview of how MSIM, at anorganisational and investment team level, identified andresponded to key marketwide and systemic risks during
the reporting period.
MSIM’s Global Risk & Analysis (GRA) team performs
ongoing monitoring for emerging geopolitical andfinancial risks in the market. These risks are identified
by the market risk team at both the portfolio level andaggregate business line level, and they are assessed using
measurements such as exposure analysis, beta analysis
and scenario analysis. The team assesses the business’s
top exposures to identified risks and the implied stressprofit and loss across different hypothetical market-driven
scenarios. Findings from this analysis are then sharedwith the investment teams and management, and they
are also escalated to the Investment Management Risk
Committee (IMRC), which is the forum for representatives
across different functional groups to discuss key risk
issues and make recommendations to manage those risks.
Additionally, the IMRC discusses market trading volume
and liquidity with portfolio managers and traders to assess
potential trading disruptions, and performs screenings for
issuers that may be impacted by sanctions, working with
its partners across the Firm to mitigate these risks.

The MSIM GRA team conducts scenario analysis to monitor
the climate risk of portfolios across asset classes. These
scenarios are forward-looking and aim to measure thefinancial impact of hypothetical transition risks. The results
are monitored for changes over time and factored into
portfolio construction, composition and investment decisions
made by some investment teams (as appropriate) to ensurethat climate risks across client portfolios are appropriately
identified, tracked and managed. Additionally, our GRA teamconducts its own research regarding climate change andother topical ESG risks, and develops our own proprietaryscenarios. This work to create new scenarios ensures that thestress testing remains relevant and an effective tool for risk
management as market conditions change.
Topical ESG risks (including climate change) are also
reviewed in regular discussions across our MSIM’s Market
Risk team. Once identified, risks are measured throughseveral different kinds of analysis. For example, exposure
screening may be conducted at both the individual
portfolio and aggregated business line levels. New
scenario analysis may also be developed to measure thefinancial impact of hypothetical scenarios. Changes inrisk levels, scenario analysis results and exposures aremonitored at the portfolio and aggregate business line
levels, and the trend line over time is analysed by the teamand used to influence, where relevant, strategy, portfolio
and investment level decisions.
GRA identifies risks through its regular processes formonitoring climate metrics. The GRA team may thenengage directly with portfolio managers across certainof our investment teams on potential risks and escalates
them during risk committee meetings, which include
members of senior management. Periodic ESG risk updates
have also been provided to Morgan Stanley International
Limited (MSI) Board Risk Committee.
Recognising that climate change is an economic reality anda growing risk that businesses and investors are learning
to address, MSIM seeks to develop better analyses
on climate change to provide our clients and otherstakeholders with more information to enable better
investment decision-making and increase awareness of the
impact of climate change as a systemic risk.
The impacts of climate change range in nature, severity
and frequency, and therefore it is critical for financial
institutions to understand how such impacts may affecttheir business and clients. Firm Risk Management (FRM),
in partnership with other areas of the Firm, continues tofocus on identifying and managing risks related to climatechange to limit their potential impact to Morgan Stanley.
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PROMOTING WELL-FUNCTIONING MARKETSSPOTLIGHT #2

New Platform Supports Climate Change Mitigation
In November 2022, MSIM launched a growth-oriented private equity
platform to invest in companies seeking to mitigate climate change.
Through the collective investments it makes, the platform seeks to
avoid or remove one gigaton of CO2 equivalent emissions from the
Earth’s atmosphere from the date of investment through 2050. The
new platform focuses its investments on private companies that seek
to deliver attractive financial returns alongside measurable positiveenvironmental impacts across the mobility, power, sustainable food andagriculture, and circular economy sectors. The platform will also seek
to leverage Morgan Stanley’s sustainability resources to partner withportfolio companies. This may include monitoring ESG risks, reporting
Scopes 1-3 emissions, aligning companies with key trends, and pursuingearnings growth, multiple expansion and enhanced exit potential.

Defining Climate Risks

PHYSICAL RISKS

As informed by the Task Force on Climate-related Financial
Disclosures (TCFD) as well as various non-governmentalorganisations, regulators and financial institutions,
MSIM, in line with Morgan Stanley, categorizes the risks
associated with climate change into two groups: transition
risks and physical risks.
TRANSITION RISKS

Risks associated with the move to a low-carbon economy,
generally falling into one of three categories:
1. 	 Policy and legal changes, such as local, national orinternational regulation of carbon emissions
2. 	 Technology advancements, such as replacement of existingproducts with lower-emission options
3. 	 Market changes, such as changes in consumer and businesssentiment or impacts resulting from public perception ofan organisation’s action or inaction on climate change

The physical impacts of climate change include harm topeople and property arising from acute climate-related
events such as hurricanes, heatwaves, floods or wildfire,and chronic, longer-term shifts in climate patterns, suchas higher average temperatures, rising sea levels andlong-term drought. Such events could disrupt MSIM’s
operations or those of our clients or third parties on which
we rely, including through direct damage to physical assets
and indirect impacts from supply chain disruption andmarket volatility. Over the longer term, these events could
impact the ability of certain of our clients or customers to
repay their obligations, reduce the value of collateral, limit
insurance coverage and result in other effects.

ESG Three Lines of Defence Enhancement In 2023
In early 2023, MSIM undertook work to clarify the
responsibilities across functions involved in sustainability
investing activities and expand the role of Firmwide functions
within the second line. Within the first line, investment teams

FIGURE 4.2

Types of Transition and Physical Risks
TYPES OF TRANSITION RISKSTYPES OF PHYSICAL RISKSPOLICY AND LEGALTECHNOLOGYMARKET

CarbonTaxes……
Renewable
portfolio
standards……

Improvedenergyefficiency……
Greaterbattery
storage……

Increaseddisclosure

Lower-emission
products

Shifts inconsumer andbusiness sentiment……
Impactof public
perception
regardinginaction on
climate change

252023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

ACUTE

CHRONIC……

Highertemperatures……

FloodsSea-level rise……

……

Wildfires

Long-term
drought

Hurricanes

PROMOTING WELL-FUNCTIONING MARKETSSPOTLIGHT #3

Progress on Achieving Carbon Neutrality and Climate-Resilient Operations
In 2022, Morgan Stanley achieved its commitment to carbon
neutrality8 across its global operations. Its carbon neutrality status
covers direct scope emissions from its operations, scope 2 locationbased emissions from purchasing energy and scope 3 emissions frombusiness travel and downstream leased assets.
Morgan Stanley achieved its goals of carbon neutrality and 100%
renewable electricity through the following strategies:
Reducing its energy use through efficiencies in its real estate byemploying projects across our infrastructure.



remain primarily responsible for identifying sustainabilityrelated risks, including climate risks, supported by various
functions within the first line (e.g., MSIM Sustainability
Team and investment oversight). The GRA team also has
responsibility for ESG risk identification as well as for thereview and challenge over fund-level activities.
DEVELOPING GLOBAL REGULATION

Regulatory authorities are using the TCFD
recommendations to issue guidelines for relevant sectors.
Beginning 1 January 2022, UK FCA rules required TCFD
reporting for asset managers and asset owners with first







Securing a virtual power purchase agreement for a wind-based powersystem accounting for approximately 50% of Morgan Stanley’s annual
global electricity consumption.
Contracting directly for renewable electricity and buying renewableenergy certificates.
Purchasing carbon offsets to compensate for its remaining emissions.

For more details, please see Morgan Stanley 2022 ESG Reportpublic disclosures to be made by 30 June 2023. In line with
the Firm’s commitment to climate change, MSIM in June
2023 published its inaugural TCFD report. Details of thereport can be found in the MSIM 2022 Climate Report.

Effectiveness in Identifying and Responding toMarketwide/Systemic Risks, and Promotion of
Well-Functioning Financial Markets
We outline below a high-level summary of the key groups
and committees involved in addressing marketwide andsystemic risks on behalf of clients, the Firm and within
financial markets.

TABLE 4.1

Summary of Key Groups/Committees Addressing Marketwide and Systemic Risks#

ROLE & PROCESS FOR ESCALATIONTYPES OF MARKETWIDE/SYSTEMIC RISKSMSIM
FIRST LINE OF
DEFENCE

Investment Teams/
GRA/Portfolio
Surveillance

Investment teams are ultimately responsible for addressing andmitigating risks associated with their respective products andstrategies, working with the MSIM Sustainability team and other
MSIM/Firm stakeholders (including MSIM Legal Compliance Division(LCD), GRA, Portfolio Surveillance)
Periodic meetings with the Sustainability Team Leads, Investment
Team ESG Regulations Working Group, IM ESG Committee andInvestment Oversight Committees ensure ongoing communicationand escalation of potential/actual risks
Portfolio Surveillance oversees and ensures all ESG screening andmonitoring guidelines are agreed to between investment teams andclients on the outset of client onboarding, implemented, andmonitored throughout the mandate
GRA identify, monitor and manage risks at security, portfolio and
MSIM levels, working with investment teams and MSIM
Sustainability and Sustainability Oversight teams. Updates (including
escalation) to IMRC and other regional MSIM Risk Committees are
made on a periodic basisAll relevant marketwide and systemic risks tothe extent they are relevant to specificinvestment strategies and products, including
those which may have wider implications (pleasesee above)
Specific focus/priority on greenwashing,stewardship-washing, environmental (including
climate change), social (including human rights,
controversies) and governance etc., asappropriate and relevant to the strategies/
products they manage

The Firm’s carbon neutral status reflects the actions above. This is a management-determined metric that may be viewed or calculated differently byothers who may use the same “carbon neutral” terminology. Morgan Stanley has determined that the boundary around our carbon neutrality status is scope
1, scope 2 location-based emissions, scope 3 business travel and downstream leased assets, carbon offsets purchased from the voluntary carbon market,
green power contracts and market instruments (e.g., Renewable Energy Certificates (RECs), Energy Attribute Certificates (EACs)). There are instanceswhere green power contracts and instruments that we accept for our purposes to meet carbon neutrality do not align with the criteria required to reflect
those purchases in our scope 2 market-based figure in accordance with the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard(Revised Edition) (“GHG Protocol”). For our GHG emissions table aligned with the GHG protocol, please see pg 60 of the Morgan Stanley 2022 ESG Report.
8

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PROMOTING WELL-FUNCTIONING MARKETS#ROLE & PROCESS FOR ESCALATIONSUBJECT MATTEREXPERTISE



MSIM
Sustainability/
Stewardship Team(s)MSIM
Sustainability
Oversight



SECOND LINE OF
DEFENCEThe MSIM Sustainability and Stewardship teams provide subject
matter expertise, supporting the Investment Teams holistically andwork with MSIM/Firm stakeholders (including MSIM LCD, GRA,
Portfolio Surveillance etc.) to address product, regulatory, strategy,
stewardship and data-related areas (Principle 2).
The MSIM Sustainability team hosts and coordinates theSustainability Team Leads, Sustainability Regulatory & ProductWorking Group.
MSIM Sustainability Oversight ensures processes are in place tocapture and monitor product/investment commitments made. Please
see Principle 5 for further details.
Stakeholders above also periodically update Board-level members
given ESG is a standing agenda topic at quarterly meetings

TYPES OF MARKETWIDE/SYSTEMIC RISKS

All relevant marketwide and systemic risks
relevant to investment teams and theirrespective products including wider implicationsfor MSIM as a whole (please see above)
Specific focus/priority on greenwashing,stewardship-washing, environmental (including
climate change), social (including human rights,
controversies) and governance etc.



MSIM Compliance works with investment teams and the MSIM
Sustainability, Stewardship and Sustainability Oversight team toadvise on ESG-related regulatory and industry consultations; advise
on ESG related policies and procedures; and conduct periodic
reviews of the MSIM businesses’ compliance with laws, regulations
and policies, including with respect to ESG investing approaches,
disclosures and practices

Firm Risk
Committee(Global, Regional)Oversees Firm-level risk based on divisional businessactivities, provides guidance on management and mitigationof potential/actual risksAll relevant marketwide and systemicrisks relevant to the Firm as a whole(please see above)

Firm Operating
Risk Committee(Global, Regional)Oversees Firm-level operating risk based on divisional businessactivities, provides guidance on management and mitigation ofpotential/actual risks
Reports to various Firm BoardsAll relevant marketwide and systemicrisks relevant to the Firm as a whole(please see above)

Oversees, guides and ensures Firm-level regulatory compliance anddisclosures, working with functional stakeholders across divisions
Reports to various Firm BoardAll relevant marketwide and systemic risks
relevant to the Firm as a whole (pleasesee above)

GSO integrates sustainability considerations into the Firm’s
decision-making, across corporate policies, business activities
and operations
ESRM Oversees the Environmental and Social Policy Statement(ESPS) and related policies and procedures, conducts due diligenceon relevant transactions and provides internal subject matter
expertise on environmental and social risk



Sustainability-specific areas/priorities
concerning MSIM, including, but not limited to:environmental, climate change, biodiversity,
social, governance and regulation.

IAD is an independent and objective assurance function reporting
directly to the Firm’s Board Audit Committee
IAD assists the Firm in achieving its strategic and operational
objectives by identifying and assessing risks facing the Firm andproviding independent, objective and timely assurance tostakeholders about the effectiveness of the Firm’s risk management,internal controls and governance processesAll relevant marketwide and systemicrisks relevant to the Firm as a whole,including governance, and internal controls(please see above)

The role of Boards is to execute on their respective Board Charters,
which include but are not limited to: ensuring businesses comply
with their respective objectives and operate within appropriate
governance and control frameworks, discussing and providing
guidance on managing potential/actual risks upon escalation etc.
The main functions of Boards are to protect the Firm andbusiness unitsAll relevant marketwide and systemic risks
relevant to MSIM and the Firm as a whole(please see above)

MSIM Compliance

FIRM-LEVELRegulatory
Oversight

SUBJECT MATTEREXPERTISE
GlobalSustainability
Office (GSO)

Environmental& Social Risk
Management (ESRM)
THIRD LINE OF
DEFENCEInternal Audit (IAD)BOARD-LEVEL
Various Board
Committees(MSIM (including
Investment
Oversight)/FirmLevel, EntitySpecific, ProductSpecific, Global,
Regional, etc.)The above reflects the current MSIM governance structure and is a nonexhaustive list of stakeholders involved in identifying, managing and mitigating
marketwide and systemic risks. Further details can also be found in Principles 2, 3, 5, 7 – 12.

272023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

PROMOTING WELL-FUNCTIONING MARKETS

We consider that our risk management and engagement
approaches have been, and continue to be, effectivein identifying and responding to marketwide andsystemic risks, as well as promoting well-functioning
financial markets.

Investment Team Approaches
MSIM has set out below examples of the approaches
adopted by some of our investment teams in identifying
and responding to marketwide and systemic risks.
INTERNATIONAL EQUITYThe International Equity team specifically focuses on
factors (ESG or otherwise) that may materially influence
the sustainability of long-term returns on operating
capital. The IE team identifies financially material ESG
risks and opportunities using its proprietary screening
framework, the Material Risk Indicator (MRI), a tool
designed to capture ESG company assessments in aconsistent and comparable way over time.
As part of the MRI process the team has identified
six universal risks that must be assessed for portfolio
companies. These are considered universal as they may
be financially material, regardless of sector or geography,
albeit to varying degrees. For some companies, following
assessment, these may be determined not to be financiallymaterial. The universal risks are not static but may change
should the team determine other risks to be potentiallyfinancially material.
Climate ChangeGovernanceDiversity/Culture

Safety

Data security/Privacy

Tax

Climate Change
In 2022, the team’s carbon transition engagement
programme continued with the focus shifting to tackling
the remaining laggards, tracking progress of companies
that had increased their climate risk management andassessing new holdings for climate risk. Over the courseof the year the team engaged with 55% of the companies
it holds across its global portfolios, reflecting theconclusions from the first year and the progress made. The
programme continues in 2023.
COUNTERPOINT GLOBAL

Risk Defined as Potential for Permanent Loss of Capital
For the Counterpoint Global team, as an active
fundamental investor, the biggest risks are unexpected
macro shocks, or market rotation in and out of sectors,
when fundamentals are in the short term less relevant.
Risk Assessment & Management Approach
The Counterpoint Global team manages portfolios that are
well diversified as a way to control risk at the portfolio level.
The Counterpoint Global team considers both companyspecific and portfolio risk in construction and implementation
decisions. The team manages these potential risks throughthe rigorous analysis of business fundamentals and theevaluation of an investment’s risk/reward based on free
cash flow yield, optionality and end game. For example, this
could include assessment for potential loss in value of an

FIGURE 4.3

Proprietary ESG MRI Analysis

■

■

■

UNIVERSAL RISKS
Carbon, safety, diversity, data,
executive pay, tax

Proprietary scoring
framework
standardises ESG
assessment ofcompanies
Grades are
assigned acrosssectors, rather
than intra-sector
relative
Stock speciﬁcanalysis allows for
ESG engagement
and assessment
over time

INDUSTRY SPECIFIC RISKS
e.g. health caresafety, quality, regulation
ESG RATING
Grade A-E

MRI
ANALYSISCOMPANY SPECIFIC RISKS
e.g. payments company
antitrust, cyber security,
privacy/data regulations

POSSIBLE
ACTIONS
Avoid, adjust the
WACC, model,
position size

ESG OPPORTUNITIESMarket share gains for purpose led brands,
growth through energy efﬁcient materials, data
security solutions, carbon footprint management
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2023 UK STE WARDSHIP CODE REPORT28

PROMOTING WELL-FUNCTIONING MARKETS

investment due to increasing competition, mismanagement of
the business or financial insolvency.
The Counterpoint Global team maintains objectivity byreferring to the investment thesis, which clearly states
why the team owns a stock, and when circumstances
occur that violate the thesis, it sells, and does not modify
the thesis. The team manages portfolios that are welldiversified to help control risk at the portfolio level.
The team measures market and principal risk at theportfolio level by monitoring portfolio volatility attributed
to movements in the market and determining the impactof a realized loss on the total portfolio. The team manages
this risk through the diversification of investments.
GLOBAL OPPORTUNITY

For the Global Opportunity team, risk management is
an integral part of the team’s investment process. In an
absolute sense, the team seeks to own big ideas that win
over time. Their investment time horizon is five years.
The investment team attempts to avoid permanent loss,
which it defines as selling a position at a loss, by buying
high-quality businesses. The team considers the risks
inherent in each position by asking what could go wrong
and by evaluating company developments in the context
of the investment thesis. The investment team maintains
its objectivity by referring to the investment thesis,
which clearly states why they own a stock, and whencircumstances occur that violate the thesis, it sells, anddoes not modify the thesis. The Global Opportunity teammanages portfolios that are well diversified as a way tocontrol risk at the portfolio level.
The investment team believes that idiosyncratic risk can be
reduced by addressing what matters at the company level:Valuation risk is mitigated by not paying a price thatexceeds the team’s estimate of value;
Sustainability risk is mitigated by analysing the threat of
disruption, financial strength and ESG externalities;
Fundamentals risk is mitigated by analysing the threat ofdeteriorating competitive advantage and growth
opportunities.

Portfolio risks are mitigated by reducing correlated factor
exposures with the support of monthly reports from
Portfolio Attribution and Risk teams. Market and principal
risks are measured at the portfolio level by monitoring
portfolio volatility attributed to movements in the market
and determining the impact of a realised loss on the total
portfolio. The investment team manages this risk throughthe diversification of investments.
292023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

The Global Opportunity team is responsible for risk within
the Strategy, with ultimate responsibility lying with theHead of the Global Opportunity team.
In this task the team is supported by the MSIM’s GRA team,which uses quantitative and qualitative tools to analyse
investment risk by product area. The GRA team produces
in-depth reports for each investment programme on amonthly basis, concentrating on tracking error, R-squared,
Beta, Information Ratio, and absolute and relative exposures
versus the benchmark. The team uses a range of vendorbased and proprietary systems to conduct this analysis.
Reporting for each investment strategy is available to theportfolio managers and portfolio specialists as well as todivisional management and the Firmwide risk committee.
While risk analysis is provided monthly, however, it has thecapability to run intra-month analysis.
EMERGING MARKETS EQUITY

For the Emerging Markets Equity team, ESG materiality
is considered across the investment team, in investments
and engagements, which are an important part of theirresearch process.
Macroeconomic Risks
The EME team’s dedicated macro-thematic team conducts
original research on such issues as economic growth,credit penetration levels and currency valuations. At thecountry level, the EME team seeks to understand theenvironmental, macroeconomic, social and governancedrivers that may affect a country’s growth pathway, pose
policy risks or otherwise impact company earnings oraffect the investment case for an industry or company.
Environmental Risks
The EME team analyses the GHG emissions of theirportfolio companies and seeks to understand theimplications for corporate strategy, competitive
positioning, contingent risk and potentially incremental
market opportunities. The EME team engages withcompanies on their GHG disclosures (including Scope3), and if there is a strategy for decarbonisation, how
they plan to achieve it, and whether their targets arereasonable and achievable. The EME team encourages
companies to set more short- to mid-term quantifiabletargets to effectively measure and to evaluate theirprogress towards their long-term goals.
For products with specific carbon commitments, the teamis focused on a decarbonisation pathway at the aggregate
portfolio level. This includes creating a decarbonisation
tracker that allows them to track portfolio level andcompany Weighted Average Carbon Intensity (WACI)PROMOTING WELL-FUNCTIONING MARKETS

numbers, utilising both company reported and MSCI
greenhouse gas emissions data. The tracker also uses
company emission reduction targets to project portfolio
WACI over the next 10 years and includes a 10-year Parisaligned benchmark for comparison.
Social Risks
Accidents and injuries in the workplace are principal risks
that the EME team pays close attention to, particularly
in heavy industries within emerging markets. Not only
are accidents and injuries detrimental to victims and theirfamilies, but they also speak to the broader culture of acompany generally, and can have consequences including
loss of labour, reputational damage, tighter regulations
and fines, and loss of social license to operate.
For now, social factors remain difficult to materiallyquantify, and therefore remain an engagement topic for theteam. The EME team incorporates human rights throughtheir engagements on labour conditions, workplace healthand safety and potential social externalities.

The team has sought to respond to marketwide andsystemic risks as follows:

Governance Risks
A key criterion of the EME team’s philosophy in investingis strong governance, both at management and the board
levels. As long-term investors, it is imperative that they
understand management’s strategic goals and key targets.
As responsible managers, the team actively examinesand votes their proxies. Voting represents the direct
participation of shareholders in the overall governanceof a corporation and offers shareholders a voice on
important issues, such as director independence andexecutive compensation.
Assessing Effectiveness
The EME team assesses effectiveness by evaluatingcompany performance over time more broadly as well as
on specific risks identified for each investment. The teamlooks for transparency, changes in practices or outcomes,
and monitors third-party assessments of company
performance on these risks.



FIXED INCOME

The investment teams within the Fixed Income
organisation construct durable portfolios so that they are
not forced sellers at distressed prices during extremely
illiquid periods in the market brought on by systemicrisk events. Systemic risk is extremely difficult to hedge
and anticipate as it impacts the very structure of themarket. Therefore, the structure of a portfolio is a firstline of defence adopted by the teams—taking account offactors such as diversification, position sizing, minimisingcorrelation risk and liquidity is important.



Macro: Portfolio managers in the Fixed Income
organisation assess and monitor, through in-houseresearch and proprietary models, macroeconomic risks.
Stress Test & Scenario Analysis: Systemic risk events
are highlighted by the independent Risk Management
team via stress tests and scenario analysis conductedacross portfolios. In addition, the GRA team within MSIM
conducts climate scenario analysis at the portfolio level
and works in conjunction with climate risk subject-matter
experts in the Firm, to develop climate risk analysis
capabilities and in-house scenarios.
ESG Integration: The Fixed Income organisation
recognises that exposure to sustainability risks such as
climate change, product safety issues and corporate
governance mismanagement poses systemic risk to
portfolio management. For example, the Broad Markets
Fixed Income investment team decided to maintain anunderweight in the water utility sector of a European
jurisdiction, as a result of a multitude of operational
issues related to leakages, sewage spills, water andwastewater management inefficiencies. Such issues
drastically affect the ability of the sector to provide
water services to customers and ensure the stability of
the region’s water resources, and increased exposure to
regulatory risk. As a result of record fines and negative
news flow across multiple companies in the sector,
spreads on their bonds widened, and the team’s
underweight contributed to preserving portfolio returns.
At the same time, the team engaged with some of thecompanies to set out expectations on the improvementof those issues.
Enhanced Transparency and Disclosure: The team has
continued to leverage their access to smaller, privately
owned, high-yield companies to encourage the adoptionof market-best practices on fair customer treatment,
transparency and control systems around data privacy
and security, and sustainability-related disclosure. Issuesof transparency and disclosure can translate into productsafety, social governance and systemic risk in industries
such as private debt collection, given that this businessactivity is heavily regulated by financial and consumer
protection authorities.
Sovereign Engagement: Marketwide risks can begenerated at the country level. The Fixed Income
organisation therefore continues to actively engage withgovernments and policymakers of sovereign bond issuingcountries, across developed and emerging markets, to
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2023 UK STE WARDSHIP CODE REPORT

30

PROMOTING WELL-FUNCTIONING MARKETS

seek to promote robust institutions, political stability andprogress on sustainable development commitments.
As part of the team’s membership of the International
Capital Market Association (ICMA) and of the Greenand Social Bond Principles (GBP/SBP), and throughparticipation in several of their Working Groups, theFixed Income organisation continues to contribute to
the development and update of best practices in thesustainable finance market. The team’s proprietary
Sustainable Bond Evaluation Framework factors alignment
with the ICMA GBP/SBP as part of their assessmentof labelled transactions, and they aim to keep issuers
accountable to high standards, to minimise the risk ofgreenwashing and loss of market confidence in theseproducts. The Fixed Income organisation has also provided
inputs to the “Practical Recommendations for High Yield
Sustainability-Linked Bonds,” which have been jointly
published by ICMA and the European Leveraged Finance
Association (ELFA), of which MSIM is also a member, withthe aim of improving the transparency and overall qualityof these instruments.
GLOBAL BALANCED RISK CONTROLThe team aim to identify and analyse potential systemicrisks, that could impact market volatility and therefore its
clients’ portfolios. The team’s analysis of these risk events
may lead them to adjust the broad mix of global equities,
global fixed income and cash within the team’s asset
allocations, with the aim of maintaining each portfolio’s
realised volatility in line with its target. Examples ofprevious systemic and marketwide events through which
the team has previously guided its portfolios include theEurozone crisis, the Greek debt crisis, commodity priceextremes, plummeting Chinese equities in 2015, the UK’s
2016 Brexit referendum, multiple political and geopoliticalevents, US-China trade tensions, the COVID-19 pandemic,
and most recently, the Russian invasion of Ukraine, soaring
inflation and tightening monetary policy.  
In the early part of Q3 2022, the team saw the potential for
earnings downgrades as a marketwide risk, and potentiallythe next major headwind for equities, so the team’s asset
allocation was positioned defensively. Although valuations
improved, as the team moved through Q3 the team still saw
downside risk from rising real yields and mounting marginpressures from inflation. The team kept equity exposure at
relatively low levels, while also reducing portfolio duration,
given the increasing pressure on Central Banks to prevent
inflation expectations from de-anchoring. In the final
quarter of 2022, the team did not see any new specific risksarise, so they maintained their defensive positioning until
31

2023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

mid-December, when the slump in equities the team saw
in the first half of December provided an opportunity forthem to increase equity exposure, given a relative lack of
forward-looking macro event risks.
As the team entered 2023, they saw US inflation risks
moderating. US inflation continued to slow as they moved
through Q1 2023, whilst the job market continued to
exceed expectations. While the team did not view Q1’sbanking sector volatility as systemic and a reflection of
weakness in the broader banking sector, but rather the
result of mismanagement at certain banks, these events
provided the impetus to further tightening of financial
conditions. In mid-Q2 2023, a group of potential risks—
concerns over a global economic slowdown, weak Chinese
economic data and uncertainty over the US debt ceiling—outweighed optimism over signs of easing inflation. The
team aligned portfolios by removing the overweight inChinese equities, as they are not seeing an acceleration ineconomic momentum, nor earnings revisions, despite there-opening impetus.
The team sees climate change as a specific potential
systemic risk. Where permitted by in client or portfolio
guidelines, they tilt portfolios towards companies which
they believe are more resilient to climate change, whilst
tilting away from carbon-intensive industries. They alsoseek to increase investments in solution-type companies
which stand to benefit from opportunities arising from thetransition to a low-carbon economy. Finally, they actively
engage with companies in hard-to-abate sectors, to makesure they take into account the risks associated withclimate transition and set up ambitious decarbonisation
measures. In order to maximise the effectiveness of theseengagements, they may collaborate with other investment
teams within MSIM, or with other asset managers.  
PRIVATE CREDIT & EQUITY

PC&E as an asset class has always focused on
identification and consideration of material risks in any
category prior to making an investment and during theholding period, given the long-term nature of its strategies.
Systemic risks, such as climate change, may precipitate
an increased focus in a particular area (e.g., emissions)and become an important factor considered during theinvestment process.
With regard to company engagement as it relates tosystemic risks, the control strategies under the PC&E
teams have the ability to influence strategic direction andmajor company decisions through board positions andwhen appropriate, may use that influence to address oneof MSIM’s engagement priority areas (Principle 9).

PROMOTING WELL-FUNCTIONING MARKETSIn order to address climate risk, the PC&E teams are
exploring several different approaches to understand thecarbon footprint of its portfolio across the platform. For
example, the MSCP team, engaged an external vendor to
conduct emissions calculations for portfolio companies intheir most recent vintage funds. Furthermore, a different
vendor was engaged to refresh the ESG assessment
conducted for the same portfolio companies and to assist
in reviewing and refreshing ESG KPIs and metrics. For
the PC&E strategies where portfolio companies do not,or cannot, calculate emissions themselves or partnerwith a vendor to do so, a proxy approach based on
sectoral emission estimates of public market companies
is still leveraged to approximate carbon emissions acrossstrategies. This proxy approach is intended to help teams
identify potential areas of climate risk and opportunity
in advance of portfolio companies calculating theirown emissions and developing comprehensive climate
strategies. They are directional indicators and can serve
as a basis to encourage and support portfolio companies
towards a path of decarbonisation.
The Next Level Fund, the venture strategy looking
to generate long-term capital appreciation throughprivately negotiated investments in early-stage womenand minority-led technology and technology-enabledcompanies, is wrapping up fundraising and continuing
to deploy capital. In addition to a financial investment,
portfolio companies benefit from access to selectpartners, who together with Morgan Stanley provide
strategic assistance and operational value in order toimprove economic outcomes and accelerate businessresults. In their investments to date, 67% of founders arefemale, 50% are black, 42% are Asian and 8% are Latinx.

a unique position to play an important role in achieving
global sustainability targets. As public market investors,
understanding how companies can influence and achieve
net zero targets is important, as is assessing the financial
implications and, importantly, the capital expenditures
required to reach such targets.
To help address these systematic risks and opportunities,
the Global Listed Real Estate team, in collaboration with
Calvert Research and Management, has conducted anumber of thematic engagements with Portfolio companies,
specifically focused on encouraging issuers to commit to
net zero through setting science-based emissions reduction
targets and tracking progress of such goals.
GLOBAL LISTED INFRASTRUCTURE

The Global Listed Infrastructure team leverages thirdparty ESG research, including MSCI ESG data andSustainalytics ESG Reports. Each industry faces a varietyof ESG challenges and opportunities. As part of theteam’s fundamental analysis that seeks to understandthe material challenges facing each company, they
may reference these research tools to help identify
controversies or further assess the relevant ESG concernsthat could undermine the long-term sustainability of acompany’s returns. The team may then, if relevant, discussthem with a company’s management.
The team has a comprehensive approach to risk, with risk
management at team and firm level. At team level they
approach the following risks:

GLOBAL LISTED REAL ESTATEThe Global Listed Real Estate team believes climatechange, ESG factors and a real estate company’s approachto sustainability are important systematic risk factors
which will significantly influence a company’s potential
future risk and total return prospects.
Existing buildings face chronic and acute physical risks,
including intensifying hurricanes, floods and wildfires, aswell as economic, social and regulatory changes necessary
for decarbonisation. To limit the global temperature
increase to 1.5°C in this century as required by the Paris
Agreement, it has been estimated that real estate’s direct
carbon emissions will need to be cut in half by 2030,
compared to 2020 levels, and reach net zero by 2050.
Publicly traded real estate companies hold a significant
share of the building stock globally. As such, they are inValuation Risk (current trading levels relative to intrinsic
value; build downside risk into price targets);
Business Risk (industry structure, vulnerability to
disruption, earnings visibility, distinct business drivers),
Financial Risk (preference for low relative financial
leverage, in particular for Emerging Market
infrastructure).

The team receives a weekly Barra Risk Factor Analysis
report featuring equity models and scenario analysis on
sectors, countries, and specific systemic risks.

Stakeholder Collaboration to Promote
Continued Improvement of Functioning of
Financial Markets
MSIM maintains memberships and affiliations withorganisations that help validate our stakeholders’ rangeof perspectives, influence and encourage the adoptionof consistent and clear industry standards, and serve toreinforce our sustainability commitments and priorities.
We also dedicate time and effort to collaborating withOC TOBER 202 3|

2023 UK STE WARDSHIP CODE REPORT32

PROMOTING WELL-FUNCTIONING MARKETS

our peers on addressing systemic risks and advancing
the industry’s role in promoting sustainability as a
key investment theme. We do so through our active
participation in various industry bodies and forums, whichis also highlighted in detail with examples in Principle 10.
Through its various businesses and internal functions, MSIM
and Morgan Stanley participate in, belong to or take a leadingrole in many ESG-related initiatives and organisations.
We regularly bring together investors, policymakers,
NGOs and environmental thought leaders to share lessons
and promote innovative solutions to sustainabilityrelated challenges. This includes participating in industry
conference panels, exploring joint research and supporting
the work of groups focused on ESG-related issues. See
appendices for detailed list of our initiatives.
Notwithstanding industry collaboration to promote
well-functioning financial markets, MSIM also partners
with our colleagues in Morgan Stanley’s Global CapitalMarkets Team as part of the ICMA Green and Social Bond
Principles Working Groups, and the Firm is a member of
the Global Impact Investing Network (GIIN), the Ceres
Investor Network and the board of directors of thePartnership for Carbon Accounting Financials (PCAF).
We also actively collaborate with external industry peergroups to address the risk of “greenwashing” related tosustainability-focused products. In this regard, we haveactively participated in regulatory consultations relating to
the SFDR and MiFID II, among others, aimed at increasing
the transparency of how investment managers integratesustainability issues and risks into their investment
decision-making process. Our Head of Sustainability
Regulation and Policy is a member of the Irish Funds’ ESG
Policy and Legal workstream, representing MSIM in suchdiscussions to agree on best practices and also contributeour views and learning to promote greater disclosure ina manner that mitigates the risk of greenwashing, andto assist industry peers in responding to relevant policy
initiatives in a meaningful and impactful manner.
Some of the risks identified in this principle are partof our collaborative and key initiatives are provided in
Principle 10.

332023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

Principal Adverse Impacts on
Sustainability Factors
The business activities of the companies we invest in
may have some level of adverse impact on sustainability
factors such as environmental and social matters.
SFDR has defined a set of metrics for financial market
participants to measure and report on principal adverse
impacts, covering themes such as greenhouse gas
emissions, biodiversity, waste, employee and social
matters, and violations of international norms, amongst
other topics. These principal adverse impacts may betaken into account for products that fall within the scopeof this regulation.
MSIM’s investment teams follow their own investment
approaches and methodologies to determine if and how
to consider or prioritise principal adverse impacts, as
appropriate for each product, in line with its specificinvestment policy. We use reasonable efforts to obtain
the required data to monitor these potential impacts, andto understand any remediation efforts undertaken bycompanies. Portfolio managers maintain discretion overthe extent to which the outcomes of this due diligenceaffect ongoing engagement and asset stewardship.
Across products that do take principal adverse impacts
into account, MSIM’s Portfolio Surveillance and GRA
teams monitor and review portfolio holdings foradherence with the relevant commitments and restrictions
defined in each product’s investment policy.
Additionally, we strive to adhere to several normative
business conduct codes and standards. MSIM adopts theprinciples-based framework for responsible investing asa signatory to the Principles for Responsible Investment(PRI). We also adhere to the governance standards andimplement the UK Stewardship Code and other relevant
regional stewardship codes in our approach to investingand stewardship.
Finally, the collaboration of our private markets investing
businesses with ESRM to identify and address potential
environmental and social issues, as outlined in the ESPS,
also supports MSIM’s monitoring and mitigation ofpotential principal adverse impacts.

REVIEW AND ASSURANCE

Principle 5

Review and Assurance
Signatories review their policies,
assure their processes and assess
the effectiveness of their activities
Review, Oversight and Continuous
Improvement of Policies and Processes
Ensuring Effective Stewardship
Ongoing review, assessment and reflection of our policies,
processes and frameworks are crucial in ensuring theeffectiveness of our stewardship approach in response to
the evolving industry landscape and, most importantly,
ensuring that our stewardship activities continue to deliver
outcomes aligned with our core values of putting clients’interests first.
We follow a robust governance review and sign-off
process by relevant functional and senior stakeholders(based on the type of policy, process and framework).
Though internal processes guide the frequency of review
and updates of different types of policies, we take apragmatic approach and may conduct ad hoc reviews/
updates, if and when there are time-sensitive drivers suchas material incidents or regulatory amendments, theeffective dates of which may precede our regular review
and update cycles. Examples of these include:
MSIM PROXY VOTING POLICY AND PROCEDURESAs described in Principle 2, our MSIM Proxy Voting Policy
was updated earlier this year in line with our commitment
to conduct annual updates in Q1 of each year.
The MSIM Proxy Review Committee (PRC) has
responsibility for overseeing the implementation of the
MSIM Proxy Voting Policy and meets at least quarterly
and reviews and considers changes to the MSIM Proxy
Voting Policy at least annually. Regular review of the
MSIM Proxy Voting Policy by the MSIM Sustainability
team and the MSIM Global Stewardship Team has led
to ongoing incremental improvements and clarifications
to the existing policy—and during this reporting period
the teams actively engaged to seek the views of MSIM’s
public-side investment teams to ensure that proposed
amendments were aligned with their proxy voting
strategies and ultimately MSIM’s end-clients. These werethen incorporated and presented to the relevant boards
for approval. Key updates for 2023 focused on ESG issues
expected to be prominent during the proxy season:



Governance: Clarification that MSIM supports hybrid
shareholder meetings but would not support proposals
seeking to establish a “virtual-only” format, restricting
shareholder engagement.
Environmental: Clarification on support for the use of
Science Based Targets by companies to ensure emissions
are aligned with the Paris agreement.
Social: Clarify support for shareholder proposals that seek
disclosure of relevant diversity policies and meaningful
workforce diversity data, including EEO-1 data.

Looking ahead, the MSIM Sustainability team and the
MSIM Global Stewardship Team will continue to actively
incorporate MSIM’s investment teams’ views as they provide
crucial intelligence on guiding companies in which we invest
towards better ESG practices, which we believe produce
long-term, sustainable returns. Future updates will further
integrate MSIM’s governance and proxy voting with clients’investment goals, using votes to encourage portfolio
companies to enhance long-term shareholder value and toprovide a high standard of transparency such that equity
markets can value corporate assets appropriately.
SUSTAINABILITY OVERSIGHT AND GOVERNANCE

In recognition of the risks that ESG and other sustainability
factors can pose to MSIM’s business and clients, MSIM hasdeveloped a sustainability risk function within its non-financial
risk (NFR) department. The purpose of this function is tocontribute to the enhancement of the MSIM sustainability
programme by taking a leadership role in strengthening its
control and governance framework. Other responsibilities
include, but are not limited to, overseeing and challenging thefirst line of defence on sustainability matters and performing
independent risk assessment of the sustainability framework.
A summary of key processes includes:










Product Governance Process: sets out how productswith ESG features are considered and approved
Sustainability Consideration Checklist: MSIM similarly
adopted a multi-dimensional approach to review our ESG
Checklist, which aims to document product/investmentlevel objectives and methodologies (Principle 2)Marketing Review Process: sets out how ESG
statements and claims in marketing materials arereviewed, and by whom
SFDR Incident Oversight: reviews outstanding
investigations and passive breaches, and the consistent
application of the breach remediation policy
Protocol for Review of ESG-Related Public Statements
and Memberships: sets out pathway for review of
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REVIEW AND ASSURANCE

ESG-related Public Statements and requests to join
ESG-related initiatives
Collaborative Engagement Process: sets out risk
assessment process to be followed when an investment
team wishes to engage with a company to effect specificchanges or on thematic issues
Product Disclosures Process: sets out process to befollowed for SFDR pre-contractual and periodic disclosures

MSIM is also aware of the evolving global legal, regulatory
and industry landscape relating to ESG and will continue
to adapt its governance framework accordingly to meetthese obligations.
MSIM SUSTAINABLE INVESTING POLICY

The MSIM Sustainable Investing Policy was updated
in May this year to reflect, primarily, the enhanced
sustainability governance structure including the creationof the MSIM ESG Committee. The MSIM ESG Committee
now has responsibility for and oversight of the MSIM
Sustainable Investing Policy, which it reviews periodicallyand updates as appropriate.
Additional updates expected in Q4 of this year will include
updated EU Sustainable Finance Disclosure Regulation(SFDR) Level 2 language relating to entity-level Principal
Adverse Impact (PAI) considerations to align with our Irish
Management Company, MSIM Fund Management (Ireland)
Limited’s entity PAI statement, and the inclusion of ourMSIM-level sustainability approach and MSIM engagement
themes, given the addition of our fifth theme, Natural
Capital & Biodiversity. These updates are driven by ourperiodic internal reviews to reflect enhancements to MSIM’s
sustainability governance and to ensure consistency andtransparency in messaging across different channels.

Internal and External Assurance;Continuous Improvement of Stewardship
Policies and Processes
Assurance of MSIM’s sustainability and stewardshippolicies, processes, activities and reporting is importantin ensuring we continue to deliver on our client
commitments in line with internal and external regulatory
and industry requirements, and that our reporting andcommunications are an accurate reflection of this and are
fair, balanced and understandable.
INTERNAL

Internal Audit’s assurance approach provides anobjective assessment of the effectiveness of MSIM’s
policies, processes, activities and reporting, as IAD isfully independent of the business, with the Chief Audit
35

2023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

Officer reporting to the Chair of the Firm’s Board Audit
Committee and administratively to the Firm’s Chief
Executive Officer. Additionally, the EMEA Head of Internal
Audit reports to the Chair of the MSIM Audit Committee
and administratively to the EMEA Chief Executive Officer.
IAD has full accessibility to Morgan Stanley and possesses
a deep knowledge of the business and applicableregulations. ESG is also a focal area for IAD across theFirm, with multiple audits conducted across business
units between 2022 and 2023 focusing on climate risk,sustainable finance and ESG investing.
IAD’s mandate is to evaluate the design, implementationand operating effectiveness of the system of internal
control across the Firm using a variety of tools andtechniques at its disposal. Every activity (including
outsourced activities) and every entity of the Firm
(including subsidiaries, affiliates and branches) are subject
to IAD coverage. IAD identifies and assesses key risks
associated with the Firm’s products, services and activities(“auditable universe”) to inform its coverage for theassurance plan activities, and evaluates the adequacy andeffectiveness of the Firm’s system of internal control.
IAD will consider the key aspects of a business’s control
framework, including evaluating the key processes ofother control groups who work with the business, such as
Compliance, Operations, Technology and Finance.
IAD conforms with the Institute of Internal Auditors’ (IIA)
International Standards for the Professional Practice ofInternal Auditing, which is validated by an independent
third party every five years. To fulfil its purpose, IAD
maintains a professional staff with sufficient knowledge,
skills and experience to meet these requirements.
In Q4 of 2022, IAD completed an audit of the MSIM ESG
investing framework, including sustainability governance,
monitoring over sustainable investing, ESG integrationin portfolio management activities, sustainable investing
reporting and the use of exclusionary screens. IAD also
completed a separate audit in Q4 2022 focused on
the inclusion of sustainability factors in the productgovernance process and disclosures related to the EU
SFDR Level 1 requirements.
In Q1 2023, IAD completed an audit of MSIM’s proxyvoting processes, including governance and oversightof proxy voting, management of proxy vote processing,vendor monitoring and user access entitlements to key
proxy systems. In addition, IAD commenced an audit of EU
SFDR Level 2 and TCFD, including disclosure generation,
incorporation and documentation of the sustainable
investing considerations into the investment decision-

REVIEW AND ASSURANCE

making process and monitoring of these, and adherence toselected investment team ESG policies.
Internal Assurance of Stewardship
In Q4 of 2021, the MSIM Compliance team completed
an ESG Testing review to assess whether relevant ESG
disclosures complied with investment team practices,
documentation and applicable regulations, and in Q4
of 2022 IAD completed an ESG Investing audit on oursustainability and stewardship governance, reporting andselect portfolio management processes. Though Firm
policy does not allow external disclosure of results ofinternal reviews/audits, we continue to review, assess andenhance our overall approach holistically, as identified in
our previous 2022 report. Progress is provided throughout
this report in Principles 6, 7 and 10.
MSIM LTD BOARD

The MSIM Ltd Board is ultimately responsible foroverseeing the business of the entity, including oversightof its stewardship activities. As noted previously, the MSIM
Ltd. Board has approved the issuance of this report.
EXTERNAL

On proxy voting, an external auditor also performs anexternal SSAE-18 audit of the proxy voting process andprocedures as part of the Firm’s annual Sarbanes-Oxley
review. We have passed this audit in each of the last eight
years, indicating that our process continues to be robustand effective.
MSIM maintains voting records of individual agenda
items at company meetings in a searchable database on
its website on a rolling 12-month basis. As a result of
wanting to provide greater transparency to clients, wehave enhanced and improved this reporting to include
vote rationales for items voted against management andrationales for voting on shareholder resolutions.
OTHER REVIEWS TO ASSURE PROCESSES AND ASSESSEFFECTIVENESS OF STEWARDSHIP ACTIVITIESAs part of MSIM’s ongoing oversight of third-party
providers, MSIM performs periodic due diligence on
service providers used to support our stewardship andinvestment activities. Topics of the reviews include, but
are not limited to, conflicts of interest, methodologies fordeveloping their policies and vote recommendations, andtheir resources. Where necessary or appropriate, MSIM
also conducts on-site/virtual due diligence meetings andmeets with research staff, and compliance and information
technology teams to review policies and procedures.

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2023 UK STE WARDSHIP CODE REPORT36

SECTION 2

Investment
Approach

372023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

CLIENT AND BENEFICIARY NEEDS

Principle 6

Client andBeneficiary Needs
Signatories take account of client andbeneficiary needs and communicate
the activities and outcomes of theirstewardship and investment to them

FIGURE 6.1

MSIM Investment Capabilities and Assets Breakdown9

Assets By Investment Capabilities ($Bn)

Understanding and Meeting Our Clients’ Needs
MSIM has a diverse portfolio of clients with a broad
spectrum of needs. We believe that our independent
investment teams’ structures give us the agility andperspective to understand and meet the plurality of ourclients’ needs and investment objectives. Our diverse clientbase also benefits from the advantage of having global
teams of investment professionals in major hubs, including,but not limited to, New York, Boston, Washington D.C.,
London, Mumbai, Singapore, Hong Kong and Tokyo, whichseek to leverage their in-depth knowledge and expertiseto capitalise on investment opportunities in major markets
across the globe. The charts below provide a breakdown of
our AUM across our four investment platforms and regionsof investment, as well as a breakdown of our diverse clientbase. We seek to embed sustainable investing into ourinvestment strategies, where appropriate.

CustomSolutions
$523

AUM**

Public & Private
Alpha
$376

For the purposes of AUM consolidation, Eaton Vance AUM (including
its four investment brands – EV Management, Calvert Research andManagement, Parametric Portfolio Associates and Atlanta Capital) has
been included within our total MSIM AUM and asset class breakdowns.
**
Assets under management (AUM) includes all discretionary and nondiscretionary assets of Morgan Stanley Investment Management (MSIM)
and all advisory affiliates. MSIM Fund of Fund assets represent assets
under management and assets under supervision. MSIM direct private
investing assets represents the basis on which the firm earns management
fees, not the market value of the assets owned.
*

FIGURE 6.2

FIGURE 6.3

As of 30 June 2023

As of 30 June 2023

AUM by Region of Investment$1.4Tn*FixedIncome &Liquidity$513

MSIM AUM Breakdown by Client Geography● Europe, Australasia,
Far East● Global● Global Emerging
Markets● North America &LatAm● Asia ex-Japan● LatAm● Asia, Australia● Europe● Latin America,

4.7%
14.0%
1.8%
Caribbean, Atlantic Basin● North America
78.0%● Middle East
1.5%
● Africa
0.1%

3.91%
48.27%
1.30%
46.10%
0.40%
0.02%“Sustainable Investing” does not represent a separate investment team, but is a term used to refer to our other investment teams when acting witha sustainable investing focus.
9

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38

CLIENT AND BENEFICIARY NEEDSFIGURE 6.4

MSIM AUM Breakdown by Client Type and Product TypeAs of 30 June 2023
MSIM AUM Breakdown by Client TypeMSIM AUM Breakdown by Product Type● Institutional● Retail47%
53%● Separate Mandates● Pooled Funds

33%
67%

● Asia● EMEA● Latin America● North America

6%
15%
2%
77%

● Asia● EMEA● Latin America● North America

15%
21%
1%
63%

FIGURE 6.5

MSIM AUM Breakdown by Asset Class and Geography
As of 30 June 2023
High Conviction Equities

Fixed Income & Liquidity● Asia● EMEA● Latin America● North America

15%
18%
3%
64%

Customised Solutions

Alternative Investments● Asia● EMEA● Latin America● North America

392023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

3.0%
6.2%
0.3%
90.5%

CLIENT AND BENEFICIARY NEEDS

Investment Horizons
The investment horizon of MSIM’s clients varies dependingon their individual financial goals, objectives and liabilities.
MSIM works with clients to ensure that the investment
horizons of the strategies and solutions we are providingalign with their needs. While these may vary across our
independent investment groups and platforms, generally
most MSIM investment teams consider a three- to five-year
investment time horizon, with some teams being below or
above that range. For example, some of our concentrated
global equity portfolios have held certain companies
for decades while our money market, liquidity and asset
allocation funds consider much shorter time horizons.
The investment horizon may also vary depending on
the asset classes and investment strategy pursued—for
example, some of our private asset funds could have an
investor lock-in period of up to eight to ten years, whereas
our Liquidity funds tend to have an investment horizon of
one year or less—as well as market conditions, which, inturn, are impacted by factors such as investor confidence,geopolitical events (e.g., the Ukraine-Russia conflict) andmarketwide risks (e.g., inflation and the cost-of-living crisis).

Obtaining Clients’ Views
It is MSIM’s goal to help our clients address their
particular investment needs as well as regulatory andreporting requirements. Over the past 12 months, in
anticipation of regulatory deadlines and effective dates(e.g., TCFD) we have proactively reached out to end-clientsand intermediaries ahead of time to understand the scopeof additional and/or bespoke regulatory reporting we can
support, in line with our client-centric commitment. As aresult of this, we have implemented a number of internal
processes to collect specific types of data for clients and/or incorporated their needs in our data and technology
build-out, including further assessments on third-party
data providers on coverage, and how these may support
our clients’ needs (please see Principle 2 for more details).

Client Relationship Management at MSIM
Through our investment, distribution and client
relationship teams we are focused on fostering meaningful
relationships with our clients and in building one MSIM
following the successful integration of Eaton Vance. We
value developing unique and holistic partnerships withclients that are customised to a client’s specific investment
needs, interests and goals, which often include specificsustainable investing objectives.
Our various client interactions provide us with anopportunity to better understand how to meet theirinvestment needs. Our investment teams have publishedresearch and thought leadership in response to specificclient inquiries and areas of interest, and also joined
investor coalitions or industry organisations that areimportant to our clients. We strive to be responsive to
our clients’ needs to meet the plurality of their specificinvestment objectives and targets.

Incorporation of Client Views, Stewardship andInvestment Policies Into Asset Management
The incorporation of clients’ views, stewardship andinvestment policies are generally conducted by individual
investment teams corresponding to their specific clients,
as demonstrated by the examples that follow.
INTERNATIONAL EQUITYThe IE team regularly meets with clients to respond toindividual questions/requests, e.g., customise separate
account portfolios with additional client-specificexclusions. In addition, the team provides customised data
and reporting to their UK pension fund clients for theiruse in reporting in order to meet their own regulatory andclient reporting needs.
The IE team also communicates with clients as follows:Biannual Engage report, outlining the IE team’s
engagement activities and voting statistics as well as
ESG-related thought pieces
ESG fact cards for all global SICAV funds as well as for
the Global Sustain OEIC and the Global Sustain strategy
Engagement case studies and proxy voting data may beshared during the team’s quarterly update calls

GLOBAL OPPORTUNITY

The Global Opportunity team ensures that its client
mandates take into account clients’ stewardship policies
through consultation during the onboarding process
based on open dialogue and consensus on Investment
Management Agreement guidelines, agreed to by each client.
In 2020, through the incorporation of one large client’s
sustainable investment objectives, the Global Opportunity
team partnered with the client to launch Global Change, acustomised global equity strategy that has over $6.8 billion
in assets as of 30 June 2023. This demonstrates both thesuccess of incorporating a client’s sustainable investment
objectives and stewardship policies as well as collaboration/
partnership to achieve the client’s specific goals.
The Global Opportunity team regularly obtains client
feedback, which is integrated into the team’s annual
ESG Update that discusses ESG integration within theinvestment process. For example, clients have previously
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CLIENT AND BENEFICIARY NEEDS

requested company engagement case studies andinformation relating to the carbon footprint of portfolios,
which the team incorporated into its annual ESG Update.
The Global Opportunity team continues to innovate andevolve its process, and believes that integrating ESG
within its investment analysis improves the risk-and-reward
profile of client portfolios. To do this, client feedback isincorporated into the team’s future plans, including ESG
reporting and potential product launches.

example, they manage a climate-focused credit mandate
for a large European institutional client, where theirability to evidence the role of issuer engagement on
decarbonisation plays a key role.


EMERGING MARKETS EQUITYThe EME team seeks to add value to clients’ stewardshipand investment policies through engagements withcorporates on sustainability issues on clients’ behalf,
portfolio-level sustainability reporting, and detailed
reviews with clients on their stewardship practices.
The team also publishes a yearly report with detailed
ESG metrics and engagement examples. Customised
reporting on the team’s ESG progress is provided toclients throughout the year. In addition to this, the teamcustomises portfolios for clients who wish to implement
specific exclusions or additional ESG standards.
The EME team also engages with clients on sustainability
and ESG topics to understand their investment policies
and stewardship activities so that the team can partnerwith them and ensure alignment with client interests.
FIXED INCOME ORGANISATIONThe Fixed Income organisation welcomes collaboration
with and feedback from clients in delivering innovative
fixed income solutions to meet clients’ sustainability
requirements and to confront the challenges of ESG
integration in fixed income more generally.
Examples of the organisation’s constructive interactions
with clients over the past year include the following:




41

Implementing customised climate-focused mandates: The
team leverages access to a highly sophisticated institutional
investor base, particularly in Europe, to test and receive
feedback on their ESG frameworks, methodologies andreporting. For instance, they manage a number of climatefocused client mandates, in which the implementation of
specific portfolio decarbonisation pathways was the resultof their dialogue with them around the most appropriate
metrics and targets to use, in order to align with theirorganisational policies while taking into consideration
science-based climate frameworks.
Engagement aligned with clients’ objectives: Some ofthe organisation’s client mandates embed specificexpectations around active engagement with bondissuers to help attain the portfolio’s objectives. As an2023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

Developing new approaches to expand the scope ofsustainability within portfolios, e.g., to sovereigns andsecuritisations: The team has started to discuss withsome of our clients how to embed decarbonisation targets
for sovereign bond issuers in aggregate portfolios, a
growing area of focus within the fixed income market,
which presents some implementation challenges.
Expanding data access to respond to clients’ needs: The
team continues to assess the value of onboarding new
ESG datasets to best serve client needs. For example, they
have recently expanded their access to climate-relateddata, in line with client demands and in alignment with
their desire to most effectively deliver on their
responsibility to monitor exposures to climate-relatedrisks and to decarbonise portfolios, where applicable.
Evolving portfolio-level ESG reporting: The teamregularly looks for client feedback on portfolio-level ESG
disclosure and reporting to ensure it aligns with market
best practice, and it is highly informative to clients.

PRIVATE CREDIT AND EQUITY

The PC&E teams implement client-specific stewardshiprequirements (through side letters or negotiation of thefund documents) such as: (1) excuse rights or investment
restrictions (e.g., tobacco, alcohol, weapons); (2) clientspecific reporting; and (3) enhanced due diligence or
portfolio-monitoring procedures.
The PC&E business published its inaugural ESG Report in
2021, which detailed how ESG is integrated throughout
the investment life cycle across strategies (where
relevant), PC&E’s governance structure, ESG-related
partnerships around ESG and select case studies thathighlight the impact the PC&E teams have had throughits work with portfolio companies. The 2023 report iscurrently being updated.


Clients may request that the PC&E teams take further
action in the form of increased transparency andreporting (e.g., according to IFC principles, in alignment
with TCFD or specific reporting pertaining to modern
slavery). These requirements are discussed and agreed
upon through side letters with clients when the LP
commitment is made to the strategy.
Strategies across the PC&E teams may further provide
LPs with material ESG updates during quarterly investor
updates and/or annual meetings.

CLIENT AND BENEFICIARY NEEDSGLOBAL LISTED REAL ASSETSThe Global Listed Real Estate team actively works withseparately managed account clients to customise investment
strategies, guidelines and reporting requirements throughthe client onboarding process, and in response to ad-hoc
requests and client communication, while taking into accounta number of factors including client sustainability and proxyvoting needs and investment objectives. In addition, the teamprovides clients with the flexibility to vote proxies if that istheir preference or to have MSIM vote proxies on their behalf
according to the MSIM Proxy Voting Policy.
The Global Listed Real Estate team has also participated inconferences and webinars and published thought leadershipcontent to help communicate with clients on sustainability
topics, including the team’s stewardship and investment
activities and outcomes.
The Global Listed Real Estate team has converted its
European investment funds from SFDR Article 6 to
SFDR Article 8 during the period, in response to market
preference for investment vehicles with an increased
emphasis on ESG considerations.
PRIVATE REAL ESTATE

Morgan Stanley Real Estate Investing seeks to manage
the environmental footprint of assets in a way thatenhances financial value and reduces negative impacts
while maximising value to investors and the communities
in which the funds operate. Interest in transitioning
investment portfolios to net zero by 2050 is accelerating
among the investor community. Select MSREI funds haveset 2050 net-zero aspirations and interim Scope 1 and 2
carbon reduction targets.
PRIVATE INFRASTRUCTURE

The MSIP team also contributes to the Infrastructure
Module of MSIM’s UN PRI annual survey, which looks at
responsible investment implementation during fundraising,pre-investment processes and post-investment processes.

Communicating With Our Clients
About Our Stewardship Activities andContinuous Reviews
From a broader MSIM perspective, consistent with ourpledge to have a clear investment process, we also pride
ourselves on being available to our clients and providingthem with regular and timely information on our services
and stewardship activities. Collective stewardship andsustainable investing updates are consolidated andintegrated into regular communications with our clients.
These regular touchpoints include: annual or biannual client
meetings; our annual client conference; quarterly conference
calls (in the case of certain strategies); portfolio-levelsustainability reports; and monthly information packages.
Client relationship managers and investment teams arealso available to connect with clients outside thesescheduled touchpoints. Via their regular client interactions,
our investment teams have observed the increasingly
prominent role that stewardship plays in our clients’investing objectives and that has informed the magnitude
of our efforts in this space.
In 2023, MSIM hosted additional events, continuing tobuild on these important client relationships, by covering
topics that are most meaningful to our clients. Some ofthese were/will be conducted cross-divisionally with ourFirm colleagues, including, but not limited to:

The MSIP team publishes an annual ESG report for its
investors that highlights the team’s approach to theintegration of sustainability considerations throughout theinvestment life cycle and provides an annual update on
The MSIP team’s focus areas and key accomplishments.
In addition, the MSIP team is a founding participant of the
Global Real Estate Sustainability Benchmark (GRESB)
Infrastructure Assessment and has participated in its surveys
since inception in 2016. GRESB participants are scored andbenchmarked on their ESG policies, management practices
and performance. The GRESB Infrastructure Assessment
covers a range of asset types, including energy generation,energy transmission and distribution, transportation,
telecommunications, water and waste treatment, and social
infrastructure. The GRESB process seeks to provide clientswith an understanding of how portfolio companies areassessed against sustainability criteria.

Morgan Stanley Sustainable Investing Summit –featuring ESG capabilities and thought leaders across ourinvestment teams and businesses– Corporate executives and investors shared their

outlooks on the clean-energy transition, newsustainability technologies and evolving regulations.

Morgan Stanley Asia Pacific Summit – the Firm’s
flagship client event in Asia (since 2002) bringing clients
together with policymakers, industry experts, thought
leaders, corporate leaders and senior global investors
exchanging views and sharing insights on topics that will
shape the future.

– There were 800 C-level executives from more than
400 leading public and private companies from theregion in attendance and more than 2,000 top-tierglobal investors.

– Three days of one-on-one and small-group meetings

between corporates and investors, three days of track
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42

CLIENT AND BENEFICIARY NEEDS

presentations, fireside chats and panel discussions led
by policymakers; industry experts; thought leaders;senior corporate management; and Morgan Stanley
economists, strategists and sector analysts.

– The success of the Summit reflects the Firm’s ranking
as the No. 1 Asia Corporate Access Provider in
Institutional Investor 2022.

In addition to these dynamic client touchpoints, this MSIM
UK Stewardship report is the most comprehensive reporton our collective global sustainability/ESG, engagement,
proxy voting and stewardship activities across ourinvestment platforms. Our last UK Stewardship 2022
report was shared with clients after receiving the FRC’s
approval, and we received positive client feedback on our
progress, activities and outcomes. As mentioned above,
individual investment teams may also publish team- or
strategy-level engagement reports for clients, and provide
engagement information and case studies on request.
The regular touchpoints also serve as opportunities toaddress client queries, such as how geopolitical or market
events might effect portfolio holdings, portfolio managers’
outlook on certain asset classes, companies or industries
or details on portfolio performance. We typically seekclient feedback to ensure that we deliver the highest
level of client satisfaction through our sustainability/ESG
and stewardship approach, investment products, client
relationship management and client reporting solutions.

Effectiveness of Our Client
Communication Methods
MSIM has assessed the effectiveness of our chosen methods
to communicate with and understand the needs of ourclients using factors such as direct client feedback, thescale and spread of our AUM across different regions andinvestment platforms (for example, due to increased ESG
priorities and preferences across our investor and client base,
we are seeing increased demand not only for our Sustainable
Investing products but for bespoke reporting that will assist
our clients’ respective regulatory and stakeholder reporting/transparency requirements), and our ability to access ourclient and investor base (ranging from separate accountclients with dedicated MSIM relationship managers toinvestors in our funds who are able to communicate with us
through investor forums and conferences).
MSIM considers that our chosen communication channels
and approaches have been effective in taking into

432023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

account clients’ sustainability and stewardship needs.
We believe this is demonstrated firstly in the successful
implementation and scale of our bespoke investment
solutions, custom portfolios, multi-asset strategies andoutcome-oriented accounts for clients—which, as of 30
June 2023, consists of $703 billion in AUM, half of ouroverall AUM. It is also evident from the long-standing
relationships we have with many of our key clients, whohave been invested in our strategies for decades—acrossdifferent investment teams, either within a client capacity
or as co-investors alongside our investment teams. Ourlongest legacy MSIM mandates date back to the 1980s,
capital we have managed for approximately 40 years.
In 2023, MSIM continued to engage with our clients to
get their feedback on both how well we communicate
with them and how we reflect their views and priorities in
the management of their portfolios. An example of this is
our internal sustainability regulatory project workstream,
which has been created to:Implement client sustainability preferences as part ofclient suitability assessments, in response to the EU MiFIDII revisions, which became effective from August 2022; andReport on SFDR Level 2 product and entity disclosures,
which came into effect on 1 January 2023.

This workstream consists of stakeholders across functional
teams, including our MSIM Head of Sustainability
Regulation and Policy, MSIM Sustainability team, ProductDevelopment, Legal and Compliance, Sales Managementand ESG Data/Technology teams who work together toensure relevant MSIM product information and data is
tracked, monitored and measured so that clients can makebetter and more informed investment decisions when it
comes to selecting their sustainability preferences.
MSIM continues to monitor different regulatory reporting
requirements in different jurisdictions, where there ispotential for asymmetry of reporting and information
shared with clients in different jurisdictions, which we
believe can create challenges for our clients with global
mandates and footprints. For example, in the UK, theSustainable Disclosure Regulation (SDR) is expected in Q4
of 2023. In line with our core Firm value of Putting ClientsFirst, we are committed to understanding how we canensure consistency in our disclosures across jurisdictions
and support our clients with their reporting needs.

STEWARDSHIP, INVESTMENT AND ESG INTEGRATION

Principle 7

Stewardship,
Investment and
ESG Integration
Signatories systematically integrate
stewardship and investment,
including material environmental,social and governance issues,and climate change, to fulfil their
responsibilities
ESG Integration, Portfolio Management and
Stewardship
Although issues prioritised during stewardship andinvestment decision-making vary across different MSIM
investment teams, the teams are guided by MSIMwide Sustainable Investing Policy, and Engagement &Stewardship Principles. MSIM investment teams act as
responsible long-term investors and are responsive to
ESG factors that they believe can present both material
risks to and opportunities for the investment portfolios
they manage.
MSIM adopts a tailored approach to ESG integrationand stewardship, with public and private investment
teams ultimately responsible for exercising theirjudgement to identify and integrate materially relevantrisks and opportunities into their investment decisionmaking process, including due diligence and research,
valuation, asset selection, portfolio construction, andongoing engagement and investment monitoring. MSIM’s
investment teams assess materiality in the context of ESG
integration and stewardship through the considerationof various factors, such as investment philosophy, asset
class, the nature of the issuer, the size of the holding, theexposure to sustainability risk (including both physicaland transition risks) and the investment time horizon,
ultimately reflecting the Firm’s core values.
The following examples demonstrate the different types
of issues, ESG factors and stewardship methods prioritised
by investment teams across asset classes and geographies
throughout the investment process generally and during
the reporting period.

High-Conviction Equities
While engagement and Sustainable Investing approaches
differ across our individual High-Conviction Equity teams,
many of our investment teams or asset class platforms
have appointed at least one dedicated Sustainable
Investing/ESG specialist to coordinate and support thiswork for the relevant group. The following examples
demonstrate the diverse approaches taken by ourinvestment teams with respect to ESG integration in
investments and stewardship.
A) INTERNATIONAL EQUITY

When integrating ESG analysis into the investment
process, the team explicitly focuses on material ESG risks
and opportunities and their effect on the sustainability of
future returns on operating capital. The team believes thatseeking to understand how ESG factors may impact longterm returns has to be rooted in company-specific analysis.
The team uses its proprietary tools as part of this analysis.
MRI (See also Principle 4)
 The fundamental question each investor seeks to answer
is whether the factors in question may significantly
impair or enhance the company’s long-term returns on
operating capital employed, the team’s primary
quality metric.
For each company, the team attempts to identify– Industry-specific ESG factors/risks.
– Key universal ESG factors/risks (team agreed).
– Quantifiable ESG data is also analysed.
Pay X-ray
 Scoring tool to compare company pay plans.
Each element of pay plan receives a positive or negatives
score, rolled up into an overall company score.
The team may use this score to help inform theirdecisions when voting on remuneration.

Information gathered through ESG analysis and stewardshipcontributes to the team’s acquisition, monitoring and exiting
decisions. The team may analyse and quantify the financial
materiality of ESG considerations, for instance, in terms of
the percentage of sales and profits that may be affected bya particular factor (e.g., shifts in demand, impact of potential
new regulation on the business model), potential impact on
the growth rate and the cost base of the company, and thecompany’s strategy to mitigate such financially material risks
or take advantage of any opportunities. This is reviewed by
the investment team as part of discussions in their weekly
investment meetings when new companies are evaluatedand current holdings monitored.
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STEWARDSHIP, INVESTMENT AND ESG INTEGRATIONThe nature of ESG factors can make it challenging to quantify
their impact. As such, the team may employ a range of
methods to reflect the outcome of their ESG analysis:








Where feasible, they run scenario analyses, e.g.,
forecasting the impact of a financially material ESG factor
on the company’s growth rate, profits or capex and theresulting change in fair value—for instance, modelling theimpact on profits and valuation of consumer staples
companies switching to more sustainable packaging.
They may adjust the weighted average cost of capital(WACC) to reflect the higher or lower risk.
They may also reflect potential risks by adjusting theposition size, in addition to any model or WACC changes.
Finally, they may choose not to invest in a candidate
company if they believe financially material ESG risks asassessed by the MRI are too high.

A high MRI grade does not automatically suggest alarge position and a relatively low MRI grade does not
automatically trigger a reduction or divestment of a holding.
The ESG assessment is an important component of theresearch process, not the sole driver of investment decisions.
The following examples detail instances where the teamadjusted the financial model for companies held due
to stock-specific, sector-related and systemic ESG risks
identified by the team:For a consumer staples company, the team assumed a
sub-GDP terminal growth rate of 1% when valuing thecompany and used an 8.5% WACC (0.5% above
competitors and considerably higher than the industry)
due to the ESG risks for the company.
The team added 0.1 to the beta for two of the professional
services companies they hold due to the ESG risks of thesector, with an approximate 10% impact on fair value.
For a communication services company the team owns,
they chose to adjust the WACC due to regulation-related
ESG risks regarding data use and data protection. The teamalso chose to moderate the position size to reflect the risk.

B) COUNTERPOINT GLOBALThe Counterpoint Global team employs sustainability
research additively within their investment process,acknowledging that environmental and socially oriented
initiatives within companies can be drivers of value whenthose initiatives capitalise on:Moat Extension– Example: increasing the switching costs from smart
buildings’ efficiency data

45

2023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

Growth Opportunity– Example: a new market such as mobile-based financial
services for the under-banked populationEfficiency Opportunity– Example: a profitability enhancer such as energy
efficiency practices in cloud computing, and

Optionality– Example: making plant-based protein more
widely available

The Counterpoint Global team’s Sustainability Research
process focuses on identifying material opportunities andrisks presented by environmental, social and governancefactors for companies. As part of the team’s process,they focus on identifying companies with “sustainability
optionality,” which they define as the potential tobenefit from the growing demand from stakeholders forenvironmentally and socially responsible products andservices. The team views sustainability optionality as aform of intangible value, which is often overlooked bymarket participants and thus serves as a key differentiatorin how they assess the long-term prospects of companies.
Key aspects of the team’s evaluation include engagementwith company leadership, systematic evaluation of thealignment management’s long-term incentives, and anassessment of the cultural adaptability of organisations(with a particular focus on identifying companies that give
their sustainability leaders the agency and decision-making
authority to capitalise on opportunities). In terms of material
risks, the team seeks to discern the externalities created bycompanies that detract from the environment and society,and can ultimately result in substantial costs. The team
integrates these insights into their assessment of a company’scompetitive advantages and long-term prospects, which arecore to Counterpoint Global’s investment process.
Rather than using ESG factors as a screen to reducethe investment universe, the team uses sustainability
research not only as an additive process both to augment
their understanding of existing investments, but also to
identify new investment opportunities. They go a stepfurther than passive sustainability integration (i.e., screens)to actively partner with select portfolio companies tohelp them understand and realise the value of their“sustainability optionality.”C) GLOBAL OPPORTUNITY

The Global Opportunity team’s investment processintegrates analysis of sustainability with respect todisruptive change, financial strength and environmental
and social externalities and governance. The investment

STEWARDSHIP, INVESTMENT AND ESG INTEGRATIONFIGURE 7.1

Proprietary HELP & ACT Framework
WE CARE HOW COMPANIES HELP & ACT
H ealth: Improve humanity’s quality and duration of life
E nvironment: Protect the planet and its inhabitants
L iberty: Freedom, equality, privacy and security
P roductivity: Improve our knowledge of how the universe works to make our lives better within it&
A gency: Skin in the game and incentives to work on behalf of long-term shareholders
C ulture: Encourage a culture of innovation, adaptability and shared values
T rust: Reliability of financial statements and management
team views ESG as a component of quality and considers
the valuation, sustainability and fundamental risks
inherent in every portfolio position.
As bottom-up investors, the Global Opportunity teamdoes not outsource ESG analysis to third-party providersof sustainability ratings that produce scorecards ranking
companies versus industry peers. Based on the investment
team’s analysis, such ESG ratings are derived from dozens
of metrics and hundreds of ESG data points, thus suchapproaches may reward corporate issuers with high rates
of disclosure rather than businesses with sound operational
performance. In the investment team’s view, ESG ratings
approaches risk leading investors to inconsistent andmisleading conclusions. Therefore, the Global Opportunity
team deems disclosure rates to be of lesser importancethan potential material risks to company fundamentals.
The Global Opportunity team’s quality assessment identifies
the key ESG-related opportunities and risks for eachprospective investment based on materiality to the longterm fundamental drivers of the business. Using the team’s

proprietary framework, HELP & ACT (please see Figures
7.2 and 7.3 above), the Global Opportunity team analyses
potential impacts to humanity’s health, environment, liberty
and productivity, and governance measures to ensure
agency, culture and trust, framed by a set of questions
applied consistently across companies.
In company engagements, investment team members
typically discuss topics specific to each business. Examples
of general questions the team typically asks company
management teams include:What is your most material ESG opportunity?

What is your most material ESG risk?



How are management incentives aligned with shareholders?

The Global Opportunity team publishes an ESG Updatethat discusses ESG integration within the investment
process using the HELP & ACT proprietary framework,
company engagement, and the carbon footprint of theportfolios, and summarises participation in collaborative
initiatives and relevant MSIM policies.

FIGURE 7.2

Proprietary HELP & ACT Framework – SDGs
HELP & ACT is informed by the Sustainable
Development Goals (SDGs) adopted by
the United Nations in 2015, comprised of
17 goals and 169 targets to be achieved by2030 with the aim “to end poverty, protect
the planet, and ensure prosperity for all.”

Source: United Nations The content of this publication has not been approved by the United Nations and does not reflect the views of theUnited Nations or its officials or Member States. For more details on the Sustainable Development Goals, please see https://sdgs.un.org.
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46

STEWARDSHIP, INVESTMENT AND ESG INTEGRATION

D) EMERGING MARKETS EQUITYThe EME team manages both funds that integrate ESG
as well as Sustainable funds with measurable positiveenvironmental and/or social objectives. The EME team’s
Sustainable funds invest in companies that meet the
product’s sustainable commitments, and the team may
additionally choose to implement exclusions based on
activities and norms.
The EME team’s ESG and sustainability research informs
its engagement strategy, which seeks to understand thesustainability strategy and/or financially material issues foreach company. More specifically, factors the team examines
can include, but are not limited to, carbon emissions,environmental footprint (e.g., water usage, recycling
practices, waste to landfill), worker safety, employee
retention and turnover, supply chain management, andboard independence and composition. To identify andassess these ESG issues, the EME team refers to thirdparty sources (such as MSCI, Bloomberg and ISS), company
financial reports and disclosures, as well as the team’s own
internal research, which can include dedicated company
specific engagements with management on ESG.
For the EME team’s Sustainable funds, the team has
identified several sustainable themes around which it
seeks to align the portfolio after the initial negative
screening process.
The EME team seeks companies that contribute positively
to several sustainable themes, including but not limited toresponsible energy, access and affordability, decent work
and innovation, and sustainable production and circular
economy. To identify names in this category, the team looks
for businesses that are aligned by revenue exposure and/or business operations to identified sustainability themes.
The team uses both third-party data (such as MSCI and
Bloomberg) as well as company disclosures to measurealignment with these themes.
As active investors, the EME team integrates material ESG
data and analysis into investment decision-making. The
degree of this integration varies between products. The
baseline for each product is anything that is financiallymaterial, which can include sustainability factors.
For sustainable products, the team includes carbon
commitments and thematic alignment.
The team is moving from baseline engagements, or
engagements on a wide array of issues, to more targeted
ones. The team continued its work in conducting thematic
engagements with portfolio companies on financiallymaterial issues, such as decarbonisation. Over the course of
the year, the team directly engaged with companies fromhigh-emitting sectors to analyse the viability of existingtransition pathways. Through their engagements, the EME
team is able to identify key drivers of these companies’
emissions and potential opportunities for improvement andchange. This furthers the team’s efforts to improve ESG
integration within the investment process.

FIGURE 7.3

EME ESG ApproachContinuous Engagement and Active Ownership

POTENTIALINVESTMENT IDEA

47

IDENTIFICATION AND
ASSESSMENT OF
MATERIAL RISKS

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FUNDAMENTAL
ANALYSIS

FINAL INVESTMENTDECISIONSTEWARDSHIP, INVESTMENT AND ESG INTEGRATIONESG Data

3. 	 Measurement and ongoing monitoring of key ESG

In terms of limitations to the team’s process, data still
remains difficult to assess or quantify, specificallyclimate change scenario analysis or social metrics such as
gender pay gap. The EME team engages with third-party
vendors and portfolio companies on these data gaps toincrease transparency.
FIXED INCOME AND LIQUIDITY

The Fixed Income organisation supplements traditional
credit analysis by conducting ESG research in-houseand integrating the analysis of material ESG risks andopportunities in the investment decision-making process.
The teams’ approach to embedding ESG considerations
into the investment process relies on three key steps:
1. 	 ESG integration through proprietary ESG research andscoring methodologies across corporate, sovereign andsecuritised debt, and through in-depth evaluations oflabelled Green/Sustainable bonds;
2. 	 Active engagement with bond issuers to seek todrive positive change in the management of ESG
risks and opportunities, discussed in more detail in
Principle 9; andmetrics at the portfolio level.
1. ESG INTEGRATION THROUGH PROPRIETARY ESG RESEARCH ANDSCORING METHODOLOGIES:As described in Principle 1, the Fixed Income organisation
partners with Calvert to conduct ESG research in-house,
and to develop models that reflect the characteristics ofdifferent asset classes within fixed income.
Across the team’s proprietary ESG research and scoring
methodologies, the focus and prioritisation is on:
I.

Reflecting the relative materiality of E, S and G
factors for an investment;

II.

Rewarding positive sustainability momentum; andIII. Penalising exposure to severe ESG-related
controversies that can adversely impact bond priceor liquidity.
These assessments and scores inform the portfolio
construction process and investment decision-making
across the Fixed Income platform, across a range of asset
classes (where prioritisation of ESG issues may differ).

FIGURE 7.4
FIXED INCOME ASSET CLASSPROPRIETARY METHODOLOGY

Corporate Bonds

Over 700 underlying vendor datapoints feed into custom environmental and social thematic indicators in
Calvert’s ESG research models. The team’s ESG analysts seek to uncover financially material ESG issues to which
a sector is exposed, and then determine how well each company is managing these risk exposures. This analysis
results in a proprietary ESG score and assessment that is relevant in the context of a specific sector peer group.
The overall ESG score is composed of a structural score, representing a long-term measure of the company’s
approach to ESG risks in its operations, products and services, and of a circumstantial factor, reflecting the
ESG analyst’s shorter-term evaluation of the company’s involvement in and response to controversial or
adverse events.

Sovereign Bonds

The team conducts statistical analyses on sustainability data from the official sector, focusing on factorsthat underpin economic progress and resilience of sovereign nations, and which it considers most material
to the performance of their debt, to develop the team’s own proprietary ESG scores. Additionally, the teammake adjustments to the underlying E, S and G scores based on GDP per capita, to help remove bias against
emerging markets, and incorporate a momentum factor that combines the analysts’ qualitative view of recent
developments within a country with a quantitative assessment of track record.
The team is able to use its scoring methodology to help construct a sovereign portfolio that is tilted towards
what it considers to be the stronger-performing countries from a sustainability standpoint.

Securitised Investments

The team assesses and scores a security’s negative, neutral or positive contribution towards sustainability factors(which differ based on type of securitisation). Contributions are then mapped towards specific UN Sustainable
Development Goals (SDGs). The team uses this approach to screen its portfolios.

Green/Sustainable Bond
Evaluations

The team’s proprietary Sustainable Bond Evaluation Framework seeks to assess each bond and score it basedon multiple criteria, including the fit within the issuer’s broader strategy, the relevance and additionality of theselected projects or sustainability indicators in the context of the issuer’s core business, the alignment of thebond structure with best practice in the markets, such as the International Capital Market Association’s (ICMA)
Green and Social Bond Principles, external verifications and the quality of reporting. This process includes anevaluation of the extent to which the transaction contributes to specific sustainability objectives aligned with the
UN Sustainable Development Goals (SDGs).

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STEWARDSHIP, INVESTMENT AND ESG INTEGRATION

2. ACTIVE ENGAGEMENT WITH BOND ISSUERS

The team considers meeting management as an integral
part of its investment process, including within its
evaluation of the ESG credentials of issuers. Touchpoints
with management on ESG-related topics occur acrossmultiple levels:I.

Trading desk: Fixed Income traders maintainrelationships with the banks that underwriteand distribute new bond issues, including green
and sustainable bonds. Once a new bond issue isannounced, the trading desk is alerted and oneof the sector credit analysts is assigned to cover
the issue.

II.

Credit Analysts: The credit analyst will typicallyreview roadshow materials and attend a roadshow
to meet with the issuer’s management team orother representatives. The roadshows offer the
analysts the opportunity to ask questions related
not only to the credit but also to the specific newissue, and to clarify any uncertainties within the
structure of the bond.

III. ESG analysts: ESG analysts generally pair credit
analysts in attending roadshows focused on Greenand other labelled Sustainable Bond transactions.
These meetings provide an opportunity for ESG
analysts to supplement data-driven ESG scoringmodels with a more qualitative assessment of
an issuer’s efforts and progress on sustainability
issues. ESG analysts also provide feedback toissuers and structuring advisers in relation totransaction-specific issues as well as more broadly
on Green Bond structuring practices, to promote
their alignment with market standards for project/indicators selection and impact reporting.
In addition to regular meetings with issuers’ management
and treasuries as part of credit updates and new issuance,
the Fixed Income organisation also runs a targeted
engagement programme that aims to engage withcompanies with lagging practices on specific E, S or G
issues, in order to set clear expectations around how suchconcerns can be addressed.
The programme is based on the Fixed Income Engagement
Strategy, first published in 2020 and last updated in 2023,
and is structured around a thematic framework in linewith MSIM’s thematic priorities for sustainable investing.
Further details on MSIM’s thematic priorities and the Fixed
Income organisation’s engagement approach are outlinedin Principle 9.
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3. MEASUREMENT AND ONGOING MONITORING OF KEY ESGMETRICS AT THE PORTFOLIO LEVEL

Monitoring of Portfolio ESG Alignment and ESG Data Use
The Fixed Income organisation aims to measure and monitor
any real-world effects stemming from its investments. The
Fixed Income ESG Strategy and Research team supports
the investment team in the monitoring of portfolios and thedevelopment of measurement frameworks and reporting
tools, collaborating with ESG data and technology experts
across MSIM and Calvert. As part of this process, the teamseeks to align with existing market frameworks, such as
the TCFD for climate-related financial disclosures, and the
UN SDGs for impact measurement, in addition to evolving
regulatory sustainability disclosure requirements.
The main challenge in Fixed Income ESG integration is data
gaps, which particularly affect the High Yield and Emerging
Markets investment teams. The Fixed Income organisation
is taking steps to address this constraint: first by fillingsome of those data gaps through in-house, bottom-up ESG
research on those issuers; secondly, by proactively engaging
with some of the companies whose ESG disclosures anddata are significantly lacking, to help gather qualitative
insights from meetings.
Focus on Governance and Disclosure
The Fixed Income organisation views governance as thepillar upon which strong credibility is built across anyother environmental and social topic. The team therefore
conducts due diligence on corporate governance,transparency and accountability, and disclosure matters
across its assessments and dialogues with issuers,
focusing on, among other things, how they link executive
compensation to specific sustainability KPIs and targets.
In particular, the Liquidity members of the Fixed Income
organisation pay close attention to governance risks
identified in proprietary ESG research and engagement.
Governance risk plays an important role for liquidity, inan explicit acknowledgement of the factor’s relevance tothe types of credit requirement for investment by money
market funds. With almost one-fifth of Fixed Income andLiquidity engagements in the reporting period being withFinancials, the Liquidity team is able to use the outcomes ofsuch dialogues to inform investment, avoid headline risk andachieve objectives of capital preservation and liquidity.
Regional Differences in Measurement
The Fixed Income organisation accounts for regional
differences in its approach by considering the stage ofdevelopment of the issuer’s country, to ensure that its
assessment of their sustainability strategy and targets is
contextualised and comparable to peers.

STEWARDSHIP, INVESTMENT AND ESG INTEGRATION

For example, in some emerging markets, a longer glidepath
might be necessary to achieve desired sustainability
outcomes and minimise negative externalities, orthere may be a need for engaging in issues related tocapital markets policies and processes to facilitate theirfunctioning. This can manifest in the form of a longer
phase-out period for fossil fuels in order to continue
providing affordable energy to the broader population,
more time to improve diversity of a company’s boardof directors or management team, reflecting the needfor a broader change in culture, or trade-offs between
job creation and land use, among others. On the other
hand, a global company operating in both developedand emerging markets must be considered in a different
regional context. For example, a power company operatingin various emerging markets must be mindful of cultural
heterogeneity in its construction of a just decarbonisationand fossil fuel phase-out strategy.
EXAMPLE 1: EMERGING MARKETS CORPORATE

By way of example, the team engaged with an emerging
markets meat-processing company that was rated as alaggard by third-party ESG data providers. Engaging incollaboration with MSIM’s Global Balanced Risk Control
team, the team structured the discussion around material
issues in the sector, such as support of local indigenous
communities, the reinforcement of ethics and complianceoversight, and environmental governance linked todeforestation. The team asked the company to improve
its reporting practices, and following the meeting, thecompany improved its CDP Climate Change score toposition itself as a leader within the industry.
EXAMPLE 2: EMERGING MARKETS SOVEREIGNIn the context of Emerging Markets Sovereign Debt, theteam has been conducting engagements with selected
governments with a focus on improving rule of law,transparency, regulatory efficiency, market functioning andopenness, as well as on countries’ climate transition andsocial development agendas, especially when backed bysustainable financing plans. For example, in Q4 2022 theteam engaged with the Ministry of Finance of a Central Asian
country on the back of legacy social controversies. The teamraised questions about the government’s policies to ensure
food security and social stability in the context of wheat priceliberalisation, to which the sovereign emphasised a recurring
support mechanism for the socio-economically vulnerable.
Following the demonstrated progress on the social andgovernance sides, the team plans to follow up on energy
sector reforms—which slowed down due to the pandemic—
and continue to monitor developments on the social front.

In addition to the points highlighted above, each investment
teams in the Fixed Income organisation also have theirown team-specific issues/priorities when conducting due
diligence and, at times, geographic allocations are not always
at the forefront of security selection based on the specificfund strategy.
Fund-Level Differences
The Fixed Income organisation incorporates ESG criteria
across a flexible range of sustainable investing solutions:

Positive and negative screeningPrinciples-based investment



Low-carbon and climate-aligned solutions

Green bonds

The Fixed Income organisation, in collaboration with
Calvert, has developed a comprehensive Sustainable Bond
Evaluation Framework for green bonds. The ESG analysts
on the Calvert Fixed Income ESG Research and Strategy
team look through the labelling and critically assesssustainable bonds that come to market, to ensure theevaluation of their sustainability characteristics is integrated
into the investment process, for the benefit of clients.
The framework seeks to drive a structured, systematic
assessment of investments in Green and other Sustainable
Bonds, both at issuance and throughout the life of the bond.
Applying a robust research process also provides aneffective platform for the Fixed Income organisation
to push for improvements in the structure of these
instruments as well as surrounding disclosure. The teambelieves it has a duty to encourage issuers and underwriters
to implement best practices to achieve meaningful positive
sustainability outcomes through the issuance of robust
sustainable bonds and engage with issuers and participate inindustry initiatives to achieve this.
The evaluations enhance the information available toportfolio managers and credit research analysts, furthering
their understanding of how effectively issuers are managing
material ESG issues and leveraging tailwinds, and it is an
integral component of the investment decision process
for these instruments. Certain Fixed Income Green Bondstrategies only invest in labelled sustainable bonds thathave been assessed positively through this framework.
At the same time, the Fixed Income organisation relies on
its experience in the market to uphold standards for the
additionality of selected projects or targets to be financed.
In particular, the Green Bond market offers a unique

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STEWARDSHIP, INVESTMENT AND ESG INTEGRATIONFIGURE 7.5

Sustainable Bond Evaluation Model: Key Elements

Sustainable
Bond
Assessment
Identify
Robustness &MaximizeConﬁdence

AnnualUpdate andReview

In-depth
Qualitative
Analysis

ImpactReportingAssess andReafﬁrm Impact

ActiveEngagement

Issuer Level
Assessment

opportunity for fixed income investors to engage withissuers, at a time when issuers and their management are
particularly sensitive to investor feedback on sustainability.

Morgan Stanley Real Assets

Over the past year, Calvert has continued to add additional
resources to support the Sustainable Bond Evaluation
process. This is aimed at ensuring global research coverageof the growing labelled sustainable debt market, enabling
the team to evaluate these transactions consistently andin a timely manner across the time zones where they areissued, for the benefit of investment teams and investors in
our Fixed Income strategies.

The Global Listed Real Estate team’s identification
and assessment of risks and opportunities related tosustainability—specifically the E, S and G pillars—are acore element of the team’s research process. The team’s
ESG focus is comparable to its focus on other factors suchas building quality, tenancy, occupancy, strategic businessplans and so on.

Alternative Investments
The Alternative Investments business consists ofMorgan Stanley Real Assets and Private Credit andEquity strategies.

GLOBAL LISTED REAL ASSETS

Global Listed Real Estate

The team undertakes a mosaic approach to sustainability
research, using both quantitative and qualitative data frommultiple sources. The team’s internal research complements
and enhances data from company sustainability reports
and third-party providers as they focus their sustainability
research on the areas shown below.

FIGURE 7.6

Global Listed Real Estate Sustainability Research Areas

ENVIRONMENTAL








51

SOCIAL

Energy Usage and Renewables
Water Usage
Emissions (GHG)
Waste Reduction and Diversion
Supply Chain and Diversion
Tenant Engagement
Climate Resilience
2023 UK STE WARDSHIP CODE REPORT

Health and Wellness
SafetyDiversity and Gender Equality

GOVERNANCE








|

OC TOBER 202 3

Governance Structure around
Sustainability
Board Diversity
Compensation programmes
Government and Regulatory Risk
Business Ethics
Sustainability-Linked Financing

STEWARDSHIP, INVESTMENT AND ESG INTEGRATION

The team’s proprietary research process ranks therelative strengths and weaknesses of each company
in the investment universe on ESG factors. The teamthen adjusts its valuations of the companies to accountfor these ESG risks and opportunities, and the impact
they may have on a company’s net asset value and cash
flow forecasts in both the near and intermediate terms.
Ultimately, the team seeks to identify real estate securities
with the best total expected returns for clients, inclusiveof adjustments for ESG risks and opportunities.
The Global Listed Real Estate team actively integrates
sustainability into the investment process by assessing
key ESG risks and opportunities in the bottom-up stock
selection process primarily by leveraging third-party
ESG providers, supplementing third-party research with
proprietary research conducted by the team for assessing
and quantifying risks and opportunities related to ESG, andthrough engagements with company management to discuss
ESG-related strengths, weaknesses and opportunities. The
team may approach company management with competitive
insights, financially sound business cases and practicalsolutions to potentially improve their real estate operations.
While ESG considerations are an integrated andfundamental part of the investment process, they are oneof several key determinants used by the investment team
to determine if an investment will be made or the size inthe overall portfolio.
Global Listed Infrastructure
The Global Listed Infrastructure team focuses on a varietyof ESG areas when assessing investments, with priorities
varying by sector given the difference in business drivers/
areas of potential ESG improvement. Examples of primaryand secondary focus areas by infrastructure super-sector
that may be considered are summarised below:


Utility– Primary – exposure to clean energy operational

business lines, progress on decarbonising existing
operational footprint (Environmental).

– Secondary – community relations as it relates tominority/female representation within the workforce,
management and the board; increasing direct link
between ESG performance and C-suite pay (Socialand Governance).
Energy Infrastructure– Primary – progress on decarbonising existing

operational footprint, progress on identifying truly
value-enhancing energy transition project areas, rather
than just “greenwashing” opportunities (Environmental).

– Secondary – community relations as it relates to

new asset project builds; progress on strengthening
minority/female representation within the workforce,
management and the board; increasing direct link
between ESG performance and C-suite pay (Socialand Governance).

Communications– Primary – progress in improving ESG metrics

throughout the company’s supply chain, given low
direct (Scope 1) emissions footprint; particular focus
also on power sourcing (Environmental).

– Secondary – progress on strengthening minority/

female representation within the workforce,
management and the board; increasing direct link
between ESG performance and C-suite pay (Socialand Governance).

Transportation– Primary – progress in improving ESG metrics

throughout the company’s supply chain, given
significant reliance on third-party contractors for
asset upkeep and new build; steps taken to help end
customer passengers/freight distributors adapt andutilise lower-carbon alternatives (e.g., a toll road
operator’s initiative to incentivise use of EVs).

– Secondary – progress on strengthening minority/

female representation within the workforce,
management and the board; increasing direct link
between ESG performance and C-suite pay (Socialand Governance).

new asset project builds; progress on strengthening

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STEWARDSHIP, INVESTMENT AND ESG INTEGRATION

Private Global Real Assets
The Head of Sustainability for Global Real Assets
supports the Private Real Estate, Infrastructure and Real
Estate Credit investment teams to develop and executesustainability strategies across the US, Europe and Asia.
The Private Global Real Assets group considers the below
four focus areas when managing ESG across different
asset classes including ESG integration, driving operatingand environmental performance across assets, improving
ESG engagement and disclosure, and advancing ESG
thought leadership.10
PRIVATE REAL ESTATE

Morgan Stanley Real Estate Investing seeks to integratematerial ESG elements throughout the investment process,where appropriate, as part of its approach to responsible
investment and risk management. MSREI’s Environmental
Management System (EMS) is an internal documentthat provides best practice, guidance and resources forinvestment teams to facilitate implementation of funds’ ESG
elements throughout the entire investment lifecycle, tothe extent financially and operationally feasible. The EMS,aligned with the ISO 14001 standard, helps investment
teams identify and monitor ESG risks and opportunities
throughout the investment process from due diligence toasset management. The EMS also includes best practices
for new construction and major renovation projects.
PRIVATE INFRASTRUCTURE

The MSIP team identifies and assesses various material ESG
factors, including environmental and climate change risk,
during due diligence and works with portfolio companies on
platformwide initiatives during acquisition and post-close
implementation. To ensure effective implementation of theMSIP team’s programme, the MSIP Head of Sustainability
and investment teams monitor portfolio company ESG

integration and data such as greenhouse gas emissions andhealth and safety metrics. Where applicable and relevant
the MSIP team also supports portfolio companies to set
and implement strategic ESG goals.
PRIVATE REAL ESTATE CREDIT

The Private Real Estate Credit teams strive to incorporate
ESG considerations throughout the investment life cycle,
where feasible. However, as a private real estate credit
lender, investment teams are limited in their ability to apply
ESG practices across investments (in contrast to that of
the borrower/owner of the underlying real estate). As an
example, outlined below are select steps to integrate ESG
throughout the investment process, where possible.


Due Diligence: The investment teams perform ESG due
diligence both prior to and after issuing loan applications
in order to analyse ESG implications of the property andsponsorship. Given each loan’s unique characteristics,
there may be nuances in the due diligence processdepending on the loan. There are varied considerations
across E, S and G that may be reviewed and may vary byloan structure; select examples are listed below:– Environmental – This category is particularly relevant

for the targeted investment universe, as real estate
assets consume energy and water, generate waste, andrelease greenhouse gas emissions. As a result, ESG due
diligence is performed to fully understand the type of
asset in the collateral portfolio, its associated activities
and its impact on the environment;– Social – Within the teams’ investment universe, social

considerations are generally relevant in the context ofloan portfolio and collateral management practices.
For example, servicing procedures may be reviewed
to ensure best practice is followed and applicablelegislation is adhered to; andFIGURE 7.7

ESG Focus Areas

ESG INTEGRATIONManage and identify ESG risks
and opportunities in theinvestment process

DRIVING OPERATINGPERFORMANCEESG ENGAGEMENT &DISCLOSURE

ADVANCING THOUGHT
LEADERSHIP

Improve performance by driving
environmental and social
initiatives

Create value and differentiation
through enhanced
collaboration and disclosure

Deepen in-house expertise, andaspire to position Real Assets
as a leader in ESG

Select Private Global Real Assets Funds take ESG considerations into account in investment decisions on a non-binding basis only. Please refer to theoffering documents of any fund prior to investment for details on how, and the extent to which, the relevant fund takes sustainability considerations
into account on a binding or non-binding basis
10532023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

STEWARDSHIP, INVESTMENT AND ESG INTEGRATION– Governance – Generally, governance factors are

MSIM is a limited partner, general partners’ internal
ESG policies, procedures and documents are reviewed.

evaluated at the sponsor level. Areas considered may
include board responsibility and oversight of ESG
matters, ESG-dedicated individual(s), established ESG
committees or taskforces, etc.

While the above provides select examples of ESG
considerations, the geographical location, management
framework and type of collateral may influence which
ESG elements are considered.

– Legal due diligence: Performed in partnershipwith MSIM Legal to ensure compliance withregulatory frameworks and to identify exposure
to long-term liabilities.

– Valuation: Depending on the results of the pre-investment due diligence process, deal teams may
account for these factors in their overall valuation of
the company, deal structure and contract negotiations.

B) PRIVATE CREDIT AND EQUITY

The PC&E business has its own Sustainable Investment
Policy outlining investment teams’ belief thatincorporating ESG factors into the investment process isessential for minimising investment risk and maximising
investment return. The identification of ESG risk andopportunities factors early on in the investment process
can reduce financial, regulatory and reputational risks anddrive value for investors and other stakeholders. While thespecific ESG factors incorporated into investment analysis
vary depending on what is material to a particular asset
class, sector, geography and/or investment opportunity,
the areas below generally reflect the sustainable andstewardship approaches that are incorporated into theinvestment process and assessment of financial impact.
Investment strategies that go beyond integration and link
ESG criteria to investments may have additional strategyspecific ESG policies.

– Investment Committee: The PC&E teams created

ESG due diligence questionnaires, based on the SASB
Engagement Guide, that are required to be completed
for investment committee meetings. Both private
equity and private credit questionnaires cover acomprehensive set of metrics across E, S, and G, andthe questions were selected and curated based on
their relevancy to the industries that the PC&E teams
invest in. Specifically, the private-credit scorecard isused to determine an ESG score for each borrower.
The score is a composite score based on an evaluationof ESG factors across a standardised set of diligencequestions that covers the portfolio company andsponsor. Each component (E, S and G) is measured
on a scale and an aggregate total ESG score is
calculated. A total ESG score below an establishedminimum threshold requires additional discussion andconsideration by the fund’s respective investmentcommittee, and the transaction may be declined
if it presents material downside risk. In rare cases,
heightened ESG reputational risks may be escalated
to the Firm’s Franchise Committee.

ESG Investment Integration
The PC&E teams are committed to consideringand incorporating material ESG issues whenevaluating investment opportunities throughout
the investment lifecycle:
Pre-Investment– Screen for sensitive sectors: In accordance with

Morgan Stanley’s Environmental and Social Risk
Policy, the PC&E teams will generally avoid investingin certain environmentally sensitive sectors and willconduct enhanced due diligence for specific sectors
outlined in the policy, employing expert consultants
where necessary. The European Private Credit team,in particular, may apply additional sector-based
exclusions in a number of business activities/sectors
including ammunition, adult entertainment, weapons,
tobacco, upstream production of palm oil, and oil andtar sand development.

– Operational due diligence: Conducted by deal teams

through review of investment policies, procedures andsite visits, and responses to ESG questionnaires. Where

Investment Decision-Making

Post-Investment– Ongoing monitoring: the investment teams continue

to monitor sustainability performance and risks where
possible with the aim of maximising investment value
at exit. Material issues identified through monitoring
are raised with members of MSIM’s Risk team.

– Stewardship and engagement: investment teams

engage with the investee and relevant stakeholders
to encourage ongoing improvement of sustainable
practices, raising issues at the appropriate level (e.g.,company management and board of directors).

– Continuous improvement: investment teams may set
sustainability goals for portfolio companies and track
improvement across a range of ESG factors using Key
Performance Indicators (KPIs) where possible.

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STEWARDSHIP, INVESTMENT AND ESG INTEGRATION

Given that information rights and the ability to influence
portfolio companies vary across the PC&E teams’ strategies,
the following are examples of how individual teams
integrate ESG considerations into the investment process:I) MORGAN STANLEY CAPITAL PARTNERS (MSCP)The MSCP team manages a middle-market private equity
platform, focusing primarily on North America. For the MSCP
team, deal teams act as a first filter for potential portfolio
companies that are being considered. Any company that is
associated with material ESG risks that cannot be mitigatedor improved on will not be put forward to the Investment
Committee for further discussion and approval.
For companies that do make it to the next round in theselection process, the team considers ESG risks andopportunities throughout the investment lifecycle, starting in
the investment due diligence phase, where it seeks to identify
ESG risks and value drivers, and continuing through to thepost-investment phase where investment teams partner withinvestees to maximise ESG opportunities and value drivers.
Case Study
The MSCP team has been evolving its approach to further
embed ESG into the post-investment process. The teamdeveloped portfolio company-specific ESG initiatives androadmaps based on ESG industry standards and metrics
measurement; this effort was supported by external ESG
experts working closely with portfolio company ESG leads
to assess and provide recommendations on ESG practices
and activities tailored for each company. The MSCP teamalso conducted a GHG emission inventory baseline acrossportfolio companies as a first step to understanding
the actual portfolio climate footprint beyond the proxyestimation conducted across the PC&E business. The
MSCP team also launched an effort to develop carbon
abatement plans to help portfolio companies evaluate
options to reduce their carbon footprint.
II) MORGAN STANLEY PRIVATE EQUITY SOLUTIONS: 1GT FUND

Sustainability Value Add
The team seeks to establish itself as the ‘lead sustainability
investor’ for each transaction in which the Fund participates.
Core to this designation is the role the team plays in adding
value to portfolio companies through its engagement
activity, providing advice, tools and additional resourcesthat help advance progress towards the goals contained ina bespoke Sustainability Value Add (SVA) action plan that isdevised for each company post-investment.
Contents of SVA actions plans have been informed by theoutcomes of the due diligence process and conversations
with company management in terms of their goals and55

2023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

ambitions, and will generally be collaborative in nature,
working towards shared sustainability-related goals. The
SVA is comprised of three pillars, one of which relates
specifically to ESG items to ensure that this is a focus area
for ongoing improvement throughout the holding period
for each investment the Fund makes.
Structured engagement activity
Engagement activity objectives and targeted outcomes are
determined through a combination of strategic priorities
and company-specific considerations.
Strategic engagement priorities may in some instances bederived from MSIM level areas of focus or determined by
the ESG Lead and IC on an annual basis to better reflect theFund’s portfolio companies. Strategic engagement priorities
include i) data disclosure – improving disclosure of ESGrelated data, incorporating data relating to the PAI indicators
as defined by EU SFDR, ii) minimising carbon footprint– identifying levers for reduction in Scopes 1-3 emissions
to amplify the positive carbon impact resulting from acompany’s avoided emissions, and iii) Diversity, Equity &Inclusion – raising awareness of Diversity, Equity and Inclusion(DEI) and exploring ways a portfolio company can support adiverse, equitable and inclusive work environment.
Company-specific engagement activity tends to arise asa result of ESG due diligence outcomes and may relate
to identified areas of relative weakness or potential tocause significant harm as per the EU’s EU SFDR, material
sustainability-related opportunities as identified by thedeal team, or areas identified by company management
as those from which they would like to receive additional
input and ESG resources.
Data collection and monitoring tools
Over the last 12 months, the team has begun utilising the
RepRisk platform. The platform leverages machine learningand artificial intelligence to screen hundreds of thousandsof public sources on a daily basis to produce timely andinformative alerts in relation to emerging controversies or
conduct-based risk to which a company may be exposed
or with which it may be associated. Any new controversy
or incident that is detected by the system prompts an
instant email alert to a member of the ESG team, providing
a summary of the controversy or incident. Dependent on
the circumstances, any such email alert is likely to leadto reactive engagement with company management tounderstand the implications of the controversy or incident,
and to explore possible remedial options.
The team is also in the process of onboarding a digitalplatform, Novata, to streamline the data collection andSTEWARDSHIP, INVESTMENT AND ESG INTEGRATION

monitoring process through the use of a combination ofstandardised and bespoke data collection requests. These
requests will be automated at specific time intervals, theformat of which should help to alleviate the burden on
portfolio companies and seek to maximise the response
rate. This platform will be operational from 2024 onwards.

target companies follow good governance practices. The
teams’ approaches to stewardship and investment do not
generally differ based on geography—although the ESG
issues/factors that are prioritised for engagement withspecific investments may differ based on regional practices
and progress in those areas.

ESG Data

A) GLOBAL BALANCED RISK CONTROL

Systematic data integration with fund administrator datais still underway, along with the development of reporting
capabilities for data housed on the new platform.
Collecting and storing ESG data will be examined
once financial and operating metric storage has beensuccessfully completed.

The team believes in the merits of a multidimensional
approach to incorporating sustainability-related practices
into their portfolios. The team aims to assist their clientsin expressing their desired sustainability attributes
through a combination of exclusions, ESG integration,
allocations to solution providers and exercising of
stewardship, where appropriate.

Custom Solutions
Certain of the Multi-Asset portfolios integrate ESG factors
contingent on asset class and style of investing. As an
example, for quantitative investing, the team may optimise
the portfolio by using ratings or scores balanced against
other risk/return objectives. For customised portfolio
solutions, the team may review ESG factors to assess
impact on asset allocation and/or customise a basket of
securities or funds according to the particular sustainability
preferences of the client. For highly active, concentrated
equity portfolios, integrated sustainability analysis isconducted based on an ESG materiality framework.
The Multi-Asset teams also conduct thematic
engagements on materially important environmental and/or social issues facing companies in order to ensure that

Prior to investment, the team may exclude companies
involved in activities that are proven, or have the potential,
to cause significant harm to the environment and/or
society, thereby impacting financial performance. The
team considers the indirect impact of the entire value
chain, including, for example, suppliers and retailers. The
team works on an “engage or exclude” basis whereby ifthey believe a company, or broader industry, is open tochanging its behaviour, they will seek to engage, to help
effect that change.
The team’s core ESG integration approach typicallyprioritises those issues that are deemed material for agiven company as they believe addressing these issues
has the potential to enhance long-term risk-adjusted
financial returns for their clients. Material ESG risks and

FIGURE 7.8

ESG Integration Approach Example
ESG-TILTED EQUITY BASKETSRegional equity baskets, e.g., for the UK,
US, Europe, Japan, Emerging Markets,
Asia-ex Japan

ESG
ScoresBaskets target top-quartile ESG
performance in each sector*
ESG Equity
BasketConstruction

Tilt towards companies demonstratingstrong carbon emissions management**
Valuations &Tracking Error

Low Carbon
Transition

Valuation check, to ensure the team do not
overpay for ESG quality

The team expect sustainability leaders to display attractive risk-return characteristics over time
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STEWARDSHIP, INVESTMENT AND ESG INTEGRATION

opportunities are those that are likely to have an impact
on a company’s business model and/or value drivers. By
tilting towards companies who better manage these risks
and opportunities, the team aims to hold securities that, inaggregate, represent top-quartile ESG performers, withineach sector, within each region they invest in.
In recognising that climate change poses a significant risk
to the global financial system and, in turn, the stability of
economies globally, the team can implement additional
climate-related tilts, which reflect the Low Carbon
Transition risks and opportunities a company faces as wellas the company’s management of same, or asset classlevel decarbonisation targets. For example, the team may
incorporate a strategy to decarbonise a portfolios’ core
equity exposures targeting net zero emissions by 2050.
The team takes a broadly similar approach to theirdeveloped government bond holdings, by overweighting
those bonds from issuers with above-average ESG
practices and momentum while underweighting thosefound to be below average.
The team also leverages MSIM‘s broader expertise, as
illustrated throughout this document, in their asset allocation
process. For example, they often partner with MSIM’s Fixed
Income organisation, allocating investment-grade credit
sleeves to this team for active management, where they
incorporate ESG factors in their investment process.
The team also has experience making investments that
support potential solutions to many of the world’s mosturgent environmental and social challenges. They include

both equity and fixed income solution providers, currently
through funds and ETFs.
The GBaR team believes that they have a duty to workwith the firms in which they invest, to achieve distinct
sustainability-related objectives, such as enhanced
disclosure or improved management of material ESGrelated risks and opportunities. For further information on
their engagement approach, please see Principle 9.
Ongoing Developments
Given GBaR’s top-down and diversified approach toinvestment, the team currently holds a broader set of issuers
than other MSIM investment teams in more concentrated,bottom-up strategies. While the GBaR team believes theirapproach to theme selection leverages the team’s skills
appropriately, they may be more limited than other teams
that spend more time researching individual companies andliaising with management teams on a more regular basis.
The GBaR team have addressed this limitation bybuilding out their ESG team. The team has hired staff
with direct experience in sustainability-related researchand engagement and has increasingly been working
with MSIM’s investment teams as well as the Global
Stewardship Team. The team has a dedicated sub-ESG
group comprising two research analysts and led by theteam’s Head of ESG Research.
As discussed last year, the GBaR team believe they
can further enhance their ESG approach by increasingcollaboration with specialists across MSIM in order toleverage investment teams’ combined knowledge and

FIGURE 7.9

Investing in Solution Providers
ENVIRONMENTAL

Resource
Management

ClimateIssues addressed by portfolio’s
impact investments

 nergy Efficiency
ERenewable Energy G reen Buildings


SOCIALWaste & Resource
Management Pollution Water Sustainable
Agriculture
and ForestryBasic Needs

Health careAffordable Housing

Empowerment
Education
Financial Inclusion I nequality D igital Divide

Aligned with many of the UN’s SDGs

Source: United Nations The content of this publication has not been approved by the United Nations and does not reflect the views of the United
Nations or its officials or Member States. For more details on the Sustainable Development Goals, please see https://sdgs.un.org.
572023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

STEWARDSHIP, INVESTMENT AND ESG INTEGRATION

ownership to drive change at portfolio companies. The
team continues to take a more collaborative approach
to exercising stewardship. Approximately a third of
GBaR’s engagement strategies carried out during thereporting period were collaborative efforts with other
MSIM colleagues. This represents a significant increasein the team’s willingness to collaborate. They believe
this will ultimately serve to enhance the teams’ ability toeffectively engage with their portfolio companies.

Notwithstanding the appointment of ISS and Glass
Lewis as proxy advisers (ISS is also MSIM’s proxy voting
administrator), as noted earlier in the report, MSIM does
not outsource proxy voting, and hence does not rely oneither firm to implement a custom stewardship policy. As
active managers and owners, our stewardship philosophy
is enshrined with performing stewardship directly withcompanies it invests in, in order to promote long-term
shareholder value in line with the views of its clients.

Stewardship and Service Providers

MSIM communicates with both service providers at least
monthly to discuss research and other operational voting
issues to ensure that both service providers are kept
well aware of our stewardship and voting needs and our
expectations of them. In the event the GST discovers apotential discrepancy in the underlying service provider’sresearch, we generally escalate and contact the provider’shead of research to resolve the issue.

MSIM views proxy voting as a key component ofstewardship activities and obtains information on
corporate governance, proxy voting, issuer research,and selected environmental and social issues from ourinvestment teams’ own research, as well as independent
advisers (ISS and Glass Lewis), to provide vote execution,
reporting and record-keeping services.

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MONITORING MANAGERS AND SERVICE PROVIDERS

Principle 8

Monitoring Managers
and Service Providers
Signatories monitor and hold toaccount managers and/or service
providersMonitoring of Service Providers To Ensure
Services Meet Our Needs
Policies, procedures and controls are in place at different
levels within the organisations to manage and oversee
relationships with and services received from service
providers MSIM utilises in its investment management
and engagement activities. MSIM adheres to bothMorgan Stanley and MSIM-specific policies to select,assess and monitor service providers to ensure we candeliver best-in-class investment solutions and client
servicing standards. This section provides an overview ofthese controls, how the GST monitors its service providers
and how they are held to account.

Morgan Stanley Policies
MSIM adheres to both Morgan Stanley and MSIM-specificpolicies to select, assess and monitor service providers toensure we can deliver best-in-class investment solutions
and client-servicing standards.
Based on Morgan Stanley’s Sourcing Guidelines, the firm
engages with suppliers who respect, follow and abide by
our Core Values: Doing the Right Thing, Putting ClientsFirst, Giving Back, Leading With Exceptional Ideas andCommitting to Diversity and Inclusion. In an ever-changing
market, the Firm is committed to evaluating new suppliers
to meet our evolving needs as well as those of our clients.
Morgan Stanley looks for strong capabilities, high-quality
and attractive commercial offerings that build lasting
partnerships over time. Engaging with suppliers who sharethe same core values is key to the Firm’s success; our global
social responsibility is a direct reflection of the Firm’s corevalues and enhances our ability to provide superior service
to our clients, our employees and our communities.
Morgan Stanley holds itself to the highest standards andthe Firm expects its suppliers and its suppliers’ suppliers
to adhere to these key values and apply them to how they
do business with us and in general. This is outlined in the
Firm’s Supplier Code of Conduct, which demonstrates
592023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

its commitment to conducting business honestly andin accordance with its legal and regulatory obligations,
including commitments to its suppliers’ environmental
sustainability, social and ethical business practices. The
Firm also ensure supplier diversity by working with firmsthat foster diversity in business, economic development
and communities.
Morgan Stanley is committed to being a responsible
corporate citizen, respecting and supporting the protection
and advancement of human rights. With operations aroundthe world, the Firm strives to uphold global standards
for responsible business, including equal opportunity,
the freedom to associate and bargain collectively, andthe elimination of modern slavery, human trafficking,and harmful or exploitative forms of child labour. Pleasesee our Morgan Stanley Modern Slavery and Human
Trafficking Statement for more details.
In selecting and monitoring its service providers, the Firm
has a Global Third-Party Selection and Engagement Policythat establishes a framework for Morgan Stanley’s sourcing
activities from external, unaffiliated third parties for which
its Re-engineering Management (REM) Sourcing Team isengaged. The Policy is designed to help ensure that thesourcing of goods and services by Morgan Stanley is done ina fair, competitive, independent and objective manner, withappropriate due diligence and with substantive involvementfrom the REM Sourcing Team. Additionally, sourcing
decisions must be made in accordance with all applicablelaws, regulatory requirements and sound businesspractices. The Policy complements the Global Third-Party
Risk Management Policy, which sets forth requirements
for identifying, assessing, managing and controlling risks
associated with the outsourcing of business processes andcontracting for goods and services.
The Morgan Stanley UK Regulated Entities Supplement to
the Global Third Party Risk Management Policy establishes
requirements specific to the Firm’s UK Regulated Entities
and is designed to enable UK Regulated Entities to manage
risks within the Morgan Stanley International Group’s
Third Party Risk Appetite in compliance with SYSC 8 of
the FCA Handbook, the Outsourcing section of the PRA
Rulebook, the EBA Guidelines on Outsourcing and other
UK Regulated Entities-specific regulations and policies
listed in Appendices.

MSIM Policies
MSIM complies with both the Investment Management
Public Markets Enhanced Vendor Management Programme
procedures and the Investment Management Private
Enhanced Vendor Management Programme Procedures inMONITORING MANAGERS AND SERVICE PROVIDERS

selecting and monitoring service providers on both our Publicand Private investing platforms, including vendors used forstewardship and engagement purposes. The goal of theEnhanced Programmes is to identify, monitor and manage
risks associated with vendors that support both the PublicMarkets and Private Markets businesses. These procedures
supplement Morgan Stanley’s Global policies (as outlined
above) in addition to our divisional and regional policies.

meeting-level research (Glass Lewis). MSIM is responsible
for ensuring that voting instructions from our investment
teams and clients are communicated to ISS and we havecontrols in place to ensure instructions communicatedelectronically are accurately recorded in ISS systems for
execution (including scenarios where votes have been split
because of client preference or differing investment teamconvictions—please see Principle 3 for more details).

While Morgan Stanley’s global policies focus on financial
stability and information security of vendors, MSIM’senhanced programme policies seek to ensure that there
are specifically identified individuals—vendor relationshipowners (VROs)—in the business or related control/
support groups that are responsible for the proper
oversight of vendors. Proper oversight includes ensuringthat a vendor is providing the services contracted and theinvoices for such services are reasonable and consistent
with the contractual terms of the vendor arrangement.

This includes a confirmation report for vote data feed sent
to ISS and an automated end-of-day reconciliation of votes
instructed between ISS and MSIM systems. Additionally,
MSIM reviews on a monthly basis a vote audit reportprovided by ISS, confirming the execution status for all
meetings. The Global Stewardship Team also conducts
ex-post reviews to confirm that ISS has accurately
implemented voting instructions.

A centralised list of key vendor relationships on bothPublic and Private investing platforms is stored in the
Firm’s Vendor Repositories and assessed through the
Firm’s Supplier Portal for Assessing Risk (SPAR) prior
to onboarding. Vendor records must be created andmaintained for all vendors in scope. VROs are required toperiodically certify as to their periodic due diligence andongoing monitoring. Due diligence and ongoing monitoringof vendors (including our proxy advisers and ESG data
providers discussed further below) are conducted throughvarious methods (as appropriate), including:1. 	 Periodic meetings or site visits and the use of feedback

loops to guide these discussions;2. 	 Review of key risk indicator (KRI) and key performanceindicator (KPI) reports provided by the vendor;
3. 	 Measuring the service against a service-level agreement

to ensure contractual expectations are being
understood and met by the vendor; or4. 	 Periodic monitoring of services provided.

Contract renewals are also used as an opportunity toevaluate the services provided and to give feedback
to vendors.

Proxy Advisers
As mentioned in Principle 7, MSIM retains ISS and Glass
Lewis to obtain information on corporate governance,
proxy voting and issuer research; however, we do not
outsource proxy voting decision-making to either firm.
The primary services they provide to MSIM are vote
execution of our proxy decisions, reporting (ISS) andMSIM performs due diligence reviews on retained proxyadvisers on an annual basis and the reviews are conducted
onsite or virtually by members of the Global StewardshipTeam and MSIM Compliance. The focus of annual diligencemeetings tends to revolve around timeliness and qualityof research, particularly on emerging sustainability
topics. Though we do not rely on proxy advisers’ voterecommendations, we do expect accuracy in the underlying
research provided in their proxy reports. When we identify
any errors in the underlying research, The Global StewardshipTeam will contact the provider’s head of research to pointout a potential error. If we are correct, the vendor will publish
an update to the report to reflect the identified error. We
will also seek assurances from vendors that they are taking
reasonable steps to reduce the likelihood of such an error
recurring in future. We will also provide feedback to our
proxy advisers on an ad hoc basis, on how they can improvetheir services to better suit our and our clients’ needs.
If any material issues were to arise in connection with
the quality or continuity of service we receive fromthese providers, MSIM will take steps to escalate andaddress them in line with the policies and procedures
summarised above.
No critical issues were identified during the reporting
period 1 July 2022–30 June 2023. MSIM continues tofocus on maintaining transparency and accountability
to its clients with respect to participation in corporate
governance decisions on their behalf. With this objective
we are engaged in active discussions with our proxy voting
service provider to ensure voting records and associateddisclosures are upgraded to meet evolving client
requirements and are in line with the enhanced SEC N-PX
reporting requirements.
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60

MONITORING MANAGERS AND SERVICE PROVIDERSESG Data Providers
As noted above, investment teams use ESG data in a
number of different ways. Some use it to inform their own
fundamental research while other teams integrate thirdparty data into models and proprietary scoring frameworks.
For ESG data and information, MSIM may leverage thirdparty data on top of any independent analysis conducted.
MSIM recognises that the lack of standardised ESG
disclosures has created a fragmented market, and until
such disclosures are improved and systematised we mayneed to leverage third-party ESG information. We do thisthrough both our own relationships with third-party ESG
data providers and those that Morgan Stanley licenses at
the firm level. We can also draw on the expertise of theMorgan Stanley Institute for Sustainable Investing and
GSO relating to ESG data analysis, to support and inform
various approaches to data integration, as required.
SELECTION AND ASSESSMENT OF ESG DATA PROVIDERS

When selecting ESG data providers, a number of factors
are considered, including methodology, coverage, history,transparency and materiality alignment. An industrywide
assessment of ESG data providers covering several
hundred providers was conducted several years ago by
Morgan Stanley’s Global Sustainability Office (GSO).
This has enabled additional statistical analyses, whichtake place whenever the team onboard or consider
new providers or datasets to understand similarities ordifferences between data providers across a common
universe (e.g., any potential biases in datasets).
An example of a recent marketwide dataset assessment
relates to the analysis we conducted on third-party vendor
solutions for the EU Taxonomy Regulation (EU 2020/852)(EU Taxonomy). The team asked each of the vendors underassessment to provide as much granularity as possible oneach of the steps of its EU Taxonomy assessment on thesame universe of companies.
In general, our findings from these assessments allowed
us to make more informed decisions on vendor solutions,
understand issues and challenges vendors are facing, andultimately better assess their respective product solutions
to fit our investment and engagement needs.
These analyses are always conducted in parallel to arelevant literature and methodology review. As was thecase with some physical risk vendor offerings, our analysis
of Implied Temperature Ratings (ITRs) ultimately led us tothe conclusion that some third-party vendor solutions are

61

2023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

not yet fit for purpose. Significant differences in output
results for the same set of locations or portfolio holdings
imply that while a vendor solution is available in themarket, utilising the solution in a portfolio management
context would not be appropriate at this time.
In order to democratise ESG data access, broaden useof these data points and create a consistent set of highquality and commonly utilised vendors and datasets, thefirm has put in place an “ESG data stack” as highlighted in
Principle 2. The ESG data stack contains data sets acrossthe ESG spectrum of approaches, across asset classes andacross data providers. The data stack is constantly being
reviewed to ensure the highest-quality vendors are used,and new datasets are added when:1. 	 emerging sources of ESG data are made available (e.g.,asset class expansion or specific thematic areas likeclimate risk or water utilisation);2. 	 coverage can be improved;
3. 	 a more transparent or granular data set is available; or4. 	 an improved methodological approach is utilised.

QUALITY CONTROL EXAMPLES AND REMEDIATION PROCESSIn general, third-party ESG data is centralised at
Morgan Stanley for broad consumption across theorganisation, including MSIM. As part of this centralisation
process, data is vetted with quality-control checks on arecurring basis to ensure data provider feeds are accurate,
timely and, where needed, merged with existing firm
infrastructure and identifiers, and/or expanded to improveissuer coverage.
When quality-control checks identify potential issues,
the centralised ESG data team at Morgan Stanley thatmaintains supplier relationships will engage the data
provider in a timely manner to ensure revised data isprovided or an explanation regarding the issue is provided.
A recent example includes the checks as part of theprocess for producing MSIM’s Entity PAI:

Checking for outliers in the data by reviewing the raw
data that ISS sent us for each of the 16 mandatory PAIs
we would report on.
Four data points were flagged as part of this process andISS was contacted to confirm if they were accurate ornot. They confirmed that those four values had since
been restated but were not yet available in our data
feeds. They provided the restated values, which weoverwrote in our feeds.

MONITORING MANAGERS AND SERVICE PROVIDERS

The identification of this error ensured that the impact
on the two PAIs that were impacted by these outliers
was not overstated.

In such circumstances data providers will then need to passfurther quality-control checks following further granularinspection of the data. If questions still exist, the team willtake appropriate action, which may range from liaising further
with the data provider to resolve the issue to terminating
use of the relevant product or services. In some cases,
erroneous data is purged from our centralised ESG data
platform and replaced with corrected information. Users ofsuch information are notified via mail groups, at which point
revisions to reporting would be made or noted if any of theinformation was used.
Updates, including new additions or changes to a vendor data
feed, are handled similarly. The centralised Morgan Stanley
ESG data team works with the vendor to identify the change,
assess the downstream impact on technology systems
and establish a timeline for the change to be implemented.
Relevant teams are notified in advance following bestpractices associated with change management.

Consistent Framework Across MSIM
The MSIM ESG Technology and Data team follows data
governance standards as laid out by the Firm’s Global Data
Governance Framework. Since the acquisition of Calvert,
the team has a dedicated group that is actively engaged in
integrating data and technology systems across MSIM andCalvert and ensuring alignment with Morgan Stanley data
governance principles.
The policies, procedures and processes we implement
in monitoring, working with and assessing service
providers such as proxy advisers and ESG data providers
demonstrate our commitment to ensuring a consistentframework across an organisation of our size, particularly
on data quality, assurance and vendor standards. In
particular, we are working towards supporting ouractivities outlined in Principles 2, 6, 7 and 8 as wellas others with a foundation of centralised and wellgoverned ESG metrics, which will enable consistency andtransparency in internal reporting, client reporting andinvestment engagement.

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SECTION 3

Engagement632023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

ENGAGEMENT

Principle 9

environmental issues, pay, and corporate governance. This
helps our investment teams manage risk in the near andlong terms, enhance understanding of investee companies/
issuers, and, where relevant, create positive sustainableoutcomes—all of which benefit our clients.

Engagement
Signatories engage with issuers
to maintain or enhance the valueof assets

PRIORITIES AND PURPOSE

MSIM has identified five common themes that many of
our investment teams include in their engagements, basedon respective strategies, where relevant and appropriate.
These five engagement themes13 are aligned with theUnited Nations Sustainable Development Goals, and areissues that may cause risk to our society and wellbeing,
global economy, and/or capital markets, but can alsopresent opportunities for improved sustainable andfinancial outcomes.

Engagement Selection and Prioritisation
APPROACH

As active investors and active owners, MSIM has aduty to steward its clients’ capital. We fulfil this duty
by engaging with selected companies in which weinvest. Our investment teams endeavour to engage
in constructive dialogue with companies, which may
encompass meetings and discussions on a particularissue to multiyear engagements/stewardship on a rangeof E, S or G topics specific to the company or asset toencourage improvement. These topics can encompass afull range of subjects that affect the long-term value ofa business or asset, including strategy, capital structure,operational performance and delivery, risk management,

MSIM investment teams may prioritise engagements basedon a variety of factors including position size, investment
horizon, frequency of annual general meetings, headline
events and materiality. Examples of investment teamspecific engagement approaches over the 12 months from
1 July 2022 to 30 June 2023 are provided throughout therest of this section.

FIGURE 9.1

MSIM Engagement Statistics
1 July 2022–30 June 2023

Total Engagements: 55111
Engagements by MSIM Engagement Themes12● Decarbonisation &Climate Action● Diverse & Inclusive
Business● Circular Economy &Waste Reduction● Decent Work &Resilient Jobs
● Natural Capital &Biodiversity

MSIM Engagements by region
57%● North America● Europe● Asia (Ex Japan)● Japan● Rest of World● South America

16%
12%
9%

40%
39%
9%
4%
4%
4%

6%

Please note that certain MSIM investment teams may not be included in these figures.

Refers to ESG engagements conducted by MSIM investment teams, Global Stewardship Team, between 1 July 2022 and 30 June 2023. Includes
engagements with corporate and non-corporate issuers. Please note that certain MSIM investment teams may not be included within these figures.
12This pie chart refers only to the breakdown of MSIM priority engagement themes; other engagement subjects are also covered by investment teams
13
See https://www.un.org/sustainabledevelopment/sustainable-development-goals/ for more details on the Sustainable Development Goals
11

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ENGAGEMENTFIGURE 9.2

MSIM Engaging Companies Themes
Supporting the transition toa low carbon economy in linewith Paris Agreement goals enewable energy and clean techR
Energy efficiency
 P hysical impact adaptation


DECARBONIZATION &CLIMATE RISK

Supporting business practices
that create a more just andinclusive society

DIVERSE &INCLUSIVE BUSINESSSupporting business models
that reduce negative
impact on biodiversity inline with the Post 2020
Biodiversity Framework
NATURAL CAPITAL &BIODIVERSITY

Supporting business models
that reduce impact on natural
resources and that innovate to
reduce waste generation, witha focus on plastic waste

Affordable access toessential services Investing in communities R acial justice P ay equity
 B oard/employee diversity
Sustainable sourcing and useof resources L and and sea use change D eforestation Pollution reduction ecycling and reuseRSustainable sourcing L ifecycle analysis
 Water stewardshipCIRCULAR ECONOMY &WASTE REDUCTION

Supporting decent work acrossthe entire value chain andmaking workforces resilientin the face of innovationand change utomation and the workforce
ASupply chain management
 Living wage Workforce well-being


DECENT WORK &RESILIENT JOBS

Investment teams may also engage on other areas not limited to these five themes. MSIM recognises that the UN Sustainable Development Goals (SDGs)
were written by Governments for Governments and therefore engagement themes with corporates and the SDGs may not be perfectly aligned. The
content of this publication has not been approved by the United Nations and does not reflect the views of the United Nations or its officials or Member
States. See https://www.un.org/sustainabledevelopment/sustainable-development-goals for more details on the Sustainable Development Goals

SPOTLIGHT #4

Adoption of Natural Capital & Biodiversity as MSIM’s Fifth Engagement Theme in 2023
In 2023 MSIM added Natural Capital & Biodiversity as our fifth
engagement theme. This addition formalises existing engagement
efforts and aligns overall themes to the process laid out in the MSIM
Engagement & Stewardship Principles, and our MSIM Proxy Voting
Policy, which also addresses biodiversity.
Prior to being put forward as a new engagement priority Natural
Capital & Biodiversity was at the centre of a growing number of MSIM
investment teams’ engagement efforts, particularly following the
COP15 conference in December 2022.
WHY ENGAGE ON NATURAL CAPITAL & BIODIVERSITY?
Sector Materiality
We identified a number of sectors, including materials, infrastructure,
consumer staples, energy and utilities, for which biodiversity-related
factors may pose a significant material risk. We believe such sectors
represent key engagement targets, with the purpose of understanding
how they are approaching these risks and encouraging progress.
In our investment teams’ experience, companies are increasingly open
to feedback and discussion on this topic, with many in the process of

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developing strategies to comply with the TNFD (Taskforce on
Nature-related Financial Disclosures) frameworkBased on this MSIM proposed three key asks for investment teams toinclude when engaging on this issue:
 to integrate biodiversity considerations in business models andstrategy; to set specific biodiversity commitment and targets that reduce
negative impact;
 to highlight the materiality of this topic from an investor
perspective in an effort to raise it up businesses’ agendas

TNFD framework will improve disclosure
Reliable data remains a challenge. The TNFD finalised its disclosure
recommendations in September 2023 and we believe the newly
released metrics provide a great opportunity to ask companies for
improved disclosure.
For further insights into our perspective on Natural Capital & Biodiversity,
please refer to the following reports: ESG Insight: Biodiversity Loss andimplications for Investors, ESG Insight: Single-Use Plastic in the Consumer
Staples Sector, Engagement Reports: Autumn 2022; Spring 2022

ENGAGEMENT

Process and Methods
Although MSIM does not have centralised investment
beliefs across asset classes and strategies, there arecertain parallels in the chosen approach to engagement
across our various investment teams, which reflect ourcore values as a firm and our determination to act as
responsible long-term investors (as described in Principle 1
and Principle 6 above).
Our investment teams generally seek to engage
constructively with company management to encourage
improved disclosure, behaviour change and (whereappropriate) target-setting. Teams tend to prefer one-onone engagements directly with senior management/board
directors, considering them the most effective way toarticulate views to, and engage in constructive discussion
with, a company’s management. If those efforts prove
unsuccessful, they may escalate their issues or concernswith the CEO or additional members of the board of
directors, or they have the option of voting against
management proposals or board directors, or in support ofshareholder resolutions.
Notwithstanding one-to-one engagements with senior
management/board directors we are also supportiveof collaborative engagement where such engagement
appears necessary to materially enhance portfolio values
and likely to deliver tangible outcomes in relation to key
sustainability or stewardship-related issues, provided
we can do so in a manner that is in full compliance withapplicable laws, regulations and judicial precedents. Moredetails on our collaborative engagement activities are
outlined in Principle 10.

Stewardship Monitoring and Engagement
MSIM is a predominantly active investment house andinvestment teams are responsible for monitoring theperformance of companies throughout the investment
process. The extent and frequency of monitoring varyacross investment teams and are dependent on a numberof factors including the investment strategy and the sizeof interest held.
Some investment teams actively monitor at the stocklevel by evaluating company fundamentals, financials andmanagement, including sustainability management. Others
approach portfolio construction using a top-down, macro
approach to strategic asset allocation and undertakethematic engagements with select companies across theportfolio, as needed. Investment teams may take different
approaches depending on asset class and type of security,and certain issues may be deemed more material for
issuers in certain geographies.

Monitoring of companies in which MSIM invests ourclients’ money may include, but is not limited to:1. 	 Reviewing and analysing relevant public information

published by the company (which may include a
company’s quarterly financials, earnings calls, generalcompany reporting and/or disclosures, including
sustainability-related disclosures);2. 	 Developing proprietary quantitative models toforecast performance, leveraging third-party
data services;3. 	 Conducting proprietary and reviewing

external research;
4. 	 Attending company presentations and/or

analyst conferences;5. 	 Where appropriate, engaging directly with companies

in which MSIM invests on behalf of our clients (which
can include engagement with company executives andboard members through in-person meetings, conference
calls and email correspondence); and6. 	 Ongoing monitoring of external events that may

impact company performance (e.g., regulatory changes,
news events).
These monitoring activities support real-time identificationof engagement targets and topics across our investment
teams’ portfolios.

Supportive Function of the Global
Stewardship TeamThe Global Stewardship Team serves as a first point ofcontact for MSIM investment teams on proxy voting,stewardship trends and engagement where the knowledge
and experience of the Global Stewardship Team is viewed
as beneficial to the engagement process. The majority ofengagements coordinated by the MSIM Global StewardshipTeam focus on shareholder meetings. Please see Principle 12
for highlights from the 2023 proxy season.
During these engagements, the Global Stewardship Teamand members of relevant investment teams meet withcompany management and, when appropriate, a member
or members of the board of directors to discuss the issues
raised by the company’s proxy, including, but not limited
to, executive compensation, board structure, ESG issues
and shareholder proposals.
Topics of routine engagement focus on governance bestpractices such as board independence, succession planningand executive pay. Other topics of consideration may
include the company’s sustainability initiatives and goals,
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ENGAGEMENT

and corporate culture. In consultation with individual
investment teams, the Global Stewardship Team may
request engagement outside the normal proxy process in
response to a company headline event or to proactively
discuss thematic ESG issues. In these cases, the Global
Stewardship Team may contact the company and request
a meeting with the appropriate management team and/or a member or members of the board of directors.
MSIM representatives selectively interact with company
boards when the knowledge and experience of the Global
Stewardship Team may be necessary and beneficial to theengagement process.

Investment Team Approaches to Engagement
As mentioned above, while MSIM has identified fiveengagement themes, our investment teams prioritise
engagement objectives, methods and assessments in varying
degrees depending on asset class, geography, investment
style and strategy. The following examples demonstrate
investment teams’ diverse engagement strategies andcorresponding rationale under each asset class:High-Conviction Equity
INTERNATIONAL EQUITYEngagement Approach
The investment team is responsible for engaging directlywith companies. The team’s ESG engagements generally
have three key purposes:
1. 	 Assessment of materiality of specific ESG issues

relevant to companies;
2. 	 Their strategies to address these issues; and3. 	 Monitoring of progress and encouraging companies tobetter manage and mitigate financially material ESG
risks and take advantage of opportunities.
The team seeks to engage with specific objectives andtracks the company’s response and progress on therelevant, financially material ESG issues, including, but notlimited to, improving disclosure on these issues; creatinga strategy to manage the risks or opportunity, including
setting official targets where relevant; and linking KPIs
related to the issue to management compensation.
The team engages with companies on ESG matters in three
ways: stock-specific engagement, thematic engagement andoccasionally where relevant, collaborative engagement.
Given the team’s bottom-up investment process, their

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engagement approach is principally stock-specific, engaging
on material ESG issues identified in the investment process
and documented more specifically in the MRI or Pay
X-Ray. In some cases, the team may also apply a thematic
approach to particular material ESG issues should they
believe it beneficial to engage with several companies on
one topic across industries or sectors. These thematic
engagements fall within the three team-agreed priority
areas of Planetary Boundaries, People Welfare, and Trustand Integrity. In addition, the team may occasionally choose
to engage collaboratively on material ESG issues withselect partners whose approach is complementary to theteam’s own and where a collective voice may be helpful.
The team rarely engages in collaborative initiatives dueto their own access to companies and existing, regulardialogue with company management.
Engagement Methods
The method of engagement is usually determined ona case-by-case basis, depending on the topic that theywant to discuss with company management and the timeframe. Dialogue with companies on engagement topics
can be prolonged and require multiple engagements.
Initial engagements may focus on fact finding, building
understanding of how the company approaches aparticular subject, and the measures and policies they may
already have in place.
The team prefers to build an in-depth understanding ofwhat the company is doing by engaging with the company’s
Sustainability Team and Investor Relations. If the teamrequires more information or has specific questions thatthey wish to have answered, as shareholders they havegood access to company senior executives and will engage
directly with them on the subject.
Engagement Progress Monitoring
Progress may be monitored through additional virtualor face-to-face meetings, via the telephone or by email
correspondence. If the team does not see any progress,
they will consider appropriate escalation (please see
Principle 11 for the International Equity team’s escalation
approach and case studies). The team measures progress
as follows:Does the company acknowledge the issue raised?
Has the company come up with a plan and/or specifictargets to address the issue?
Has the company implemented this plan?

ENGAGEMENTCASE STUDY 9.1
INVESTMENT TEAMInternational Equity

ASSET CLASS

High-Conviction Equities

MSIM ENGAGEMENT THEME(S)

Diverse and Inclusive Business (DEI)COMPANY SECTOR/INDUSTRY

Health Care

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)EuropeMATERIALITY

A lack of diversity in clinical trials can pose a financially material risk at the company level; if atreatment is ineffective or causes harm in addition to the significant risk it presents to patients, it also
poses both financial and reputational risks to the companies involved.

ISSUES

Clinical trials are the only way to provide the US Food and Drug Administration (FDA) and otherregulatory bodies globally with the data necessary to assess whether a drug works and if it is safe forpatients. New drugs are approved following clinical trials. However, clinical trial populations used bypharmaceutical and health care companies are not always representative of those who end up using the
medicine. Trials are over indexed toward White European and American populations, with other ethnic
groups acutely underrepresented.
Clinical research has shown that drugs elicit different responses due to patients’ metabolism and absorption
rates, among other factors—all of which can vary according to race, ethnicity and gender. If trial participants
don’t accurately reflect patient populations, the drug being tested may not work in the way intended whenused among the wider population. Beyond a reduction in efficacy, it also may not be safe.
Companies able to improve clinical trial constitutions may be better positioned to market the drug
and inform on the safety and effectiveness of new medicines, thereby increasing the understanding ofcertain diseases, as well as possible prevention and treatment methods for all populations.

ACTIONSThe International Equity team’s intention during the first phase of their engagement programme ondiversity in clinical trials was to develop a good understanding of what the companies they hold are doing
to meet the increasing requirements for diversity, learn from those leading the way and encourage others
to embed clinical trial diversity within their processes, starting with adequate disclosures.
As part of the programme, they met with the Global Head of the Health Equity and Population Science
Team of a Swiss multinational health care company they own in their International Equity portfolios. Fromtheir engagement it became clear that the company has implemented several leading practices in termsof race equity in clinical trials and has allocated specific resources to the issue. The catalyst for forming
the team four years ago was the push towards personalised health care—this can’t be done if medications
aren’t tested on people with different genetic profiles. The company recognises that the push for trial
diversity has to come from the top and be embedded within the trial process. To encourage this, they
have internal goals in place for inclusive research, and funding bids for trials now include information andproposals around demographics of the trial populations. The company also has an internal dashboard
featuring data and demographics from both live and historical trials.

OUTCOME/NEXT STEPSThe team asked if this dashboard could be made public, given the importance for pharma companies topractise and demonstrate inclusion and equity in their clinical process. The company advised that while
this was their intention, it was not ready to be released publicly yet—although they were hopeful it
would be possible within a year.
The team’s 2022 engagements represent the first phase of their multi-year engagement programme on DE&I
within clinical trials; in 2023 they will conduct follow up engagements with the companies to progress theconversation, especially important given increasing regulation on this subject. As the team learned during
their engagements, the companies they hold are on the cusp of disclosing data on DE&I in clinical trials,
which will provide active data points and enable a better understanding of how the companies are managing
this risk. Understanding what constitutes best practice also provides the team with a standard against whichto compare peers, allowing them to encourage improvement across the board over time.

INVESTMENT DECISION

The engagement did not result in a significant change to the team’s investment thesis for the company.

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ENGAGEMENTFIGURE 9.3

International Equity Engagements – Corresponding With MSIM Engagement Themes
From 1 July 2022 to 30 June 2023, the International Equity team had a total of 130 ESG engagement meetings. Figure 9.3 shows a breakdown of
portfolio company engagements that corresponded with MSIM’s Thematic Engagement Themes:

Decarbonisation & Climate Action

1.0

71
28

Natural Capital & Biodiversity
Diverse & Inclusive Business

18

Decent Work & Resilient Jobs

17
15

Circular Economy & Waste Reduction

Please note: more than one subject may be covered in a company engagement, and therefore the total number of engagements may not equal the
total number of discussion topics. The chart above is not representative of the full scope of engagement topics covered by the International Equity
team during the time period.)
COUNTERPOINT GLOBALEngagement Approach
The Counterpoint Global team’s engagement approachis viewed holistically with their investment activities, andthey consider their ability to deliver long-term value.
Each portfolio company is engaged with differently given
respective areas of materiality.
The team’s engagement process is iterative, with eachengagement providing new information that enhances
the team’s view of the company and what they regard
as its priorities, gaps and opportunities. When the teamhas provided suggestions or recommendations forcompanies on their business practices, the team monitors
the company’s alignment with these suggestions over a
period of time. The team’s engagement tracking notes
allow them to flag issues for follow-up and for monitoring
throughout the investment process. The team often goes
into engagements with predefined topics to discuss with acompany, but in some cases, they will identify additional
issues through an engagement, which then become newissues to monitor moving forward. For companies withsignificant, ongoing ESG challenges, the team may monitor
a company’s management of the same issue over an
extended period of time and discuss that issue in every
subsequent engagement call. For other companies, thetopics of engagement may change frequently along with
the KPIs and objectives used to monitor them.
The team is increasingly finding that its global, allsector, all-capitalisation, integrated sustainability
research approach is novel to companies and presents
the opportunity for partnership, where the team shares
strategies with companies to help them capitalise on thesustainability opportunities available to the company. The
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team selectively offers companies access to its network ofother operators, or sustainability practitioners where they
think doing so would create the opportunity for a mutually
beneficial dialogue.
The team pays close attention to proxy voting, using theirvotes and other shareholder rights to promote governancealigned with long-term shareholder interest. The
Counterpoint Global team also engages some companies
in discussion on various aspects of corporate governance,sometimes as an adjunct to proxy voting.
The Counterpoint Global team engages with companies indifferent ways, including:When evaluating strategy and management quality, theteam’s Investors engage companies to discuss issues that
may include environmental and social policies and practices.
The Team’s Sustainability Lead working with the MSIM
Global Stewardship Team to directly engage current
portfolio companies—through the governance channel todiscuss ESG initiatives. Most recently, a US-based holding
engaged with the team to specifically discuss ESG.
Regular meetings with senior Management of portfolio
companies – In regular updates with management teamsof the team’s portfolio companies, the investment teammembers address ESG drivers where there are clear
enterprise value implications (e.g., expected dilution fromshare-based-compensation). Socio-economic
empowerment, inclusion, community development, data
governance, security and risk management are otherareas of high focus. Companies engaged in thesesustainability-related business activities are expected tobenefit in the form of enhanced growth rates,
profitability and/or competitive advantages.

ENGAGEMENTGlobal institutional conferences attended by portfolio
companies’ Sustainability Heads – members from theteam attend and/or speak at these conferences, theattendees of which would generally include seniorsustainability officers from current portfolio companies
and other global organisations.

Based on information obtained via various means outlined
above, investment team members create Sustainability
Research Insights, which are then distributed to allmembers of the Counterpoint Global team following an“SR Engagement,” which the team defines as a discussion
where it asks the company a set of questions designed
to clarify the state and sophistication of the company’ssustainability strategy and processes. These SR Insights
notes synthesise the key insights learned from thediscussion, which tend to contextualise the opportunities
and risks as well as assess the team’s understanding of
the long-term alignment of incentives as well as theculture of adaptability, which the team views as often
useful in capitalising on sustainability-related themes. On
a quarterly basis, the team’s Sustainability Lead highlights
the most material and often out-of-consensus insights
acquired through that quarter’s engagements, giving
the senior investors the opportunity to ask questions
and prompt new questions for future engagements.
These insights are additive to the entire analysis of thecompany, to give senior investment decision-makers amore complete view into the opportunities and risks facing
the company.
GLOBAL OPPORTUNITY

The Global Opportunity team’s investment processintegrates analysis of sustainability with respect todisruptive change, financial strength, and environmental
and social externalities and governance. The teamviews ESG as a component of quality and considers thevaluation, sustainability and fundamental risks inherent inevery portfolio position. As bottom-up investors, the teamdoes not apply top-down ESG positive/negative screens
to a benchmark. Nor does the team utilise ESG scorecards
from third parties that rank companies versus industry
peers. In other words, ESG in isolation is not a principal
driver of the team’s investment thesis; it is but one
important component of the team’s quality assessment.
Incorporating ESG-related potential risks andopportunities within an investment process is about
ensuring long-term stewardship of capital. Over extended
time horizons, the team believes that ESG risks are
more likely to materialise and externalities not borne by
a company are more likely to be priced into the valueof securities. Therefore, the Global Opportunity teamcontinues to innovate and evolve its process and believes
that integrating ESG within its investment analysis
improves the risk and reward profile of client portfolios.

CASE STUDY 9.2
INVESTMENT TEAM

Global Opportunity

ASSET CLASS

High-Conviction Equities

MSIM ENGAGEMENT THEME(S)

Decarbonisation and Climate Action, Circular Economy and Waste Reduction, Decent Work andResilient Jobs

COMPANY SECTOR/INDUSTRY

E-commerce and Fintech

COMPANY LOCATIONSouth America

MATERIALITY

Company specific

ISSUES

The company’s mission is to democratize commerce and payments across 18 countries in Latin America.
Decent work and economic growth are core to the business as enabling entrepreneurship, job creationand socioeconomic development enhances the continent’s largest commerce platform comprising over
500,000 small and medium-sized enterprises (SMEs), 9 million sellers and 67 million buyers. Providing
financial services such as digital payments and credit helps merchants build their business and generate
6-11 jobs on average.

ACTIONSThe team engaged a Latin American ecommerce and financial technology platform to discuss progress on
sustainability priorities.

OUTCOME/NEXT STEPSThe company is focused on responsible consumption and production by decoupling resource
consumption from e-commerce growth through best practices and has achieved 100% recycled
cardboard under circular economy initiatives while recognizing room for progress to reduce plastic
packaging. The company has also made significant progress on climate action by committing to ascience-based target to reduce emissions, publishing TCFD report, and developing plans to increase
renewables from 15% of electricity consumption. The company is also working to secure additional
supply of electric vehicles for third-party logistics firms by addressing challenges of financing andcharging network availability.

INVESTMENT DECISION

Continue to hold the investment.

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ENGAGEMENTEngagement Approach
For the Global Opportunity team, engagement priorities
differ by individual company and are not region-specific.
The team’s research has identified both ESG opportunities
as well as risks that may impact the value of a company.
In such cases, the team takes an engagement approachto guide/steer the company towards better sustainability
practices and strategies that correspond with the company’sbusiness. This is demonstrated in the following case study:
EMERGING MARKETS EQUITYEngagement Approach
The EME team’s engagement process is driven byfinancial materiality and improving performance throughunderstanding a company’s financial and sustainablestrategy. As active managers, the team understands
companies’ operational performance and ESG strategies
are dynamic. Research and engagement allow the team
to look beyond an ESG data point and analyse how acompany’s ESG risks and opportunities are evolving, andhow they will impact long-term financial performance.
Engaging with management teams allows the team toevaluate whether the company has a clear differentiatorand gives them an additional lens into viewing
management quality more broadly.
After identifying material risks for a company, the teamconducts a baseline engagement meeting with management.
The EME team believes that a company’s engagements are a
two-way street—the team not only listens and learns about
the company’s sustainability strategy, but also educatesthe company on industry-best practices and provides

guidance, such as encouraging management to set specificemissions targets and communicating the risks which theteam believes are most material to the company. The EME
team views a successful outcome as when a material metricimproves, or when a company might adopt a suggestion
or industry standard, or where there is a change in board
independence or composition.
Post-engagement, the EME team writes up its assessmentof the company’s sustainability strategy. For the firstbaseline engagement, the team focuses most on how
the company acknowledges its ESG risks and how they
have addressed them so far. The EME team also wants tounderstand the company’s positioning and evaluate whether
or not it is committed to improvement. In its assessment,
the team identifies a few key areas and metrics on which
they can follow up post-conversation. The team follows up
in regular conversations with management.
Should the EME team not see meaningful improvement
on material metrics the team may put the stock into its
escalation protocols if the team feels that these metrics
might impact the competitiveness and growth of the stock,or if the company’s inability to make progress degrades theirtrust in management, they may exit the position. The EME
team’s approach to escalating engagement does not differ
based on strategy or geography but is decided on a case-bycase basis at stock level.
During the full year 1 July 2022–30 June 2023, the EME
team held a total of 59 dedicated ESG engagements withcompany management teams on a range of ESG themes:

FIGURE 9.4

EME Team Engagements – Corresponding With MSIM Engagement Themes
Decarbonisation & Climate Action

1.0

55
20

Circular Economy & Waste Reduction
13

Decent Work & Resilient Jobs
11

Diverse & Inclusive Business
Natural Capital & Biodiversity

1

Please note: The chart above is not representative of the full scope of engagement topics covered by the Emerging Markets Equity team during
the time period712023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

ENGAGEMENTCASE STUDY 9.3
INVESTMENT TEAM

Emerging Markets Equity

ASSET CLASS

High-Conviction Equities

MSIM ENGAGEMENT THEME(S)

Diverse and Inclusive Business, Decent Work and Resilient Jobs

COMPANY SECTOR/INDUSTRY

Consumer Staples/FoodCOMPANY LOCATION (WHERE
IT IS HEADQUARTERED)

Asia (ex Japan)

MATERIALITY

This company is held in an EU SFDR Article 8 fund that gives due consideration to material sustainability
risks for portfolio holdings. For this engagement, the team identified the material risks to be inclusivity,
environmental preservation and product integrity—all of which would impact profitability if poorly
managed. Inclusivity affects the company’s ability to distribute its products (as detailed below). Robust
environmental preservation or management can affect consumers’ perception of the company as wellas support management of regulatory risks. Lastly, product integrity includes food quality and safety,
which can directly impact sales volumes. The team wanted to further understand how the company isaddressing these issues and specific initiatives put in place which resulted in an engagement.

ISSUES

The team had a first engagement to understand the company’s sustainability strategy and approach tomaterial risks, and assess its level of ESG integration.

ACTIONS

During the engagement, the team discussed several material issues. While the company is relatively new
to sustainability reporting and communication, the company shared its sustainability strategy, whichcentres around inclusivity, environmental preservation and product integrity. The company places great
importance on its positive contribution to stakeholders and its products, which directly contribute totackling malnutrition and stunting in children in Indonesia. A key component of the company’s inclusivity
strategy is their exclusive programme that comprises over 4,000 agents who sell the company’s
products to more than 300,000 households on a weekly basis. The target of the programme is toempower low- to medium-income Indonesian housewives by providing a source of income and financial
independence. Many of these women are previously unbanked and so the company also helps them
open their first bank account. The team encouraged the company to consider measuring and disclosing
satisfaction rates for agents. During the team’s engagement, they also discussed other material topics
including environmental preservation and product integrity and encouraged the company to set specifictargets around the issues discussed

OUTCOME/NEXT STEPS

While the company is still ramping up its sustainability capabilities and reporting, the team wanted tohighlight that the company is receptive to advice and areas of improvement. Given that this was the team’s
first engagement with the company, they were satisfied with its responses and will continue to engage
with the company to further improve performance and transparency. The team will follow up on issues
discussed and the company’s responses, including specific targets set, during their next engagement.

INVESTMENT DECISION

The team concluded that the company demonstrates awareness and efforts to address material issues,
which resulted in their decision to continue to hold the investment.

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ENGAGEMENT

FIXED INCOME AND LIQUIDITY

are primarily led by the Calvert Fixed Income ESG
Research Analysts, targeting issuers based on severe
controversies, or lagging ESG practices. The aim of theseengagements is to set measurable objectives to improvesustainability disclosure, in order to recommend themitigation of sustainability risks and promotion ofopportunities. The team’s targeted engagements are
generally one-to-one meetings, to maximise theopportunity for detailed discussion and advocacy.

Engagement Approach
The Fixed Income organisation has a long history of creditrelated engagement. Since 2020—when the organisation
first published their Fixed Income Engagement Strategy—
they have been supplementing that with a structured
approach to ESG-focused engagement across corporates,
agencies and sovereigns.
The Fixed Income organisation believes they have an
important role to play in building a constructive dialogue
with debt issuers, with a unique position versus equity
counterparts due to their access to a broad range of entities
beyond listed companies: e.g., governments, municipalities
and privately held companies. Through engagement, theorganisation also aims to enhance transparency in the market,
improve price discovery of the proper cost of capital andultimately help preserve the long-term value of holdings.
In 2023, the Fixed Income organisation updated their ESG
Engagement Strategy to better describe their integrated andtargeted approach to engagement, and an expanded set ofthematic priority areas, as outlined in the chart below:Integrated engagements: The Fixed Income organisation’s
integrated engagements seek to address financial materiality.
Led by Credit Research Analysts as part of the regularcourse of business, these engagements serve as informationgathering opportunities for the Fixed Income investment
teams to expand their insights on issuers’ ESG strategies. For
example, Fixed Income Credit Analysts leverage Sustainable
Bond Roadshows as an opportunity both to supplement
research and gauge sustainability momentum. Integrated
engagements may be one-to-one meetings, or with otherinvestors, such as during roadshows.
Targeted engagements: Targeted engagements focus on
specific ESG issues to encourage corrective action. These

Thematic focus: The Fixed Income organisation
structures their engagement meetings around a set ofthematic priorities that are aligned with MSIM’s
engagement themes.

Over the 12-month period from July 2022 to June 2023,
the Fixed Income organisation conducted over 160
engagement meetings, continuing to focus on the theme ofdecarbonisation and adoption of science-based emissions
reduction targets. In addition, macroeconomic issues such as
inflationary pressures and the rising costs of living aroundthe world led to a growing focus on social inclusion and Just
Transition, labour and human rights, and good governance.
Some of the engagement meetings conducted by the
Fixed Income organisation, in particular with financial
institutions, may also benefit the Liquidity team. In somecases, the Liquidity team may rely on the credit analysts
and ESG analysts in the Fixed Income organisation to
help conduct engagement meetings associated with theirinvestment holdings.
Over the course of the year, the Fixed Income organisation
conducted a thematic engagement series, involving an
in-depth dialogue with select issuers on themes on which
the organisation considers it important to advocate forpositive outcomes. For example, in 2023 the Fixed Income
organisation launched an engagement series focusing on

FIGURE 9.5

Fixed Income ESG Engagement Strategy
THEMATICINTEGRATEDTARGETED

Seeks to address
financial materiality

Focus on specific ESG issues toencourage corrective action

Engage to supplement
research and gauge
sustainability momentum

Engage to recommend mitigationof sustainability risks andpromotion of opportunities

Decarbonization &Climate Action
Diverse &Inclusive Business
Natural Capital &Biodiversity
Circular Economy &Waste Reduction
Decent Work &Resilient Jobs

73

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ENGAGEMENT

the Just Transition topic, with select utility and energy
companies. The series sought to evaluate, on an ongoingbasis, how these companies are navigating the impact of
the low-carbon transition for the workforce, supply chain
and communities. The organisation’s key asks for thesecompanies were framed around dialogues with affectedstakeholders and the setting of time-bound targets, in aneffort to potentially advance climate change mitigation
and adaptation, and to improve socio-economic inclusion.
At the same time, the engagement series offered theFixed Income analysts additional insights to conduct athorough evaluation of those companies and, the risks andopportunities to which they are exposed, and to take that
into consideration as part of the investment process.
In light of regulatory developments, such as SFDR, theFixed Income organisation has been increasingly focusing,
within these themes, on environmental and social factorsthat are associated with Principal Adverse Impact (PAI)
indicators, with the intention of mitigating portfolios’
exposure to issuers that may do significant harm tosuch factors. These include, for example, a scale-up in
engagement focused on carbon emissions reduction acrossScopes 1, 2 and 3, and on the phase-out of fossil fuels, aswell as on human and labour rights monitoring along supply
chains, in the context of compliance with international
norms such as the UN Global Compact or the OECD
Guidelines for Multinational Enterprises.
The Fixed Income organisation’s predominant methodof engagement is via direct meetings with senior
representatives in a company or organisation. These usually
include senior Chief Financial Officers (CFOs) and membersof the Treasury teams, Heads of Investor Relations, andsenior representatives from the Sustainability teams. For
smaller companies, CEOs also often attend the sessions.
Over the last 12 months, the Fixed Income organisation
has also been enhancing its collaboration with the Calvert
Engagement team. In Q2 2023, the groups kicked off a
joint, ongoing engagement with a utility company on its
transition approach and impact on core stakeholders,with a twofold objective to: (1) assess the company’s
strategic approach towards renewables, and fossil
fuel phase-out; and (2) discuss the implementation of
initiatives and monitoring to enhance the just transition.
The joint engagement has found that the company’s
risks to exit coal by 2025 are uneven across geographies,
green hydrogen projects are on track to meet regulatory
standards, and local stakeholder relations are managed bydesignated employees. The groups solicited the company
to provide improved disclosure on potential roadblocks todecarbonisation, and focus on progress measurement anddisclosure of just transition metrics.
The Fixed Income organisation also participates inindustrywide collaborative engagement initiatives beyond
MSIM, as outlined in further detail in Principle 10. In cases
where there is a cross-asset class focus on an issuer’s
ESG risk both on the equity and fixed income side, or an
egregious conduct that warrants escalation by mobilising
the broader MSIM franchise, the team may engage
collaboratively with other MSIM investment teams andthe Global Stewardship Team.
Annual Engagement Pipeline
For the Fixed Income organisation’s targeted engagements,
they establish an annual pipeline of priority target
companies with which they aim to engage, based on but
not limited to the following criteria: laggard ESG scores,
high emissions across Scopes 1-3, high fossil fuel revenue
generation, severe ESG controversies such as violationsof the UN Global Compact or OECD Guidelines forMultinational Enterprises, size of bold-holding exposuresacross portfolios, strong misalignment with the SDGs,
or unrated names (such as high yield or privately heldcompanies), in order to make disclosure requests.
The team approaches issuer engagement constructively
and collaboratively. Depending on the impetus for
dialogue, the team seeks to set clear expectations fromthe engagement process, particularly for the team’s
targeted engagements. These can include the disclosure of
specific data points, promoting the adoption of recognised
ESG reporting standards, or suggesting alternative
practices where the team is concerned with a certain
course of action taken by the issuer.
Asset Class and Regional Differences
The Fixed Income organisation segregates their engagement
pipeline across Investment Grade, High Yield and Emerging
Market companies, based on the team’s research coverage
structure. Whilst Investment Grade issuers tend to be theprimary target of the team’s targeted engagements, as
they generally have larger quantifiable externalities, theteam has been growing their engagement with High Yield
and Emerging Markets issuers, accounting for a higher
proportion of engagements over the reporting period. The
team finds that the close relationship between management
and investor for smaller companies, particularly those in thehigh-yield space, creates an opportunity for constructive,
ongoing dialogue, which is often supported by clientswith high-yield focus (see Principle 6 for further detail on
engagement with a distinct client focus).

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ENGAGEMENTTABLE 9.1

Fixed Income Engagements – Distribution Across Fixed
Income Asset Classes
FIXED INCOME SUB ASSET CLASSENGAGEMENT DISTRIBUTION (%)

Investment grade

66%

High yield

19%

Emerging markets

10%

Sovereign, Supernationals and Agencies

5%

The Fixed Income organisation has also been using theirunique position to engage beyond corporates, focusing
on sovereigns and government-related issuers. The teamhas increasingly been engaging with emerging market
sovereigns on their progress towards lagging SDGs,
and, more broadly, on how countries can provide more
frequent sustainability disclosure and impact-focused data.
On a global scale, the Fixed Income organisation has also
been expanding the geographical distribution of their
engagements—in particular, increasing their focus on Latin
America. Whilst engagements in EMEA and the US continue
to comprise the majority of the team’s engagements acrossvarying sectors, the team’s dialogues in LATAM havebeen concentrated on metals and mining, and food andbeverage companies. The organisation’s engagements in thisregion have sought to encourage improved disclosure andreporting across the supply chain, on topics such as humanrights and biodiversity.

MSIM has access to a wide range of third-party ESG data
vendors, hence the Fixed Income organisation is able to track
ESG metrics at the issuer and, where applicable, security
levels. The factors they consider vary based on the issuer
and its sector. For example, within their autos engagement
series, the team conducted a materiality-based analysis to
identify the most important metrics to monitor over time.
These included metrics related to decarbonisation (suchas percentage of fleet that are electrical vehicles), supply
chain management (proportion of suppliers assessed using
sustainability factors), and diversity and inclusion (such as
gender diversity in the workforce and management).
Engagements are used as frequently as needed as partof the monitoring and stewardship process. The Calvert
Fixed Income ESG Strategy and Research Team monitors
controversies across holdings, and therefore in cases where
they identify a material ESG risk or a particular ESG laggard,
they aim to engage to assess whether any remediation
strategies have been implemented. They first identify any
material issues, for example any controversies or data
discrepancies within sustainability reports, before delineating
a set of specific questions and expectations. If the team
identifies areas for improvement within its engagement, they
may request action from the issuer. This can include a specificobjective, such as setting a net-zero target, and they may set
a timeline if the company is lagging behind its peers.

Example – Monitoring Progress

FIGURE 9.6

Fixed Income Engagements – Geographical Distribution
42%

41%
8%
9%

Engagement Monitoring and Measurement
The Fixed Income organisation maintains a centralised
tracker of engagement activities for monitoring and reporting
purposes, distributing a quarterly tracker of engagement
statistics and case studies for the benefit of clients. For
clients with a specific enhanced focus on engagement
embedded within their mandate, the team also provides
bespoke engagement information.
75

Progress on engagements is monitored through the periodic
assessment of selected ESG metrics.

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The Fixed Income organisation’s enhanced focus on Natural
Capital & Biodiversity within stewardship and ESG research
processes has resulted in an increasing focus on monitoring
biodiversity practices, particularly in high-risk sectors. For
example, in Q1 2023, they asked to meet with a high-yieldbiomass power company to assess their actions in relation toa biodiversity controversy, which claimed that the company
uses imported wood pellets sourced from primary andenvironmentally important forest. The company clarified to
the High Yield team that it is dependent on pellet suppliers
to provide them with data on the quality of the logs
procured, however, the Calvert Fixed Income ESG analyst
recommended that the company improve disclosure andtransparency on these sourcing practices.
As part of their monitoring process, the High Yield
team continued to assess the company’s biodiversity
practices. In Q2 2023, the energy regulator in thecompany’s jurisdiction launched a formal investigation
into the company’s sustainability reported data, namely
whether their sourcing of wood pellets was in breach of

ENGAGEMENT

sustainability requirements. The High Yield team decided
to divest from the company’s bonds given multiple
controversies and potential greenwashing of sustainability
data, mitigating the team’s exposure to linked regulatory
and financial risk. However, the team aims to monitor
whether the company has adopted recommendations
on disclosure. The team approaches engagement as
an ongoing process, particularly given the real-world
constraints that many energy companies face in the lowcarbon transition, with the possibility of future investment
if the company can achieve expected ESG standards.
Engagement Escalation
The Fixed Income organisation approaches engagement
constructively as they aim to understand the issuer’s

strategy and identify sustainability momentum. If, after
follow-ups, the team identifies that there has been no
improvement, or that the ESG risk outweighs any benefits
or opportunities, they would escalate the issue. The first
escalation step would be to the Portfolio Managers. As
bondholders, the teams use their buy/sell decisions as away of indicating their sentiment to the company on its
approach to sustainability. Any issues considered to bevery serious from a sustainability perspective would also
be raised to the MSIM Sustainability team and, in extreme
cases, to the Firm’s Global Franchise Risk committees. For
additional information on escalation, refer to Principle 11.
INTEGRATED, TARGETED AND THEMATIC APPROACHES

Example – Integrated Engagement

CASE STUDY 9.4
INVESTMENT TEAM

Fixed Income organisation, Broad Markets Fixed Income

ASSET CLASS

Investment Grade Credit

MSIM ENGAGEMENT THEME(S)

Decarbonisation and Climate Action, Circular Economy and Waste Reduction

COMPANY SECTOR/INDUSTRY

Utility

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)EuropeMATERIALITY

Concerns surrounding wastewater treatment and pollution incidents are highly material to a water
utility company, due to fines, regulatory and financial risk potentially stemming from mismanagement.

ISSUESIn Q2 2023, the team engaged with the company’s CEO and Treasury team as part of the team’s in-depth
evaluation of their green financing framework, and their upcoming Green Bond issuance, to better
understand how the issuance would fit in and contribute to the issuer’s broader sustainability strategy
and trajectory.
The proceeds from this issuance are intended to support two main projects related to new water
pipelines, increasing the company’s supply capacity measures in more water-scarce areas, and toinvestments to reduce spillage and improve water quality.
The company is facing criticism over its product management, in particular for wastewater treatment
and pollution incidents, with the industry’s regulator and investigation agency having opened
investigations into sewage treatment works and the company’s practices over the past two years.
Whilst the analyst noted that the company has managed the gross number of related incidents and hasdelivered satisfactorily on metering plans, the company had the highest number of serious incidents ofany water company within its country over the last year of reporting.

ACTIONSThe issuer explained in detail how the projects associated with the green bond issuance would befocused on addressing some of the identified issues, by seeking to improve water efficiency andwastewater management.
However, the team questioned how the company intends to quantify impacts associated with the
projects as part of their green bond impact monitoring and reporting. Company representatives statedthat in relation to their water industry and strategic pipeline projects, they intend to report on impact
annually and plan to provide new water savings and pollution-related impact figures in future reports.
The company highlighted that their event duration monitor coverage has increased across their network,
enabling them to better monitor sewer overflows. Indeed, one quarter of the company’s water CapEx
plan is directly targeted at improving performance in the case of sewer overflow and would be fundedin part by this green bond issuance.

OUTCOME/NEXT STEPSThe company’s issues around wastewater incidents raise serious concerns about the effectiveness of theissuer’s governance and management plans. Hence, the information gained in the engagement resulted in
our analyst assigning a negative momentum as part of his view of the issuer’s sustainability trajectory.
The credit analyst also downgraded his view on the company more broadly, including based on ESG
considerations. The team aim to monitor the evolution of the pending investigations against the company
and of their investments to improve their practices.

INVESTMENT DECISION

The investment team decided not to participate in the company’s new green bond issuance, based onsome of the pending concerns above.

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ENGAGEMENT

Example – Targeted Engagement
CASE STUDY 9.5

77

INVESTMENT TEAM

Fixed Income Organisation, High Yield

ASSET CLASSHigh Yield

MSIM ENGAGEMENT THEME(S)

Other* (please specify): Governance and Reporting

COMPANY SECTOR/INDUSTRY

Financial Services

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)North America

MATERIALITY

Privacy and data security are critical to the customer protection and the good functioning of financial
services. Potential lack of corporate governance structures to monitor and regulate the company’s
operations and services in this regard may leave it susceptible to regulatory, reputational and social risk.

ISSUESIn Q1 2023, the team initiated an engagement with a private debt collector that had very limited ESG
reported information and was unrated by third-party ESG agencies. The key ESG issues at the coreof this engagement were fair customer treatment, privacy and data security, and overall corporate
governance. Given the investment team’s significant bond-holding in this company, they intended toleverage the exposure to induce positive change by speaking directly to the company’s management.
The team was concerned about the social and regulatory risk arising from misaligned incentives
between the debt collection company and their customers, often making this business activity thetarget of consumer protection authorities. On the other hand, the company claimed to be best-inclass from an ESG perspective within their industry, citing previous audits that did not demand any
remediation measures.
The company outsources 60% of their collections to third parties, but reviews logged complaints
and samples of customer calls to monitor interaction with customers. However, overall customer
satisfaction is not systematically assessed.

ACTIONSThe investment team recommended that the company conduct a materiality assessment of ESG issues,
defining priorities and action points based on results.
The team advised the company to work on developing customer treatment and third-party vendor
policies, and to start with publishing an ESG report. The company agreed to internalise our feedback
and to develop an ESG summary, to be made initially available to investors only.

OUTCOME/NEXT STEPSIn Q2 2023, the company responded to the team’s ask and provided investors with an initial ESG presentation
and a selection of ESG metrics, including numbers on customer satisfaction. The team appreciate thecompany’s proactiveness and found this to be a highly satisfactory first milestone of our engagement.
The team intends to build on this positive momentum, encouraging the development of new policies
and publication of a full ESG report aligned with sustainability disclosure standards while continuing theengagement process to seek to further enhance the company’s ESG disclosure practices and quality.

INVESTMENT DECISION

The positive momentum from the engagement with the issuer, including their responsiveness to
feedback, contributed to the team’s decision to maintain investments in the name.

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ENGAGEMENTFIGURE 9.7

Fixed Income Engagements – Corresponding With MSIM Engagement Themes
Between 1 July 2022 and 30 June 2023, the Fixed Income organisation conducted 166 ESG-focused engagement meetings. Figure 9.7 shows abreakdown of topics on which they engaged with portfolio companies based on MSIM Engagement Themes.

Decarbonisation & Climate Action

1.0

289
58

Decent Work & Resilient Jobs
Diverse & Inclusive Business48

Circular Economy & Waste Reduction

45

Natural Capital & Biodiversity

16

Example – Thematic Engagement
In 2023, as part of the Fixed Income organisation’s Just
Transition engagement series, they requested to meetwith an energy company, considered an ESG leader
in the oil and gas space, to assess the impact of thecompany’s transition on the workforce, supply chain
and wider community. The company had conducted
outreach to the wider community; however, it had not
set a clear strategy relating to workforce or community
engagement. The Fixed Income organisation strongly
encouraged the company to explicitly disclose figureson employee reskilling in relation to energy transition
activities, and provided examples to the company oftransition data metrics, such as the number of newjobs created and employee turnover statistics. The ESG
analyst also recommended that in the case of any asset
divestments, the issuer contractually ensures that efficient
operations and community relations will continue under
new ownership. Given the significant transition and social
risk associated with a lack of workforce and community
engagement, the Fixed Income organisation aims to follow
up after the company’s next reporting cycle to monitor thesuggested action points.

Customised Solutions
GLOBAL BALANCED RISK CONTROLThe team aims to fulfil their stewardship responsibilities
by engaging directly with issuers through effective exerciseof their proxy voting and other rights as shareholders.
The team’s stewardship objectives are tied to outcomesthat include:







Enhanced disclosure of sustainability-related information
by issuers
Securing and encouraging improved management ofmaterial sustainability-related risks and opportunities
Improving the team’s own understanding of any
sustainability-related risks in their portfolios

Typically, the team’s main engagement priorities are
guided by top-down thematic research, based on anassessment of material ESG risks and opportunities by
their dedicated ESG analysts. They believe this is theideal approach for their strategy as researching risks to
the global economy and global markets is also central
to the GBaR team’s asset allocation process. The team’s
engagement strategy can broadly be summarised in the
below Engagement Process:

FIGURE 9.8

GBaR’s Engagement Process
Engagement
Topic Selection
Top-downthematic
based
selection

Select &Prioritise
ScreenPortfolio using
identiﬁed
KPIs

Engagement
Framework
Identify KPIs
Designproprietary
framework

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Engagement& Tracking
Company
tailored questions
tied to material
ESG issues

Company
Deep Dive
Assess eachtarget froma rigorous
bottom-up
perspective

Tracking
withperformancetrackedover time2023 UK STE WARDSHIP CODE REPORT78

ENGAGEMENTSPOTLIGHT #5

Example Engagement Series on Climate Transition
The GBaR team has long considered climate change as a potential risk
event and one of the key issues facing society and impacting markets.
Indeed, recognising this risk within their portfolios that consider ESG
factors, the team implements an additional tilt towards companies thatthey believe are better managing the risks and opportunities in the
global transition towards a low carbon economy.

To date, the team is pleased that their target companies’ strategies
are increasingly aligned with the ambition required to decarbonise theelectric utility sector. Through continuous dialogue with their target
companies, the GBaR team has validated their research findings that not
only do renewables provide lower carbon electricity, but they are also
increasingly the cheapest option compared to thermal assets. The teambelieves that, over the long term, this has the potential to lower not
only emissions, but also customer bills.

However, they also recognise that integration alone does little tomitigate the causes and effects of climate change. The GBaR team
therefore uses its influence to engage with some of the most carbonintensive sectors of the economy. Since 2020, the GBaR team haveengaged regularly with electric utility companies across Europe, the US
and Southeast Asia to encourage more ambitious decarbonisation plans,such as those laid out by the International Energy Association. Typically,
the team’s engagement has focused on prioritising renewables over gas
in the transition away from coal-fired generation. The GBaR team havealso focused on encouraging investee companies to step up near-term
decarbonisation ambitions.

However, the journey to decarbonisation is not always straightforward.
Power generation is a highly complex and regulated industry, andthe team has, through their engagements, come to understand andsympathise with the challenges inherent in such a large-scale transition
from fossil fuelled power generation to a predominately renewablesbased system. Indeed, these challenges are not only associated with
oft-cited limitations of renewable energy (intermittency for example)
but are also tied to issues such as regulatory requirements to maintainfossil fuelled plants, well founded concerns for a Just Transition, andbottlenecks concerning permitting.

During the reporting period, the team continued this engagement
programme and engaged with 11 electricity generators. In doing
so, the team typically meets staff directly responsible fordecarbonisation strategies.

Between 1 July 2022 and 30 June 2023, the GBaR team conducted 60 ESG-focused engagement meetings. Figure 9.7 showsa breakdown of topics on which they engaged with portfolio companies based on MSIM Engagement Themes.

FIGURE 9.9

Global Balanced Risk Control Engagements – Corresponding With MSIM Engagement Themes
Decarbonisation & Climate Action

1.0

92

Diverse & Inclusive Business

30

Circular Economy & Waste Reduction

28

Natural Capital & Biodiversity

19

Decent Work & Resilient Jobs

79

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ENGAGEMENTCASE STUDY 9.6
INVESTMENT TEAMGBaR

ASSET CLASS

Custom Solutions

MSIM ENGAGEMENT THEME(S)

Decarbonisation and Climate Action

COMPANY SECTOR/INDUSTRY

Utility

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)North America

MATERIALITY

The team believe that a net zero target, at least aligned with public policy targets, is essential forelectric utility companies. In this case, a specific plan for phasing out the company’s most carbonintensive assets would provide investors reassurance as these assets are more likely to become
unprofitable over the long term while renewables gain market share.

ISSUES

The team has engaged since 2020 with a US utility company to encourage management to target net
zero emissions and phase out coal since 2020. While the team believes the company is a global leader
when it comes to decarbonisation, the team were concerned that the management does not have
any longer-term targets for decarbonisation beyond 2025. The team have consistently requested thecompany commit to a long-term net zero target.

ACTIONSThe team most recently met the company at the start of 2022 and again during 2023.
During their engagement in 2022, the company described its thinking around planning for net zero andsubsequently publicly announced a net zero plan targeting 2045 a few months after the call.

OUTCOME/NEXT STEPS

Post-engagement, the company shut down all its coal-fired plants except for minority ownership stakes in
two coal plants, which are due to close by 2024 and 2028, respectively (representing 0.4% of its capacity).
The team are pleased with the company’s new ambition and continued commitment to phase out coal;
however, the company’s plan will need to be monitored closely as it requires significant investment over along period of time. The company has a good track record and strong balance sheet to support the plans.
Furthermore, the team believes the company could bring forward its decarbonisation ambition to 2035,
in line with International Energy Agency (IEA) recommendations, given significant regulatory incentive
tailwinds. The company’s track record shows this may be possible.

INVESTMENT DECISION

The team continues to hold and engage with the company given its positive momentum on this material
ESG issue.

SPOTLIGHT #6

Circular Economy & Biodiversity (Deforestation Case Study)
In addition to the climate crisis, the world is also facing a potential
biodiversity collapse. Like climate change, loss of biodiversity andnatural capital is a systemic risk, which could generate profoundnegative environmental and social consequences and lead directly tomajor business or market disruption.
Over the reporting year, the GBaR team sought to encourage theirportfolio companies’ management teams to better understand thepotential impact and costs of neglecting the biodiversity challenge andto seek to integrate the consideration of biodiversity-related issues
into their business strategies.
Underlining how reliant economic and societal activity is on a healthyand diverse ecosystem, the World Economic Forum (WEF) found that$44 trillion of economic value generation—over half the world’s total
GDP—is moderately or highly dependent on ecosystem services.14

was most concentrated in their portfolios. Companies in these sectors
are particularly exposed to deforestation-related risk through their
supply chains. They are, of course, also dependent on the abundant
benefits derived from biodiverse and healthy ecosystems such as raw
materials for their products and clean and abundant sources of water
for their operations.
During the reporting period, the GBaR team carried out intensive,
bottom-up research on 13 identified companies. In doing so, the teamdesigned a proprietary framework to leverage company-reported andthird-party data and to translate this quantitative and qualitative data
into standardised and comparable rankings. Companies are scoredfrom 0-100% based on the team’s assessment of company policy andpractices on KPIs within each category. The framework allows theteam to assess, prioritise and track each individual target’s progress on
key engagement requests.

The GBaR team focused on the consumer staples and consumer
discretionary sectors, as this is where they believe biodiversity risk

14

WEF, Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy (2020).
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ENGAGEMENTCASE STUDY 9.7

81

INVESTMENT TEAMGBaR

ASSET CLASS

Custom Solutions

MSIM ENGAGEMENT THEME(S)

Decarbonisation and Climate Action

COMPANY SECTOR/INDUSTRY

Utility

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)EuropeMATERIALITY

The team has engaged with this company since 2020. The team most recently met with the company in2022. The company was initially targeted as the team felt there was an opportunity for the company tobenefit from the energy transition in several financially material ways. The team believe the company
can cement its leadership position and enhance its long-term business value by bringing forward its net
zero ambition.

ISSUES

Decarbonisation/Climate Action. The past years have seen a proliferation in ambitious decarbonisation
targets bolstered by policy support for clean energy build out in the markets the company operates in.
Additionally, carbon prices and policy developments in the markets where the company operates havethe potential to impact profitability and asset life for carbon-intensive assets.

ACTIONS

Since 2020, the company has made significant progress towards decarbonisation. This is demonstrated
by its reduction in direct emissions by almost 25% in the last five years.
However, following their engagements the team continued to believe the company could cement its
leadership position by bringing forward its net zero ambition. The team suggested that the company
should follow the IEA’s Net Zero guidance and seek to achieve net zero emissions in its generation
portfolio by 2030 in operations in advanced economies, and 2040 in emerging markets economies. This
would allow the company to benefit from increasing demand and policy support for clean energy.

OUTCOME/NEXT STEPSThe company agreed with the team on the need for a globally quicker decarbonisation of the electricity
system. Since the last engagement, the company announced an updated net zero target for scopes 1 and
2 by 2030 and across scope 3 by 2040. It expects to invest 65-75 billion Euros between 2026 and 2030
to transform its business towards network and renewable assets.

INVESTMENT DECISIONAs the company’s ambition is in line with the team’s expectations, they consider this engagement closed.

2023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

ENGAGEMENTCASE STUDY 9.8
INVESTMENT TEAMGBaR

ASSET CLASS

Custom Solutions

MSIM ENGAGEMENT THEME(S)

Diverse and Inclusive Business, Decent Work and Resilient Jobs

COMPANY SECTOR/INDUSTRYMedia and Entertainment

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)North America

MATERIALITY

The team believes an effective DEI strategy makes business sense for the company given thecompetitive advantage that authentic diverse storytelling has been shown to bring.

ISSUES

Given the materiality of the issue the team wanted the company to establish better board oversightover DEI issues. Additionally, the company had recently faced a shareholder proposal seeking moregranular gender pay gap reporting, which the team believed would help investors better understand its
progress on this issue.

ACTIONSOver the reporting period the team engaged with the company on three occasions across a varietyof governance and DEI-specific topics. Depending on the engagement context the team spoke withmembers of board committees, senior members of staff or investment relations officers.
Generally speaking, the team discussed how the board oversees the development and retention ofdiverse talent within the company to senior levels and was pleased to hear how increasingly involved
the board was in the strategy. They discussed the company’s bottom-up approach to hire from a morediverse pool of talent including using diverse interview panels and requested a more concrete oversightrole for the board.
The team referred to a recent shareholder proposal on gender diversity and requested that thecompany fully comply with the request for more granular data.
Additionally, with reference to research reports, the team spoke about diversity in decision-making or
high-visibility areas such as those involved with greenlighting content, production and other roles infront of and behind the camera.

OUTCOME/NEXT STEPSThe company committed to enhancing its disclosure in line with the shareholder proposal. Since theengagement the company disclosed adjusted gender, race and ethnicity pay ratio data and committed to
expanding the assessment of the adjusted pay ratio in 2023 and disclosing unadjusted median analysis of pay
in 2024. The team hopes the company can further enhance the disclosure in line with this commitment.
Most encouragingly, the company disclosed that the Compensation Committee would be taking on a broader
oversight role of DEI initiatives going forward. The team believes Board-level oversight of DEI initiatives will
ensure initiatives are monitored from the highest level and are in line with the company’s strategy.
The team continues to monitor the company with regard to diversity in decision-making functions
throughout the organisation

INVESTMENT DECISION

The team continue to hold and engage with the company given their positive momentum on thismaterial ESG issue.

Alternative Investments
GLOBAL LISTED REAL ESTATEThe Global Listed Real Estate team uses engagementswith company management to discuss ESG-related
strengths, weaknesses and opportunities, and throughthese conversations provides company management withcompetitive insights, financially sound business cases andpractical solutions to potentially improve their real estate
operations and practices, in addition to gathering information
on a company’s current and planned environmental, social,and governance policies, procedures and practices.
When taking into account both operational emissions
and embodied emissions of materials, buildings accountfor nearly 40% of the world’s CO2 emissions. Moreover,
it is estimated that building space is set to grow byapproximately 75% through 2050. Without significant
decarbonisation efforts within the real estate sector,

CO2 emissions will rise dramatically. With that in mind,
during the period the team conducted engagements, incollaboration with Calvert Research and Management,with Portfolio companies in an effort to encourage issuers
to commit to net zero through setting science-based
emissions-reduction targets and tracking progress of suchgoals. The team believes a focus on sustainability within
the real estate sector will likely serve as a differentiatorof value for landlords (and investors) going forward.
Increased tenant demand and expectations for green andhealthy buildings are leading to rental premiums for theseassets versus the rest of the market and expected to giverise to a new capital expenditure cycle for commercial realestate. Property owners that have already made significant
investments in sustainability should be best positioned
to navigate the increasing costs. At the same time,
obsolescence risk is expected to increase substantially forcarbon-stranded buildings unable to achieve greenhouse
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ENGAGEMENT

gas emissions reductions necessary to be aligned with a
1.5°C pathway. These buildings are expected to incur abrown discount, ultimately impairing values and potential
total returns
The team believes well-governed companies benefit froma wide diversity of perspectives and backgrounds on theirboards. As a result, another focus of the team’s thematic

engagement efforts in collaboration with Calvert Researchand Management has been encouraging issuers to commit
to gender diversity on boards.
Below are examples of case studies that highlightteam engagement efforts, specifically with respect toDecarbonisation and Climate Action and Corporate
Governance:

CASE STUDY 9.9

83

INVESTMENT TEAM

Global Listed Real Assets

ASSET CLASS

Alternative Investments

MSIM ENGAGEMENT THEME(S)

Decarbonisation and Climate Action

COMPANY SECTOR/INDUSTRY

Real Estate/Industrial

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)EuropeMATERIALITY

The installation of solar electricity panels on industrial units appears to offer strong income returns on
investment that are two to three times as high as standard rental yields on floorspace. Given the roof
area on industrial units is comparable in size to standard floorspace, companies that can exploit thisopportunity may be able to harness a material source of additional income and return that may driveincremental growth while also contributing to improved carbon emissions.

ISSUES

The team’s engagement with the UK industrial REIT formed part of their due diligence on a potential
new investment in a small but growing logistics business. The company had strong growth ambitions,
important given the need to cover its leasing platform, and relatively high central costs vs. existing
income through improved scale economics. Though the company appeared keen to grow the number ofunits via acquisition, the team wanted to assess how material the solar opportunity was in practice, andhow advanced the company was in its plans to advance a solar rollout given the company’s small andfragmented portfolio.

ACTIONSThe team spent a day with senior management and local operational teams in South Wales, touring a
representative sample of the company’s asset portfolio, and talking in depth about strategic options forthe business and potential uses of existing and new capital during and after the asset tours.
Management suggested it could and was looking at installing solar panels on roofs. However,management explained that logistically this could take time given it required extensive tenant
engagement, and in some cases alteration of leases, both of which increased tenant friction.
The company also suggested that although solar-generated power could be used within its buildings
by tenants, there would be additional administrative and regulatory complications if the power was
sold back to the grid. It also explained that most of its rental customers were small space users who
appreciated clarity and simplicity in lease terms, which an additional partial power supply agreement
might complicate.

OUTCOME/NEXT STEPSThe team concluded that the solar rollout potential for the company was relatively modest in the nearterm and that the majority of the growth in the business would likely come from rental growth alone.
Without the incremental layer of growth from solar economics, the team believed the scale economicsof the business model would take longer to achieve.

INVESTMENT DECISION

The team decided not to proceed with an investment in the company.

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ENGAGEMENTCASE STUDY 9.10
INVESTMENT TEAM

Global Listed Real Assets

ASSET CLASS

Alternative Investments

MSIM ENGAGEMENT THEME(S)Corporate Governance

COMPANY SECTOR/INDUSTRY

Real Estate/Data Centers

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)North America

MATERIALITY

Improper nomination practices pose financial and reputational risk at the company level; non-standard
nomination processes such as hiring outside of official board room protocols limit the board’s ability toeffectively oversee the company’s management and make sound decisions.

ISSUES

Clear and transparent nomination practices ensure boards are composed of qualified and experienced
individuals, thereby protecting the company’s financial interests and reputation. The former chairpersonof the company issued a letter highlighting the company’s governance issues, including a non-standard
nomination process for the incoming CEO and board chair which did not initially involve the entire boardof directors and took place outside of official board room protocols. The former chairperson asserted
that their replacement as board chair did not follow proper board procedures, nor did the plan toreplace the former CEO.
The letter necessitated improvement in the company’s corporate governance, specifically with respect
to increasing transparency and following appropriate protocols and procedures when evaluating andselecting executive officers and board members. Following the appropriate process will help ensure
appropriate candidates are selected for these important roles and will help instill investor confidence inthe nomination process.

ACTIONSThe team’s intention during their engagement was to advocate for increased corporate governancetransparency and greater alignment with shareholders regarding the nomination process for the boardof directors and company executives.
As part of the engagement, the team met with the company’s new board chairperson and discussed theprocess by which board directors are evaluated and selected. The team provided strategic advice ontransparency of corporate governance and greater alignment with shareholders.

OUTCOME/NEXT STEPS

Following the meeting, the company acknowledged the need for increased transparency in corporate
governance practices, specifically with respect to nomination practices. The company agreed to beforthright with a level of detail around the skills matrix and external consultants used in director
nomination considerations. The company agreed to work to instill investor confidence in their corporate
governance practices through greater transparency to ensure appropriate shareholder alignment. The
team will continue to track the company’s corporate governance practices and policies.

INVESTMENT DECISION

The engagement did not result in a significant change to the team’s investment thesis for the company.

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ENGAGEMENTGLOBAL LISTED INFRASTRUCTURE

Engagement Approach
The Global Listed Infrastructure team periodically conducts
ESG engagements with listed infrastructure companies. The
goal of these engagements is to assess each company’s ESG
efforts and through their conversations seek information ona variety of ESG topics. Generally speaking, the team looks
to highlight potential areas of risk and encourage companies
to improve their ESG metrics over time.
The Global Listed Infrastructure team takes into
consideration both the initial state of the business as well as
a company’s progress on ESG initiatives when making newinvestments or deciding to add or reduce positions. In someinstances, companies are early on in their ESG journeys,
and in other instances, companies are well-advanced, witha high level of experience and very detailed reporting. The
team looks for companies to improve in either instance as
their ESG engagement process is about ongoing, continuing
improvement. In areas where companies are naturally“green” from an environmental perspective, the team alsoemphasises the need to be best-in-class across a numberof different ESG elements, not just “E,” and to benchmark
themselves not just to their immediate peers or industry,
but rather to their regional markets more broadly.

FIGURE 9.10

Global Listed Infrastructure Engagements – Corresponding With MSIM Engagement Themes
1.0

Decarbonisation & Climate Action

39

Diverse & Inclusive Business

23

Circular Economy & Waste Reduction

17

Natural Capital & Biodiversity

11

Decent Work & Resilient Jobs

4

CASE STUDY 9.11

85

INVESTMENT TEAM

Global Listed Infrastructure

ASSET CLASS

Alternative Investments

MSIM ENGAGEMENT THEME(S)

Decarbonisation and Climate Action, Circular Economy and Waste Reduction

COMPANY SECTOR/INDUSTRY

Waste Management/Industrials

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)North America

MATERIALITY

The largest driver of energy use for environmental services companies that engage in solid waste andrecycling collection comes from a largely diesel truck collection fleet.
To decarbonise the fleet, companies have invested in converting their fleets to compressed natural gas(CNG), which generates lower emissions.
Tuck-in M&A makes up a larger portion of the company’s growth rate vs. peers, and along with that
M&A comes additional diesel trucks.

ISSUES

The team engaged with a waste collection company whose percent of collection fleet that runs on CNG
was low compared to peers. The team wanted to understand why it lagged peers in this regard, andwhat its plans were with regards to decarbonising its collection fleet.

ACTIONSIn addition to regularly meeting with the company at conferences and road shows, the team organised ameeting to specifically discuss ESG topics, of which decarbonisation of the fleet was a primary focus.

OUTCOME/NEXT STEPSManagement explained that in markets where CNG is financially viable, they look to replace diesel
trucks with CNG as part of the replacement cycle. However, the company primarily operates in rural
regions that do not have the infrastructure built out to support CNG, and hence it is not financially
viable in many of its markets. The company is focused instead on testing and developing electric trucks
that should work in these markets. The company had already been testing a hybrid electric truck andwas awaiting delivery of a fully electric truck to test in certain markets.
The team plans to monitor the progress of the EV truck testing and implementation, and continue tofollow up on the company’s CNG conversion.

INVESTMENT DECISION

The team invested in the company.

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ENGAGEMENTCASE STUDY 9.12
INVESTMENT TEAM

Global Listed Infrastructure

ASSET CLASS

Alternative Investments

MSIM ENGAGEMENT THEME(S)

Decarbonisation and Climate Action

COMPANY SECTOR/INDUSTRY

Utility

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)North America

MATERIALITY

Greenhouse gas emissions for utilities are material since the utility sector is one of the highest-emitting
sectors. If the utility company continues to generate from coal, it could face higher costs in the future.

ISSUESA US utility company has a target of reaching net zero for its Scope 1 and Scope 2 greenhouse gas
emissions by 2035. The company has ambitious targets to be the first combined electric and natural gas
US utility with electric generating assets to achieve Net Zero for its Scope 1 and Scope 2 greenhousegas emissions by 2035.

ACTIONSThe team arranged an ESG meeting with the company to understand its plan and assess the credibilityof its targets. They also discussed other ESG issues in the meeting.

OUTCOME/NEXT STEPS







INVESTMENT DECISION

The company expects approximately 60% of its emissions to decline as a function of retiring some coal
units (490 MW) and exiting other coal units by 2023 (150 MW), while retiring additional coal units by2025 (90 MW). The emission reductions from these coal retirements are expected to be partially offset
by a gas combustion turbine plant in 2024.
The company expects to address the remaining 40% of emissions by focusing on one specific coal unit
in the next plan and carbon offsets and renewable credits. It estimates only around 10-15% of its net
zero goal is achieved through offsets or credits and they need 500k tons of offsets (100k from peaking
gas and 400k from gas methane leaks). The team recommended limiting the use of carbon offsets asmuch as possible to reach net zero.
The team asked if the company is planning to establish interim goals before 2035 for CO2 reduction—it
is not. Upon questioning why its targets aren’t SBTI-based, the company reported that over 50% of its
revenue comes from gas but they can’t use Science Based Target SBTI’s gas framework as it is in processof being established. The company advised the team that the Electrical Power Research Institute is also
developing a framework and it is planning to use this.

The team kept our positive view on the Company and plan to continue our engagement in the future.

CASE STUDY 9.13
INVESTMENT TEAM

Global Listed Infrastructure

ASSET CLASS

Alternative Investments

MSIM ENGAGEMENT THEME(S)

Decarbonisation and Climate Action

COMPANY SECTOR/INDUSTRY

Utility

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)EuropeMATERIALITY

As a way to diversify from gas transportation activities, the group has in the past announced it aims toreconvert its pipeline network from gas to hydrogen. In addition, management has been at the forefront
with regards to its decarbonisation plan.

ISSUESIn the context of assessing the company’s strategy on decarbonisation, the team noted that thepercentage of the group capex aligned with taxonomy has decreased from 44% to 37%.
The team hosted several calls with top management to discuss the company’s strategy on decarbonisation,with a particular focus on understanding the rationale behind the company’s capex plan.

ACTIONSManagement explained that the size of investments aligned with taxonomy are stable at EUR3.7bn
whilst overall total capex has increased following the need to carry out capex in the short term to copewith the energy crisis that resulted from the Russia-Ukraine conflict. New investments have therefore
been implemented in order to a) add transport capacity for gas from South to North of Italy to replace
gas imports from Russia, b) build up new regasification capacity, and c) adjust compression stations toadapt the system to an inversion of gas flows from South to North. In addition, management explainedthat calculation of capex aligned with taxonomy is made by the company independently, lacking
guidelines from the EU, which should be disclosed by year-end. Lastly, capex on H2 has been postponed
to beyond 2030 given the urgency of the energy crisis.

OUTCOME/NEXT STEPSThe team was reassured on the company’s investment plan, despite its resulting in a lower share ofaligned capex, and on management’s long-term commitment to hydrogen development.

INVESTMENT DECISION

Positive investment stance unchanged

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ENGAGEMENTPRIVATE CREDIT AND EQUITYEngagement Approach
The PC&E teams lead engagement with portfolio companies
based on the business’ incorporation of its own Sustainable
Investing Policy and ESG/stewardship priorities outlined
under Principle 7. Due to the nature of the asset class anddiverse strategies, the ability to engage and thus obtain
information pertaining to underlying portfolio companies
will vary based on the nature of each strategy (e.g., control
vs non-control) and the type of investment (e.g., private
equity vs private credit). To supplement various engagement
approaches, the PC&E teams may also leverage third-party
diligence to augment the investment team’s activities.
Furthermore, engagements in the PC&E business are
not region-specific but are investment-specific given thelong-term horizon and nature of the asset class as well as
the opportunistic approach that many of their investment
strategies take. This approach aligns with the broader
investment objective of MSIM (as explained in Principle 1)
to achieve sustainable performance that delivers superior
outcomes for clients and markets over the long-term.
Control Situations (Equity)
Control situations enable a high level of regular and ongoingengagement and dialogue with portfolio company boards andmanagement teams. Investment teams collaborate closelywith portfolio company management teams in determining
100-day plans for improving operations, expanding businesslines, implementing organisational changes, etc., in orderto precipitate growth and create long-term value. As apart of that process, KPIs, including those pertaining to
ESG, are identified and reported to the investment team
as well as the board, where investment teams will haveseats, on a regular basis. While there are many common
considerations examined across all portfolio companies (e.g.,board structure, independent board members, existence of
employee policies, the presence of material environmental
risks, litigation activities, labour violations, etc.), many otherengagement topics are tailored to each industry given thefairly broad range of sectors and geographical regions inwhich the PC&E teams’ strategies invest in.
Non-Control Situations (Equity and Debt)
Non-control situations provide more limited opportunities
to engage with portfolio companies, and accordingly theteam take steps to carefully diligence and engage withsuch portfolio companies pre-investment. The level ofengagement with portfolio companies where teams do nothave control will depend on the nature of their relationshipand the willingness of each portfolio company to engage
in ESG-related (and other) topics. For equity investments,
872023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

teams may have board observer rights, which provide themwith a greater level of transparency, however, this does notenable them to fully engage with companies compared tocontrol situations. For credit investments, teams may haveaccess to information that the sponsor provides; however,the sponsor determines the materiality threshold of ESG
risks and/or incidents and ultimately has control over what
is disclosed to investors.
The Private Equity Solutions team sends annual ESG
questionnaires to its portfolio companies or GPs to obtain
updates on ESG policies, processes and performance
reporting. This approach is different from the other PC&E
teams as the Private Equity Solutions business consists
mainly of Fund of Funds, and since they are not active
owners of assets, they rely on active partners (externalmanagers) to engage with portfolio companies (although
this varies by partner/strategy/country). ESG questionnaires
are a way of obtaining information prior to deciding on next
steps with respect to each GP or investment.
Engagement approach
Engagement activity for the team will predominantly
be outcomes-based, seeking to drive positive change byengaging with the key influencers and decision-makers
within a portfolio company, with whom the team typicallyhave direct lines of communication. Key influencers
will differ between portfolio companies, and the team
therefore takes a flexible and tailored approach interms of which issues are addressed specifically, while
recognising the importance of senior manager buy-in todrive commitments to sustainability-related initiatives
from the top down. Engagement activity is tracked in the
Fund’s digital platform, DealCloud.
While there is no formal schedule for following up on
company engagements, it is expected that this will occur
on an ongoing basis, with follow-ups scheduled quarterly
at a minimum. Depending on the ESG-related objectives
and company management’s desired level of collaboration,
this may occur on a more frequent basis. Where
applicable, goals will incorporate quantitative targets
against which progress may be measured.
In addition, the team may engage with portfolio companies
on a reactive basis following the identification of acontroversy or risk event.
In the event that the 1GT deal team identifies a situationin which the portfolio company’s management of one ormore material ESG-related risks or opportunities does
not meet satisfactory levels or has been deterioratingover time, or where a company within the Article 9 fundhas been identified as potentially causing significant harm

ENGAGEMENT

through the impact of its operations on an ESG theme
or principal adverse impact indicator, the team will enact
an enhanced engagement protocol. Under this enhanced
engagement protocol, the portfolio company and deal
team work to resolve this over the course of 12 months
from the date of identification. In such an instance, thefrequency of engagement activity will likely increase
and may involve other resources, such as MSIM’s central
sustainability resources or third-party specialists. At theend of this 12-month period, the team will review thesituation and take appropriate next steps.
Engagement with portfolio companies will first andforemost be undertaken individually, pursuant to thebinding agreement between the Fund and the portfolio
company, whereby company management commits toengaging with the team and/or any third-party consultant
or specialist appointed by the Fund in relation to ESG
matters. However, the team recognises that effective
implementation of an Shareholder Value Added plan only
works if other parties in the capital stack and the board
are in alignment with it, and that collective engagements
can be powerful drivers of change. As such, the Fund will,
where escalation measures may be deemed necessary,seek to work in conjunction with other investors in
the capital stack in order to amplify the impact of theundertaken engagement and the chances of engagement
objectives and targeted outcomes being achieved.

PRIVATE REAL ESTATEEngagement Approach
MSREI recognises that it is better able to generate ideasthat develop innovative solutions to complex issues
by soliciting feedback and listening to the different
perspectives of our stakeholders, such as tenants. As
such, select MSREI funds have established a tenant
engagement programme, which includes providing selecttenant sustainability guides to tenants, and conducting
tenant engagement surveys and tenant events focusedon increasing sustainability awareness at selected assets
where appropriate across the portfolios.
MSREI strives to include ESG items in its Property
Management Agreements where feasible. Clauses may
outline requirements for cooperation between landlord andproperty manager to identify and assist with execution ofvarious sustainability measures including improving energy
efficiency, obtaining green-building certifications, etc.
For select funds, MSREI may conduct an annual property
management survey to help assess risk, monitor compliancewith a diverse set of policies and track improvements,
where possible. This survey includes questions to determine
if and how the property management and leasing
management teams are conducting reviews to ensurecompliance with leasing terms and conditions by theirtenants, including those highlighted in green lease clauses.

CASE STUDY 9.14
INVESTMENT TEAM

Private Real Estate

ASSET CLASS

Alternative Investments

MSIM ENGAGEMENT THEME(S)

Decarbonisation and Climate Action

COMPANY SECTOR/INDUSTRY

Select real estate assets within the US portfolio

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)North America

MATERIALITY

Securing competitive energy supply rates, procuring renewable energy for assets located in selectmarkets offers potential achievement of monthly savings on utility bills and reduction of greenhousegas emissions (GHG).

ISSUESMSREI seeks to reduce negative environmental footprint of assets. One of the main sources of emissions
in real estate operations is energy usage. Renewable energy procurement is one way to reduce the team’s
real estate assets’ GHG. The team identified an opportunity within their US student housing portfolio toprocure green electricity. Use of green electricity promotes more renewables in the grid.

ACTIONS

The MSREI ESG team engaged with internal asset managers and external property managers andonboarded a sustainability consultant to evaluate renewable energy procurement options within
their US student housing portfolio. After evaluation of the portfolio, the team selected assets whererenewable energy procurement was a viable solution.

OUTCOME/NEXT STEPSFor select assets, 2023 green energy procurement contracts were signed. MSREI continues to work withasset managers, property managers and sustainability consultants to monitor opportunities to expand
procurement of green electricity as appropriate to drive further GHG reductions within the portfolio.
MSREI has established the right platform, knowledge and expertise to monitor opportunities to procure
renewable energy as well as reduce assets’ GHG reductions throughout the hold period.

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ENGAGEMENTPRIVATE INFRASTRUCTURE

Engagement Approach
Morgan Stanley Infrastructure Partners is committed
to sustainability through its ESG approach, which calls
for active management of ESG issues throughout theinvestment life cycle for each portfolio company. As part ofthe investment life cycle, the team performs due diligenceon ESG topics, collaborating with internal and external
ESG specialists. As part of acquisition and ownership,
the MSIP team engages portfolio companies to support
the implementation of their ESG programs. The MSIP
team’s engagement efforts include working with portfolio
companies to report against the GRESB Infrastructure
Assessment and monitoring relevant ESG data.

CASE STUDY 9.15
INVESTMENT TEAM

Morgan Stanley Infrastructure Partners

ASSET CLASS

Private Markets – Infrastructure

MSIM ENGAGEMENT THEME(S)

Health and Safety

COMPANY SECTOR/INDUSTRY

Portfolio companies across diversified sectors

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)

Global – OECD countries

MATERIALITY

The health and safety of employees, contractors and the communities of the MSIP team’s portfolio
companies is of paramount importance. The MSIP team also believes that companies that do not
manage health and safety programs systematically over a sustained period may face potential
operational, reputational, legal or commercial risks. The MSIP team is committed to working withportfolio companies to build a rigorous culture of safety, striving for zero accidents.

ISSUES

The MSIP team tracks health and safety metrics of its portfolio companies and believes it would be
useful to continue to emphasize the importance of health and safety efforts with portfolio company
senior management and share best practices among companies.

ACTIONS

OUTCOME/NEXT STEPS


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89

2023 UK STE WARDSHIP CODE REPORTThe MSIP team hosts an annual CEO day, which involves bringing together CEOs of the team’s portfolio
companies to discuss key topics.
In 2023, health and safety best practices was one of the agenda items.
The focus of the session was to share best practices, including tracking of lagging and leading indicators(including “near misses”) as well as employee engagement, culture, and health and safety processes.
A detailed discussion was led by one of the portfolio companies, which has had an outstanding safety
record and has won awards for its safety performance.
As a result of the above, health and safety continues to be an area of focus for portfolio company CEOsand their teams.
Portfolio companies continue to track and report health and safety key performance indicators.
The MSIP team continues to engage with portfolio companies on the topic|

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COLLABORATION

Principle 10

Collaboration
Signatories, where necessary,participate in collaborative
engagement to influence issuers
Through its various businesses and internal functions,
MSIM and Morgan Stanley participate in, belong to or
take a leading role in many ESG-related initiatives andorganisations. We regularly bring together investors,
policymakers, NGOs and environmental thought leaders
to share lessons and promote innovative solutions
to sustainability-related challenges. This includes
participating in industry conference panels, exploring joint
research and supporting the work of groups focused on
ESG-related issues.
Notwithstanding the mode of collaboration that we
adopt, we approach collaborative engagement from theperspective of being fiduciaries of our clients’ assets,acting on behalf of and in the best interests of our clients(Principle 6) and therefore living by MSIM’s Core Value of
Putting Clients First (Principle 1).
As mentioned in Principle 1, this past year we have been
more selective in collaboration, targeting new initiatives(e.g., 30% Club, WBA etc. outlined below) where we candirectly influence or contribute to influencing materialcauses, aligned with our fiduciary duties and client interestsand focusing on obtaining real outcomes. To support this,
we are in the process of further enhancing our oversightand governance of collaborative engagements, consciousof antitrust regulations and undue and/or unfair pressure
exerted on companies as a result of collective engagements.
Depending on the type of external collaborative proposal,
those that seek to join external organisations need to go
through the process (detailed in Principles 2 and 5) while
one-off collaborative engagements need to obtain approvalby the Firm’s Antitrust Counsel.

A select summary of the types of collaborative
engagements both at an MSIM organisational level and by
our individual investment teams over the 12 months from 1
July 2022 to 30 June 2023 are detailed below:

1) Industry Networks – Disclosure/Reporting
Frameworks
OBJECTIVES

Policy Engagement; Feedback on Global Sustainability
Regulations and Requirements; Address Systemic Issues;
Enhance Sustainability Knowledge and Share Best
Practices; Act as the Voice of Our ClientsI) PRINCIPLES FOR RESPONSIBLE INVESTMENT (PRI)

MSIM has been a signatory to the PRI since 2013.Our
membership allows us to pool resources, share informationand enhance our influence on ESG issues. It is also a hub for
us to connect and engage with other PRI signatories and tocontribute our voice and practical experiences to a widely
recognised responsible investment framework.
PRI ADVANCEIn December 2022 the PRI launched “Advance” a stewardshipinitiative where institutional investors work together totake action on human rights and social issues. Investors use
their collective influence with companies and other decision
makers to drive positive outcomes for workers, communities,
and society. Currently more than 220 investors collectively
representing USD$30 trillion in assets under management(AUM) are involved and the PRI recognises that striving for
global respect for human rights is complex and will requirevaried approaches across different businesses, regions, andsectors. However, at a high-level, three key expectations havebeen set for the focus companies:
1. 	 Implement the United Nations Guiding Principles on

Business and Human Rights (UNGPs) – the guardrail ofcorporate conduct on human rights
2. 	 Align their political engagement with their responsibility

to respect human rights
3. 	 Deepen progress on the most severe human rights

issues in their operations and across their value chains

SPOTLIGHT #7

Private Infrastructure
The MSIP team looks to engage with key external stakeholders tounderstand best practice and trends in sustainability, where applicableand relevant to the MSIP team’s business.
In early 2023, the MSIP team joined the Principles for Responsible
Investment Infrastructure Advisory Committee, which helps identify
PRI’s work streams with regard to the infrastructure sector.

In addition, in 2023, the MSIP team participated in GRESB’s
Infrastructure Net Zero Working Group which was aimed at helping
GRESB to understand the commonalities and differences among net
zero frameworks and standards.

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COLLABORATIONSPOTLIGHT #8

The PRI’s Collaborative Sovereign Engagement on Climate Change
Our Fixed Income organisation became a member of the PRI’s pilot
initiative to support governments to act on climate change in June
2023. The aim of the initiative is for investors to work collaboratively
to support governments to take feasible steps to mitigate climatechange, in line with the Paris Agreement and keeping average global
warming to 1.5°C. The initial focus of the engagement is Australia(although the plan is to cover other sovereigns in the future) and thegroup has had 20+ meetings with stakeholders such as the Central
Bank, to help the sovereign reclaim the narrative to reach climatechange goals. Australia is a key market for MSIM generally, including
Fixed Income, and we do see that may of our clients there, notably theSuper funds, are very focused on ESG. Although the FI organisation
wasn’t part of the original pilot, now that the PRI is looking to expand
it, they were keen to be part of the ongoing discussions.
The main aims of the collaborative engagement include:
Closing the gap between current action and a Paris-aligned emissions
reduction trajectory.
 Establishing a detailed, credible and economywide net zero transition
plan with supporting policy mechanisms, budget expenditure andinvestment structures.


Building greater climate adaptation and resilience across the economy
and community to avoid worsening disruption and damage fromphysical risks.
 Improving disclosure of sovereign exposure to climate risks andopportunities consistent with international standards.


Outcome
As member of this pilot MSIM is part of a working group comprising
25 international investors responsible for $8 trillion in assets undermanagement. Participating investors have identified an opportunity
to support climate policy action at a critical juncture in Australia,
following the introduction of the Climate Change Act and other major
reforms. As such in 2023 this group participated in a number of callswith the Australian Federal government and representatives of their
Debt Management Offices to provide feedback on their planned green
bond framework. In addition, the collaborative group is also planningto send a letter to the Australian Treasury supporting the requestthat the Australian government publishes an acknowledgementthat climate change is a systemic risk that may impact the value ofAustralian Government Bonds (AGBs).

OutcomeCollaboration Amongst MSIM Investment Teams

In 2023, some of MSIM’s investment teams signed up as alead investor for two engagements with mining companies,
taking an active role in defining engagement strategy
and priorities for the coalition of participants. In addition,
we are a member of a further five engagements as acollaborating investor (on multiple renewable companies),
participating in group meetings with the companies,
contributing inputs and co-signing letters.

Notwithstanding our independent investment teamstructure and decentralised approach to investment
management, MSIM investment teams will engage
collaboratively where a cross-asset class stewardship issue
arises (e.g., if there is focus on an issuer’s ESG risk or an
egregious conduct that warrants escalation by mobilising
the broader MSIM franchise).

We have begun setting engagement priorities andoutcomes with the companies where we are lead investors,
for example MSIM’s Fixed Income representatives, acting
as an internal coordinator within MSIM for one of the two
mining companies. The engagement with this company
started with a kick-off meeting in June 2023, with thedefinition of clear short- and longer-term goals. We willreport back on our progress on this and our efforts as acollaborating investor in 2024.

The Fixed Income organisation is supportive ofcollaborative engagement where such engagement
appears necessary or useful to materially enhance
portfolio values, and where the team can do so in amanner that is in full compliance with applicable laws,
regulations and judicial precedents.

FIXED INCOMESPOTLIGHT #9

Collaboration Across Equity and Debt Exposures
At the end of 2022, members of the Fixed Income organisation jointly
engaged alongside the GBaR team to provide recommendations toa utility company in which the team has significant bond-holdings,
in relation to the decarbonisation and biodiversity themes. The
collaboration enabled the teams to put forward their suggestions
with a stronger, united voice, highlighting MSIM’s engagement themes.
For example, in light of an increasing focus on biodiversity, theteams recommended that the company should set a companywide
912023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

biodiversity policy, which the company confirmed it would take tomanagement. The company highlighted positive steps towards its
targets (including coal phase out, in line with MSIM’s Decarbonisation& Climate Risk theme), and had a transition plan with achievable dates,
which is considerate of the potential challenges related to consumer
need and economics. The teams plan to monitor the company’s
assessment of biodiversity targets and policy implementation, sharing
insights between investment teams.

COLLABORATIONInternal Collaboration

OutcomeFor the Fixed Income organisation, collaborative
engagement can take place in the form of different
investment teams conducting a joint engagement if they,for instance, maintain both equity and debt exposure in
the name. As mentioned in Principle 9, the Fixed Income
organisation has also been enhancing engagements
conducted with Calvert’s Corporate Engagement team,to leverage the expertise of the Calvert engagement
specialists in some of their targeted engagements.

As part of MSIM’s membership of ILPA’s Diversity in
Action, our PC&E business commits to specific actions that
advance diversity and inclusion, both within our business,
our portfolio companies and the industry more broadly.
As a signatory, the team undertakes four essential DEI
actions that span across talent management, investment
management and industry engagement. The PC&E business,with other ILPA Diversity in Action signatories, have ongoing
dialogues on diversity-related topics, best practices, andideas to strengthen diversity related initiatives withinorganisations (e.g., related to recruiting diverse candidates).

II) SUSTAINABILITY ACCOUNTING STANDARDS BOARD(SASB) TASKFORCE FOR CLIMATE-RELATED FINANCIALDISCLOSURES (TCFD)

MSIM promotes disclosures aligned with SASB and
TCFD, in our direct engagements with portfolio
companies. Morgan Stanley signed up to the TCFD in
2017, and published its first TCFD report in 2020, with
Morgan Stanley’s 2022 ESG report released in July 2023.
As a consequence, two-thirds of companies engaged
through the efforts of SASB have agreed to implement
reporting according to the SASB standards. Since 2012,
MSIM has also been a member of SASB, where we
frequently engage with fellow investors to promote SASB
reporting standards.
During 2023 MSIM, as a member of the Ceres Paris Aligned
Investment Working group, participated in discussions
around climate strategy and risk management with peers.
These discussions contributed to the preparation for
publication of MSIM’s first TCFD Report in June 2023.

2) Investor Coalitions – Leverage Networks;
Improve Ability to Engage with Companies
OBJECTIVES

Access Broader Range of Expertise; Leverage Engagements
to Increase Our Impact; Seek Out Specific Expertise(Academic, Industry, Non-Governmental Organisations) to
Improve our Ability to Work with Companies; Act as the
Voice of Our ClientsI) INSTITUTIONAL LIMITED PARTNERS ASSOCIATION (ILPA) –DIVERSITY IN ACTION

Our PC&E business is a signatory to ILPA’s Diversity in
Action initiative, which involves GPs and LPs committed toadvancing DEI in the private equity industry, which is also
one of Morgan Stanley’s core values—Commit to Diversity& Inclusion. The goal of the initiative is to motivate market
participants to engage in the journey towards becoming
more diverse and inclusive and to build momentum
around the adoption of specific actions that advance DEI
over time.

Select signatories shared how they encourage teams toengage in advancing DEI objectives, including potential
financial incentives, non-monetary recognition and awards,
as well as leveraging Employee Resource Groups (ERGs) toincrease impact. Select data/technology solutions providers
also shared what they’re seeing across the industry,including DEI scores and metrics across portfolio companies
that are providing metrics to guide monitoring of progress.
II) EMERGING MARKETS INVESTOR ALLIANCE (EMIA)EMIA seeks to conduct engagement with Emerging Market
sovereign issuers or companies (often government-related)on ESG topics that may be challenging for individual
investors, hence joining forces with other investors canincrease the likelihood of achieving positive outcomes. The
Fixed Income organisation, though the Emerging Markets
Debt investment team, is part of EMIA’s ESG Initiative toconstruct a set of best practices for sustainable investingfor Emerging Market sovereigns and corporates.
OutcomeThe Fixed Income organisation’s representatives to
EMIA, participated in the piloting of a new portal forcollaborative advocacy campaigns. The aim of such apilot was to develop a collaborative culture to allow
other investors to join engagements and offer support, tostrengthen the message and recommendations provided toemerging market issuers.
III) CERES PRIVATE EQUITY WORKING GROUP

Our PC&E business is also a member of Ceres’ Private
Equity Working Group, which supports GPs and limited
partners (LPs) to transition private equity portfolios
towards a sustainable net zero economy. Their
contribution has included facilitating and participating insessions that provide GPs and LPs with the latest climatecentric and sustainable investment practices, policies,
frameworks and tools to assess, manage and mitigate ESG
and climate risks.
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COLLABORATION

Ongoing ProgressThrough this forum, the PC&E business has been able to
make a positive contribution by sharing their insights with
GPs and LPs on best practice within the private equity
space with respect to: (1) investment strategies aligningwith the Net Zero Investment Framework; (2) considerationof environmental and social impacts of investments to
support sustainable development; and (3) developing andimplementing investor climate action plans.
Ceres, in partnership with IIGCC and Anthesis, also released
a net zero framework specific to the private equity industry
to help firms develop practical approaches to align to
the goals of the Paris Agreement. Beyond participation inindustry forums to discuss the potential implications of thisnew framework, the PC&E business explored fit with various
strategies on the platform and what adoption would require.
PC&E’s relationship with Ceres is also reinforced by
the fact that Morgan Stanley is a member of the Ceres
Investor Network on Climate Risk and Sustainability, andthe CEO of Ceres is a member of the Morgan Stanley
Institute for Sustainable Investing Advisory Board.
IV) 30% CLUB (UK INVESTOR GROUP)MSIM Ltd is a member of the 30% Club UK Investor
Group, an investor initiative that seeks to encouragecompanies to improve diversity at board and executive
level to deliver better outcomes for investors. The
International Equity team’s Head of ESG is currently cochair of the group. During the reporting period the groupfocused their work in three areas: (1) improve knowledge
around diversity, equity and inclusion, (2) engage with
FTSE 350 companies on the 30% Club’s targets and (3)support global cooperation.
Key activities during 2023 included engagement with FTSE
250 companies on race and ethnic minority representationin line with the UK Parker Review and the research anddrafting of a soon to be released report outlining bestpractice in DEI reporting.

3) Engaging/Collaborating With Issuers –Setting Industry Standards
OBJECTIVES

Improve Industry Practices and Disclosure Standards;
Share Feedback on Structuring Sustainable Products/
Securities; Increase Transparency and Quality of Market
Instruments; Act as the Voice of Our ClientsI) WORLD BENCHMARKING ALLIANCE (WBA)MSIM Ltd joined the WBA as an ally in 2022. The WBA isan organisation that publishes publicly available research
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on companies’ performance on ESG issues. The alliance is avoluntary way to gain insight about companies and has noformal targets or binding commitments for allies.
Progress
The WBA organises an annual Allies Assembly, bringing
together investors, companies, organisations andgovernments to discuss progress, risks and opportunities.
In July 2023, the assembly was held in Mexico, andthe International Equity team’s Head of ESG Researchattended, speaking on a panel on nature-related risks andopportunities. MSIM representatives have also joined
regular Allies calls, where the WBA shares information
about their benchmarks. MSIM teams may use the WBA’s
research, where appropriate, to help understand thefinancially material risks and opportunities companies face.
For example, in 2023, the International Equity team used
elements from the Nature Benchmark methodology inthe development of their proprietary approach to identify
financially material nature-related risks and opportunities.
The benchmark results have now been published allowing
the team to use the results in their research whereappropriate. The WBA’s network of allies have also been
helpful in supporting the International Equity team to
identify new sources of information that can support the
team’s understanding of the potentially financially material
risks and opportunities facing companies they own, such asorganisations located in Southeast Asia with expertise on
palm oil supply chain risks.
II) INTERNATIONAL CAPITAL MARKETS ASSOCIATION (ICMA)The Fixed Income organisation takes part in multiple ICMA
working groups under the Green, Social and SustainabilityLinked Bond Principles, including those on Climate Transition
Finance, sustainability-Linked Bonds, and Impact Reporting.
OutcomeIn the spirit of collaboration, the Fixed Income
representatives share their feedback with issuers andstructuring advisors of sustainable bonds to increase
the transparency and quality of these instruments inthe market. As mentioned in Principle 5, Fixed Income
investment teams integrate a consideration of alignment
with ICMA’s Principles within their Sustainable Bond
Evaluation Framework, in particular for their Sustainable
Bond strategies.
III) EUROPEAN LEVERAGED FINANCE ASSOCIATION (ELFA)The Fixed Income organisation joined ELFA as a member
in 2021, and through its High Yield investment teamhelps promote sustainability awareness and best practicereporting amongst high-yield bond issuers.

COLLABORATION

Outcomes
The Fixed Income organisation contributed to ELFAand ICMA’s ‘Practical Recommendations for High Yield
Sustainability-Linked Bonds’, published at the start of2023. This guidance is part of an effort to tighten market
practice related to Sustainability-Linked Bond issues in thehigh-yield space, such as timing of redemption.

4) Giving Back to the Community: NGOs;
Talent Development
We aim to contribute to our communities, including NGOs,
as part of our Morgan Stanley Core Value: Giving Back
(Principle 1). We believe there is power in numbers when
we bring different voices and interests to the table, with
common objectives.
We also embarked on an important talent development
and recruitment initiative during the reporting period:I) SPONSORS FOR EDUCATIONAL OPPORTUNITY (SEO) –ALTERNATIVE INVESTMENTS FELLOWSHIP PROGRAMME (AIFP)In 2021, our PC&E business became a partner of SEO’s
Alternative Investments Fellowship Programme, whichaims to connect historically excluded talent to career
opportunities in the alternatives sector through interview
preparation, a curated alternative investments curriculum,
mentorship, and private networking sessions. As oneof more than 50 partners, the PC&E business helps

in educating, developing, and providing access to firstthrough third-year underrepresented investment banking
analysts and management consultants who are looking topursue careers in alternatives.
OutcomeThrough this partnership, the PC&E business hascompleted several cycles of this mentorship programme,with two SEO fellows per season, where SEO fellows are
paired up with a number of junior and senior investment
professionals across PC&E’s different strategies to help
prepare them for on-cycle, private equity recruiting.
Additionally, the PC&E business continues to explore
opportunities to potentially hire SEO fellows into its
investment teams, full time.

Overall
MSIM regularly bring together investors, policymakers,
NGOs and thought leaders to share lessons and promote
innovative solutions to environmental and social
challenges. Our priority is to always act in the bestinterests of our clients (Principle 6), as good stewards oftheir capital. This also includes participating in industry
conference panels, exploring joint research, and supporting
the work of groups focused on ESG-related issues.
MSIM and Morgan Stanley are active participants in a
number of external sustainability initiatives. Please see
Appendices for a list of current initiatives.

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ESCALATIONInternational Equity

Principle 11

Escalation
Signatories, where necessary,
escalate stewardship activities
to influence issuers
MSIM regular engagements with company management
provide an opportunity to monitor and track the
performance of our investments.
Engagement may be considered to be successful when acompany is receptive to viewpoints and suggestions, andtakes concrete steps to implement them. In cases wherea company is not receptive or where engagements do notlead to desired results, investment teams may escalate
their engagement by, for example, casting votes against
management, requesting meetings with Board members,
or writing letters to boards and management. In somecases, repeated, unsuccessful engagements in relation toa material issue may contribute to a decision to decreaseor exit a holding. Additionally, teams may consider
collaborative engagement or filing a shareholder proposal
as an escalation method in appropriate cases.
Our portfolio managers are ultimately responsible forinterpreting and integrating information gained throughengagements into their investment decision-making
process and for prioritising further engagement or
escalation, as appropriate. Hence the need for escalationand the types of escalation methods used depend on
the investment, prior engagement activities, outlook,
and a judgement call made by the investment team as
to the materiality of the issue at hand, whilst always
putting our clients’ interests at the forefront of decisionmaking (in line with our Core Value to Put Clients First).
As active owners, our investment teams already haveregular engagements with portfolio companies/issuers.
However, they also appreciate that each engagement is
unique to the particular company and so do not rely on aprescriptive engagement escalation framework. Therefore,
in some cases, it may take years to effect substantive
change on certain issues.

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Bringing issues directly to the company CEO is one formof escalation used by the International Equity team, as isvoting. Figure 11.1 below outlines the team’s voting activity
between 1 July 2022 and 30 June 2023:
FIGURE 11.1

International Equity Voting Activities% Votes against management by topic● Shareholder Proposal ESG● Other Shareholder
Proposal● Routine Business● Non-Routine Business● Compensation● Director Related● Director Election● Capitalization● Takeover Related● Company Articles

18%
1%
7%
1%
36%
3%
20%
5%
6%
3%

Over two thirds of the votes were related to executive
pay, director appointments and ESG-related shareholder
proposals. In instances when the International Equity teamhas long-standing unresolved concerns, further escalation
may include voting against the election of committee
members. For example, with companies whose pay plans
they have voted against a number of times, the teamvotes against members of remuneration committees tomake their message clearer. The team also votes against
nomination committee members when they have concerns
over diversity. In total, the team voted against 31 directors
in the last 12 months, as of 30 June 2023.
Voting on shareholder proposals is another form of
escalation. While the companies the team owns receive
fewer shareholder proposals than an average company,
presumably reflecting fewer underlying issues, when they
do, the team analyse them carefully and engage withcompanies on them. During the same time period, they
have voted in support of 30 shareholder resolutions, andagainst management 60% of the time, on a broad rangeof topics, including ESG issues, such as decarbonisation,
diversity and human rights.
During the same time period, they have voted in supportof 30 shareholder resolutions, and against management
60% of the time, on a broad range of topics, including ESG
issues, such as decarbonisation, diversity and human rights.

ESCALATIONCASE STUDY 11.1

Escalation to persuade Portfolio Company to align pay to long-term performance

15

INVESTMENT TEAMInternational Equity

ASSET CLASS

High-Conviction Equities

MSIM ENGAGEMENT THEME(S)

Other15 (Executive Compensation)

COMPANY SECTOR/INDUSTRY

Information Technology

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)EuropeMATERIALITY

As a long-term investor, the International Equity team believes it is important to ensure company
management is incentivised to deliver long-term performance. The team believes pay is a key instrument
in incentivising company management to operate in the long-term interests of a company and its
shareholders, meaning it’s critical for the boards and management teams of companies to get it right.
When compensation is managed effectively, it aligns key decision makers’ behaviour with the company’s
objectives, encouraging better performance and long-term returns to shareholders. Poorly structured
and outsized company management incentive schemes can be a financially material risk, inviting shorttermism, capital misallocation, excessive risk taking, misaligned objectives and poor shareholder returns.

ISSUES

The team assessed that the pay plan of a European multinational software company was not aligned
to long-term performance due to the inclusion of non-IFRS earnings, the short vesting period of theawards, and an insufficient degree of performance-based targets.

ACTIONSAs persistent critics of the company’s pay structure, the team escalated this by voting against its pay
plan at the Annual General Meeting in May 2022 for the reasons mentioned above. While the company
had moved away from rewards being cash settled to shares, the team was not convinced this was
sufficient to warrant a “for” vote, given aspects of the plan could detract from long-term shareholder
value, in their view.
In September 2022, the team further escalated this issue by meeting with the company’s Supervisory
Board to discuss changes to the executive compensation scheme. The company discussed that
improvements had been made, with greater disclosure on the quantum of targets and metrics employedin the plan. In particular, the team considered the 20% deferral of annual bonus and the end of
retention bonuses a positive outcome from their previous engagement. On ESG metrics, the team waspleased to see that 20% of both the long-term and short-term incentive plan is allocated to ESG targets(Net-Zero 2030 and Diversity targets), as the team had encouraged for both long- and short-term
incentives to be aligned with their relevant financially material ESG priorities and targets.

OUTCOME/NEXT STEPS

While the company has made positive changes, the team expressed dissatisfaction that targets are stillbased on non-IFRS numbers, which exclude share-based compensation. The company also shared withthe team that the performance aspect of pay excluded mergers and acquisitions (M&A); the team asked
that they make this explicit in the pay plan.
The team intends to continue engaging with the company and using voting as a form of escalation tocontinue encouraging more sensible operating metrics that they believe should help the company’s
share price performance in the long run.

INVESTMENT DECISION

The engagement did not result in a significant change to the team’s investment thesis for the company.

Other include (but are not limited to) areas such as governance, cybersecurity, product safety
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ESCALATIONCASE STUDY 11.2

Escalation to persuade Portfolio company to provide greater supply chain disclosure
INVESTMENT TEAMInternational Equity

ASSET CLASS

High-Conviction Equities

MSIM ENGAGEMENT THEME(S)

Decent Work and Resilient Jobs

COMPANY SECTOR/INDUSTRY

Consumer Discretionary

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)North America

MATERIALITY

Opaque and complex supply chains, a result of outsourcing production to cheaper labour markets, canlead to ESG-related risks falling outside global companies’ direct control. The International Equity teambelieves failure to adequately manage this issue poses regulatory, reputational and commercial risks. In
the apparel and footwear industry, a lack of raw material traceability can pose a financially material risk
to the sustainability of a company’s long-term returns.

ISSUESGreater regulatory scrutiny has increased the potential for companies to face government penalties andthe stopping of goods at their borders. A demonstration of this is cotton sourced from the Xinjiang regionin China, where multiple allegations of human rights abuses have been made. In 2022, legislation was
introduced in the US banning products made in Xinjiang from entering the US unless the importer can
prove they were not made with forced labour. Similar legislation has been discussed in other countries.
The team previously engaged on supply chain management with a sporting goods company they own thatwas named as one of the well-known global brands whose suppliers allegedly used forced labour in their
supply chain, and sought to understand the steps it is taking to mitigate supply chain risks.
The company is making significant efforts to improve traceability. Its monitoring and transparency
practices have been recognised in independent human rights assessments by the World Benchmarking
Alliance and Know the Chain16 and its anonymous worker feedback programme was recognised by aleading human rights organisation as best practice for capturing issues in the supply chain. 100% of
the company’s suppliers have shared their data, allowing the company to understand strengths andopportunities across their supply chains and identify areas where more support is needed. What the teamwould like to see now is greater disclosure and continued progress towards full traceability.

ACTIONSThe team previously supported a shareholder resolution in 2021 that asked the company to produce areport on the human rights impact of its cotton-sourcing practices. Following this vote, they engaged
with the company, including encouraging them to explore partnering with Oritain, one of several
companies offering tracing technologies that help verify suppliers’ claims on origin and traceability.
In September 2022, the company faced a further shareholder resolution related to sourcing, which
the team made the decision to abstain from; while they believe the company could make further
improvements the request within the resolution was impractical. The team explored this with thecompany in their next engagement with them, which was their second in 2022.

OUTCOME/NEXT STEPSThe company conducts extensive monitoring and reporting on supplier factories where the garments
are assembled, but currently has far less visibility over earlier stages in the supply chain, such as cotton
production, spinning and weaving. They noted that they are working with a range of third parties toimprove working conditions in their supply chains through the use of audits, remediation and capabilitybuilding efforts.
They have a policy of not sourcing anything from Xinjiang and have made this clear to the factories
they use, but they are reliant on their suppliers adhering to this. For any instances of noncompliancewithin their factories, there is a remediation and escalation process in place: any reported issues are
immediately investigated with the aim of correction. If the factory fails to make progress, it is subject toreview and sanctions, including potential termination.
There is now a team of seven within the company dedicated to traceability, including new hires in their
supply chain team with human rights expertise. In line with the team’s earlier suggestion, the company
now works with Oritain to verify suppliers’ claims of origin.
The company agreed to share more information on supply chain responsibility when the team next
engages with them in 2023; given the financially material risk this issue presents, the engagement
remains ongoing, and they will continue to encourage further progress.

INVESTMENT DECISION

The engagement did not result in a significant change to the team’s investment thesis for the company.

Know the Chain is a resource for companies and investors to address forced labour in global supply chains. Their benchmarks and practical resources
help companies operate more transparently and responsibly while also informing investor decisions.
16

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ESCALATION

Emerging Markets’ Equity
GENERAL APPROACH

The EME team’s engagements inform our views ofmanagement. When a company is not improving or
addressing a risk the team considers important to thebusiness strategy over a relevant period, the team willreevaluate the investment thesis in the context of this issue.
For our sustainable portfolios, the team have a higher
level of scrutiny of ESG criteria considered important to
the ESG commitments of the strategy.
As described below, our escalation protocols include
varying practices and timelines, and each investor
determines the use for each company as needed.
Escalation protocols:
Typically, the EME team will request a dedicated callwith the company to discuss the issue and implications/
negative effects on the business. The team will monitor
the company on an ongoing basis for improvements.
Approaches the team may use are:







Follow up in writing to send best practices and/or
suggestions for next steps for improvement on aparticular issue with those on the call.

as an improvement in metrics, increased transparency,
adoption of a suggestion or industry standard, or an
improvement in board independence or composition.
Lastly, divestment is a potential outcome.
On proxy voting, the investment team continues to voteacross the portfolios. Between 1 July 2022 and 30 June
2023, the EME team voted at 593 meetings and on 6,755
proposals. Overall, the team voted against managementin 11% of the cases, and 49% of meetings had at least
one vote against management, an increase on last year’s
statistics of 9% votes against management and 46% of
meetings with at least one vote against management. The
most common reasons for voting against management
were related to non-salary compensation and board
structure. In the 2023 season, the investment teamhas continued to focus on board independence andremuneration plans.
FIGURE 11.2

Emerging Markets Equity Voting Activities% Votes against management by topic 12 months to 30 June 2022
(across EME team’s strategies)● Capitalization● Company Articles● Compensation● Director Related● Shareholder Proposal -Raise this issue further with senior management.

ESG

Depending on the timeline and the severity of theissue, the team may vote against the board
directors responsible.
Depending on the strategy, potential divestment if
the issue is not resolved or could have an adverse
effect on the business model and/or stock price orsustainability characteristics, and/or the team loses
confidence in management.

As described above, there are several outcomes in the
EME team’s escalation protocols. The team views success

9%
4%
27%
36%
11%

● Other1%● Business Related
7%● Takeover and Transactions 5%

In the 12 months to 30 June 2023,
the EME team voted on 754 proposals against management
Source: Morgan Stanley Investment Management. The views and opinions
expressed herein are those of the portfolio management team, are notrepresentative of the Firm as a whole, and are subject to change at any
time due to market or economic conditions.

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ESCALATIONCASE STUDY 11.3

Escalation to encourage greater disclosure around material ESG factors

99

INVESTMENT TEAM

Emerging Markets Equity

ASSET CLASS

High-Conviction Equities

MSIM ENGAGEMENT THEME(S)

Diverse and Inclusive Business, Decarbonisation and Climate Action

COMPANY SECTOR/INDUSTRY

Consumer Staples/Household Products

COMPANY LOCATION (WHERE
IT IS HEADQUARTERED)

Asia (ex Japan)

MATERIALITY

The team previously engaged with a Chinese domestic cosmetics company, which has a primarily female
customer base, to address the lack of female representation on the board.
The team conducted a follow-up engagement to further highlight our concerns on the lack of disclosure
concerning ESG issues the team considers to be financially material, including gender diversity, chemical
management, waste and packaging, and carbon emissions.

ISSUES

As part of the EME team’s follow-up engagement, the team discussed with the company the lackof transparency around material ESG issues, such as chemical management, waste and packaging,and carbon emissions. The team also remain concerned about board diversity and composition as
the company had no women on the board despite serving a nearly 100% female customer base. The
objective of the call was to follow up on the team’s concerns and encourage improvement.

ACTIONSThe team engaged with the company on these issues and discussed the importance of setting asustainability strategy and specific goals. The team encouraged the company to enhance their ESG data
and reporting. They also communicated to the company their concern around their board compositionand diversity, as well as their rationale for why they believed this was a material issue.

OUTCOME/NEXT STEPS

Although the team’s initial engagement with the company revealed significant gaps in their ESG
performance and reporting, they believe that they took their feedback from the previous meeting toheart and have made improvements. During their engagement, the company discussed some of these
improvements, including setting a carbon emissions reduction plan and providing disclosures aroundchemical safety management, waste and packaging, and their supply chain practices.
The company also developed their first strategic plan around sustainability, which is based upon threemajor pillars: 1) sustainable business 2) sustainable value chain and 3) sustainable social ecosystem. The
team believe that the first two pillars are more material for the company and consist of goals that theywould like to continue to monitor, including, but not limited to, achieving carbon emissions peak and
50% renewable energy by 2025, net-zero emissions from operations by 2030, and carbon neutrality
across the entire value chain by 2045.
On governance, the company assured the team that they are aware of investors’ concerns regarding thelack of female representation on the board and that the company plans to make improvements during
the next election. The team continues to believe that the ideal board should reflect the company’s
customer base, and given that the company has nearly 100% female customers, there should be at least
one woman on the board.

INVESTMENT DECISION

After the team’s follow-up engagement, they believe that the company has demonstrated a willingness
to improve, which is demonstrated by the progress it has made since their last conversation. The teamwill continue to monitor these key material issues, but because the company is currently on track toaddress these issues, they have decided to continue to hold the investment.

2023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

ESCALATION

Fixed Income
GENERAL APPROACH

As mentioned in Principle 9, the Fixed Income organisation
stewardship and engagement process identifies a target
pipeline of key names, to prioritise engagement withseverely lagging issuers or names in which they are large
bondholders. In cases where engagements do not havethe desired outcome, for example when recommendations
from targeted engagements are not taken on board, theteam may choose to enact their escalation process.
Across geographies, the Fixed Income organisation’s
escalation process is generally the same. However,as engagement priorities may differ based on sector
and location, the factors influencing teams’ escalation
approaches may also differ. The Fixed Income organisation
also aims to consider each issuer with respect to theirlevel of regional development, which feeds into thesedifferences in factors influencing escalation.


Example 1: A persistent lack of a coal phase-out plan
might be a trigger for escalation in the engagement withan energy or mining company operating and distributing
mainly in a developed market, given the risks associatedwith new low-carbon regulation. However, the Fixed
Income organisation might concede a longer time buffer
for a company with most of their coal-related operations
and distribution in emerging markets, with lower
transition risk or where other ESG considerations—suchas access to affordable power—warrant a longer
timeline. The team is also enhancing their considerationof the just transition in their assessment of issuers
operating in global markets.
Example 2: On social concerns, the Fixed Income
investment teams would not apply the same flexibility
with respect to issues related to human and labour rights,
as they believe issuers have to abide by establishedinternational norms. The team, where appropriate,
engages with issuers operating in global markets to ensure
robust human rights policies and processes are in placeacross regions and value chains, as appropriate.

Examples 3: Governance standards may also differ
across geographies, with certain countries or regions
being more prone to company family ownership, forexample, which, in some instances, can be associatedwith less transparent remuneration practices. The Fixed
Income investment teams have, on multiple occasions,escalated concerns around executive over-compensation,board entrenchment and family ownership within thesetypes of companies.

By way of example of addressing the above concerns,
between 2021 and 2023, the Broad Markets Fixed
Income Investment team engaged with an autos company(operating globally) three times, as part of an escalation
process related to human rights issues at one of theiroperations sites.
The team had previously engaged with the company
at the end of 2021, where concerns on human rights inemerging markets had been raised. When data indicatedthat the company continued to experience these issues
a year later, the team initially engaged as part of a groupmeeting to express continued concern. However, the teamconsidered the company’s response to be narrowly tied to
the “scripted” legal narrative, and consequently arranged
a one-to-one meeting to raise additional concerns to thecompany. In this meeting, the team requested that thecompany improve transparency, conduct regular audits,and show they are addressing human rights beyond purelegal requirements.
Whilst the ownership rights conferred by equity tend
to permit better corporate access and therefore more
options with respect to escalating engagements, inthe fixed income context, the team typically escalates
engagements by either voting against a bondholder
resolution (although this is quite rare as an option) or
more often, by raising relevant issues with other internal
and/or external stakeholders in order to facilitate acollaborative engagement.

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100

ESCALATIONCASE STUDY 11.4

Escalation to encourage greater disclosure around material ESG factors
INVESTMENT TEAM

Fixed Income organisation, Broad Markets Fixed Income

ASSET CLASS

Investment-Grade Credit

MSIM ENGAGEMENT THEME(S)

Decent Work and Resilient Jobs, Human rights

COMPANY SECTOR/INDUSTRY

MiningCOMPANY LOCATION (WHERE
IT IS HEADQUARTERED)EuropeMATERIALITY

As a mining company, labour and human rights practices are highly material to the company’s businessdue to the potential financial and reputational risk that may arise from lack of compliance withinternational human rights standards, local license to operate across their global sites, as well as thehealth and safety obligations owed to workers in the company.

ISSUES

The Broad Markets Fixed Income team, through its credit analyst covering the sector and its ESG
specialists, first engaged with the company in late 2021, and followed up in Q4 2022. The teamoriginally engaged with the company in relation to controversies with local communities aroundtheir operation sites, which were deemed by third-party ESG research providers to be associatedwith violations of the UN Global Compact principles. The main purpose of the engagement wasto evaluate the extent to which the company was implementing actions to remediate such issues,
strengthen their labour and human rights policies, and improve their practices. They also used thisengagement opportunity to discuss the company’s decarbonisation policy, particularly in relation to coaldecommissioning, and their approach to a just transition.
The goal of the initiative is for the company to fully align (and comply with) the UN Guiding Principles
on Business and Human Rights.

ACTIONSThe company noted the introduction of a new, in-house human rights rating tool, prioritising impact
assessments, on issues such as dust levels present within mines, the minimisation of risks surrounding
artisanal intrusion, and detection of child labour instances. The company elaborated on the third-party
review they are conducting at the operation sites related to the controversies, and they described
their development of a cultural heritage standard to promote a respectful coexistence with impacted
indigenous peoples and traditional landowners.
In the first half of 2023, the team reengaged with the company through the team’s participation in the
PRI Advance collaborative stewardship initiative, where institutional investors are working together
to escalate engagement on human rights and social issues in the mining and renewables sectors. The
team is a Co-Lead investor for the engagement with this mining company, with the Broad Markets Fixed
Income team coordinating this effort internally.
The team’s 2023 engagement activities have helped the investor group deepen their understandingof the nature and scope of the company’s human rights policies, which will form the basis of theformulation of the team’s engagement strategy and key asks for the company in the short andlonger term.

OUTCOME/NEXT STEPS

Whilst the team’s analysts were pleased to see improvements on the company’s side on the humanrights-related front, the team perceived that the initiatives were quite high level and lacked targetingand specificity to address some of the underlying issues identified.
The team intends to continue their engagement process with the company to ensure that they are moretargeted and impact-focused in their human rights approach.

INVESTMENT DECISION

The team’s negative ESG outlook on the issuer contributed to the decision to reduce their investmentsin the name, but the team continues to hold some investments in the name.

Private Infrastructure
The MSIP team’s strong preference for controlling or
co-controlling stakes in portfolio companies generally
enables the MSIP team to escalate engagement withcompanies on their strategies and operational initiatives,

101

2023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

including with regard to ESG. Where appropriate, theMSIP team encourages boards of controlled companies toreview portfolio companies’ progress on ESG initiatives, aswell as key metrics, such as health and safety.

SECTION 4

Exercising
Rights andResponsibilities

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EXERCISING RIGHTS AND RESPONSIBILITIES

Principle 12

Exercising Rights
and Responsibilities

TABLE 12.1

Highlights of Proxy Voting Themes from 2023
Voting Season
VOTING THEMEHIGHLIGHTS

Board Diversity



Signatories actively exercise theirrights and responsibilities
Overview
As noted previously, MSIM’s investment teams exercise therights and responsibilities associated with the assets they
manage in line with their respective investment strategies,
having regard to factors such as the type of assets, theirrisk assessments and investment convictions. At theforefront of this is our collective organisational purpose
and Firm Core Value to always Put Clients First and act intheir best interests when managing their assets (Principle 1
and Principle 6).
Throughout this report, we have outlined how ourdecentralised business model allows investment teams
to approach stewardship differently when exercising
their rights and responsibilities through our Purpose
and Governance (Principles 1-5), Investment Approach(Principles 6-8), and Engagement (Principles 9-11) acrossdifferent investment teams, asset classes and geographies(although as active owners, our approach in exercising
our rights and responsibilities does not generally vary byregion). We do so by also leveraging support and expertisefrom our Sustainability governance stakeholders.

High-Conviction Equities and Global Listed
Real Asset
Over the past 12 months, we have continued to implement
enhanced governance, oversight and processes to ensurethat our holistic stewardship approach aligns withevolving client interests and regulatory developments,
and that our investment teams have sufficient support as
our product platforms and engagement activities expand.
At the same time, we uphold our fiduciary duties with ourFirm Code of Conduct.

1032023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3



Gender diversity has increased to 32% at S&P
500 companies and Financial Conduct Authority
targeting 40% at UK companies. Improvements in
racial diversity is the next target.
Increase in votes against directors, primarily due
to lack of gender diversity.

Compensation



Average support level for Say-on-Pay the last
two years continues to decline. Quantum of CEO
pay levels continue to rise to all-time highs, while
TSR was mixed.

Environmental
and Social (E&S)



Record number of E&S shareholder proposals;
62% of proposals are E&S related, while 38% are
G related. Most prevalent shareholder proposals
related to climate-related risk, diversity andinclusion, and political contributions.
Overall support of E&S shareholder proposals
continues to decline.
Strong support for proposals seeking improved
disclosure on E&S issues, racial diversity audits
and reduction in plastic use.



TABLE 12.2

Exercising Rights and Responsibilities by Asset Class
The following table (Figure 12.1) summarises examples of approaches
taken by investment teams (where appropriate) across asset classes.
ASSET CLASS

EXAMPLE OF APPROACHES (WHERE APPROPRIATE)High Conviction
EquitiesOne-to-one direct engagement
Proxy voting
Industry/external collaboration

Fixed Income and  Stewardship throughout investment stages
Liquidity
 Collaborative engagements
 Escalation with issuers to seek amendments toterms and conditions in contracts and/orindentures
Alternative
Investments







Customised
Solutions

Steer and engage with business management
through representation on board seats of portfolio
companies when in controlling ownership
Negotiated upfront and work alongsidewith business management to improvegovernance standards, transparency when innoncontrolling ownership
Use third-party due diligence services
Depend on the type of customised/bespoke
investment solutions; whilst incorporating theclients’ ESG priorities and requirements, rights
and responsibilities are exercised via the above
methods outlined in relation to the relevant
asset classes.

EXERCISING RIGHTS AND RESPONSIBILITIESMonitoring Shares and Voting Rights
MSIM’s Proxy Review Committee is responsible foroverseeing the MSIM Proxy Voting Policy. Our proxyvoting records can be found in the proxy voting section on
our website.
The MSIM Proxy Voting Policy addresses a broad range
of issues and provides general voting parameters on
proposals that arise most frequently. Our investment
teams integrate governance, sustainability and proxyvoting considerations with investment goals, using votes
to encourage portfolio companies to enhance long-term
shareholder value and to provide a high standard oftransparency such that equity markets can value corporate
assets appropriately.
Rather than simply relying on our proxy service providers,MSIM’s Global Stewardship Team has developed aproprietary system, Provosys, that tracks and monitors
shares and voting rights, including a ballot reconciliation
module. We perform a ballot reconciliation for every
meeting to ensure share positions eligible to participate
in the event are voted. MSIM’s Global Stewardship Teamtries to ensure that any discrepancies are investigatedand resolved prior to the cutoff date. The proprietarysystem also handles workflow around proxy voting,documenting the views of various parties at MSIM, as well
as voting rationale for the final decisions. We are notified
of upcoming voting events by ISS through electronic
feeds. Our proprietary system performs an automatedreconciliation comparing our shareholding data with theballots received and highlights exceptions for review.
MSIM’s Global Stewardship Team tries to ensure thatexceptions are investigated and resolved by MSIM, which
may entail communication with intermediaries and vendors
to resolve or document explanations for discrepancies.
MSIM’s proxy voting-related controls are part of System
and Organisational Controls (SOC) examination; in the lasteight years, no exceptions were found. As noted underPrinciple 5, MSIM maintains voting records of individual
agenda items at company meetings in a searchable
database on its website on a rolling 12-month basis.
These Proxy Voting Records are published periodically on
our website.
ISS serves as MSIM’s voting agent, but all vote decisions
are made by MSIM’s investment teams, informed, as
required, by research from ISS and Glass Lewis. MSIM is
responsible for ensuring that voting instructions for client
accounts are communicated to the proxy advisor. Our

proxy advisors assist us in monitoring the voting rights wehave in relation to shares we hold by aggregating proxies
and notifying us of all upcoming shareholder meetings andthe relevant voting rights. The Global Stewardship Team
maintains a control process to ensure eligible holdings are
voted at shareholder meetings.
MSIM’s equities and global listed real assets teams voteproxies in a prudent and diligent manner and in thebest interest of clients, including beneficiaries of andparticipants in a client’s benefit plan(s), for which the subadviser manages assets, consistent with our Core Value to
Put Clients First and our overarching investment objectiveof maximising long-term investment returns (Principle 1
and Principle 6). We consider voting to be an importantstewardship and investment responsibility that impacts
shareholder value, and portfolio managers have in-depth
knowledge of the companies and markets in which
they invest.

Individual Circumstances and Client Preferences
As noted under Principle 3, there are occasions
where different portfolio teams may view an issue
differently and, in those cases, we may split our votes
to accommodate those different views. Some clients
may also wish to retain voting rights for their shares or
accounts. Any client with a separately managed accountthat has delegated proxy-voting authority to MSIM is
permitted to request, at any time, how they would like acertain meeting or ballot item voted. We do not currently
facilitate clients directly voting in a pooled vehicle becauseof the practical difficulties in proportioning a ballot, andbecause we are mindful of potential legal and regulatory
hurdles that may restrict or prevent client-directed voting
in pooled fund structures.

Retention and Oversight of Proxy Advisory Firms
As noted in Principle 7 and Principle 8, MSIM retains theservices of ISS and Glass Lewis as independent advisersthat specialise in providing a variety of fiduciary-levelproxy-related services. We rely on them only for proxyvote execution, reporting record-keeping, and whereappropriate, to provide company-level reports thatsummarise key data elements within an issuer’s proxystatement or on specific thematic/market topics.
During 1 July 2022-30 June 2023, MSIM voted differently
from our primary proxy adviser, ISS, 5% of the time
across ballot items, which further reinforces our direct
stewardship/proxy voting philosophy.

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2023 UK STE WARDSHIP CODE REPORT104

EXERCISING RIGHTS AND RESPONSIBILITIESSecurities Lending
Many MSIM funds or any other investment vehicle
sponsored, managed or advised by an MSIM affiliate may
participate in a securities lending programme through athird-party provider. The voting rights for shares that areout on loan are transferred to the borrower and, therefore,
the lender (e.g., an MSIM Fund or another investment
vehicle sponsored, managed or advised by an MSIM affiliate)
is not entitled to vote the lent shares at the company
meeting. In general, MSIM will not recall shares for the
purpose of voting. However, in cases in which MSIM believes
the matters being put to vote are critical for the investment
thesis or client interests, we reserve the right to recall theshares on loan on a best-efforts basis. In order to effectively
monitor whether recalling shares may be necessary, ISSprovides electronic feeds that populate Provosys withmeeting details, including ballot-level holdings. The teamperforms ballot reconciliation to ensure appropriate ballots
are received and shares out on loan are identified by
GST through this review. We generally do not encounter
scenarios where all holdings associated to a meeting are out
on loan—the scenarios would be limited to a few portfolios
and even then, the entire holding may not be out on loan.

Equity Voting Statistics, Select Topics and Case
Studies (1 July 2022-30 June 2023)
Between 1 July 2022 and 30 June 2023, MSIM voted morethan 98% of the ballots in which it is eligible to vote. The
residual <2% of votes not voted were generally due to various
issues that can arise when voting proxies of companies locatedin certain overseas jurisdictions, where local processes canoften restrict or prevent the ability to vote such proxies or
entail significant costs. These problems include, but are notlimited to: (i) proxy statements and ballots being written in alanguage other than English; (ii) untimely and/or inadequate
notice of shareholder meetings; (iii) restrictions on the abilityof holders outside the issuer’s jurisdiction of organisation to
exercise votes; (iv) requirements to vote proxies in person;(v) the imposition of restrictions on the sale of the securities
for a period of time in proximity to the shareholder meeting;and (vi) requirements to provide local agents with power ofattorney to facilitate our voting instructions. As a result, wevote clients’ non-US proxies on a best-efforts basis only, after
weighing the costs and benefits of voting such proxies.
MSIM provides rationales for votes against key issues
like director and executive remuneration, and rationales
for shareholder-sponsored resolutions. We disclose voterationales to clients upon request. For a full disclosure of
how we voted in any meeting, please visit our website forfull voting records, which are updated on a rolling monthly
1052023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

basis. We also disclose our proxy votes globally throughannual N-PX requirements with the US SEC for all Mutual
Funds under the US Investment Advisers Act of 1940.
The following tables illustrate how the engagement andproxy voting processes work together in the exercise of
our stewardship duties. These cover some of the mostcommon proposals we review each year.
Overall Voting Statistics
1 July 2022-30 June 2023
Total number of meetings voted

8,926

Total proposals

93,877(of which are Shareholder Proposals)

896

Number of markets voted

70% of meetings with at least 1 vote against management

53%% votes against management

13%% with management

87%

Shareholder Proposals by Region
1 July 2022-30 June 2023

REGION*NUMBER OF
SHAREHOLDERPROPOSALSNUMBER OF VOTES% OF VOTESSUPPORTINGSUPPORTINGSHAREHOLDERSHAREHOLDERPROPOSALS*PROPOSALS

Asia

87

33

38%

EMEA

104

29

28%

North America

677

332

49%

South America

0

0

0%

Rest of World

28

6

21%

Total

896

400

45%

Includes cases where MSIM has abstained from voting.

Shareholders in the US and certain other markets may
submit proposals encouraging changes in company disclosure
and practices related to particular sustainability issues. MSIM
investment teams, with support from the Global StewardshipTeam, as required, consider how to vote on such proposals
on a case-by-case basis by determining the relevance of theissues identified in the proposal and their likely impacts onshareholder value. Investment teams also take into account acompany’s current disclosures and their understanding of its
management of material ESG issues in comparison to peers.
Investment teams seek to balance concerns about
reputational and other risks that lie behind a proposal against
costs of implementation while considering appropriate
shareholder and management prerogatives. They may
abstain from voting on proposals that do not have areadily determinable impact on shareholder value and may
oppose proposals that intrude excessively on management
prerogatives and/or board discretion.

EXERCISING RIGHTS AND RESPONSIBILITIES

Between 1 July 2022 and 30 June 2023, MSIM’s investment
teams supported 45% of shareholder proposals andabstained on 0.4% of shareholder proposals. On theenvironmental side, notwithstanding thematic updates
below, teams have generally voted in support of anincreased number of proposals seeking to promotesustainable packaging efforts by reducing the use of plastic
packaging. With respect to political lobbying and spending,there have been an increased number of proposals seeking
companies to assess the congruency between their statedvalues and their political lobbying activities. MSIM’s
investment teams are supportive of proposals requesting
increased disclosure of political contributions resulting in
improved transparency; however, they have not supported
proposals if in their assessment, the company has sufficienttransparency in its lobbying-related disclosure.
Select Topics
1 July 2022-30 June 2023
(I) CORPORATE GOVERNANCE/EXECUTIVE COMPENSATIONREGION*NUMBER OF
PROPOSALSNUMBER OF
VOTES AGAINSTEXECUTIVE
REMUNERATION*% OF VOTESAGAINST

Asia

3

1

33%

EMEA

1,649

593

36%

North America

2,422

580

24%

South America

0

0

0%

Rest of World

280

77

28%

Total

4,354

1,251

29%

MSIM’s investment teams have a long history of focusing
on corporate governance. They believe that good
corporate governance is a signal of quality management
and that well-managed companies should produce longterm returns for clients. Executive compensation is an
important indicator of good board oversight, and teams
consider advisory votes on remuneration on a case-by-casebasis. Considerations include a review of the relationshipbetween executive remuneration and performance basedon operating trends and total shareholder return overmultiple performance periods. In addition, investment
teams may review remuneration structures and potential
poor pay practices, including relative magnitude ofpay, discretionary bonus awards, poorly defined target
metrics, tax gross-ups, change-in-control features,and internal pay equity. As long-term investors, teams
support remuneration policies that align with long-term
shareholder value.
Between 1 July 2022 and 30 June 2023, MSIM’s investment
teams supported 71% of say-on-pay proposals and voted
against 29% of proposals. They voted against say-on-pay
proposals primarily due to excessive compensation relative
to company performance, upfront and mega grants, andpoor pay practices.

Includes cases where we have abstained from voting

CASE STUDY 12.1
INVESTMENT TEAM

Emerging Markets Equity

MSIM ENGAGEMENT THEME(S)Board compensation and composition

BACKGROUND

At the annual meeting of a South African bank in 2022, the team voted against management andagainst ISS recommendations on compensation proposals. The team disagreed with the proposed
shortening to two years of the performance period to be considered for long-term pay, noting long-termcompensation should be based on three to five years’ performance.
In addition, the team voted against the appointment of two directors, one of whom was the chairmanof the board and the other who was a member of the remuneration committee, on concerns aroundcompensation, over boarding, tenure and inadequate gender diversity.

VOTING OUTCOME

While both directors were elected, other shareholders voted against, with enough dissent to send asignal to management. On compensation, management certainly heard the team’s dissent, as the votefailed; more than 47% voted against. The team has since engaged with the company on these measures,with the goal of improving governance.

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EXERCISING RIGHTS AND RESPONSIBILITIESCASE STUDY 12.2
INVESTMENT TEAMInternational Equity

MSIM ENGAGEMENT THEME(S)

Executive Compensation

BACKGROUND

The International Equity team has voted against this leading consultancy’s executive compensation plan
every year since 2019 and, despite engaging with the company to encourage improvement, concerns
persist. The team’s main issues are the lack of disclosure of the structure of the short-term bonus or the
profit targets that drive 75% of the long-term incentive plan (LTIP), as well as the short vesting periodof the long-term incentive component.
In general, the team believes poorly structured and outsized company management incentive schemes
can be a financially material risk, inviting short-termism, capital misallocation, excessive risk taking,misaligned objectives and poor shareholder returns.

VOTING OUTCOME

Given the company’s lack of progress, the International Equity team again decided to vote against thecompany’s executive compensation plan and continued to escalate their position on the matter by
voting against the election of the Chair of the Compensation Committee, as they did in 2021 and 2022.
If the company does not make sufficient improvement in the future, the team may consider escalating
the issue further.

CASE STUDY 12.3
INVESTMENT TEAMInternational Equity

MSIM ENGAGEMENT THEME(S)

Executive Compensation

BACKGROUND

The International Equity team had concerns about the pay plan at a large professional services
company, such as 20% of the long-term incentive plan (LTIP) not being linked to performance and theshort vesting period, and, as such, had voted against the plan the previous year. Ahead of the 2023
Annual General Meeting, the team engaged with the company to express their concerns and encourage
improvement in key areas, including linking 100% of the LTIP to performance and increasing the lengthof vesting to at least five years. The team also communicated their discomfort with stock awards madeto the CEO that were unrelated to performance.
In general, the team believes poorly structured and outsized company management incentive schemes
can be a financially material risk, inviting short-termism, capital misallocation, excessive risk taking,misaligned objectives and poor shareholder returns.

VOTING OUTCOME

Subsequently, the team expressed their views at the Annual General Meeting by voting against thecompany’s advisory pay plan once again. As a sign of significant investor discontent, the pay plan votefailed, receiving 57% of votes against versus those in favour. Following this, the company requested afurther conversation with the team to discuss the subject, and a meeting was arranged to take placein Q3 2023.

CASE STUDY 12.4

107

INVESTMENT TEAM

Global Balanced Risk Control

MSIM ENGAGEMENT THEME(S)Board Structure and Composition

BACKGROUND

The team had concerns with the company’s seemingly disjoined response to a serious controversy.

VOTING OUTCOME

Considering the board’s structure and its essential role in independently overseeing management,
the team decided to vote against an incumbent new director, given his potential lack of experience
for the role and his position as a relative of the CEO. The team believed, and communicated to thecompany, that given the heightened scrutiny on them since the controversy and their mismanagementof communications thereafter, that an independent appointee would have been preferred to better
exercise independent oversight over management.

2023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

EXERCISING RIGHTS AND RESPONSIBILITIES(II) TOPICS ALIGNED WITH MSIM’S ENGAGEMENT THEMESCATEGORYNUMBER OF VOTESSUPPORTINGSHAREHOLDER % OF VOTES INPROPOSALSSUPPORT OF
NUMBER OF (VOTES AGAINST SHAREHOLDERPROPOSALS MANAGEMENT)PROPOSALS

Climate Action

77

42

55%

Board and
Employee Diversity

34

26

76%

Human Rights

37

20

54%

Political Lobbying
and Spending

55

35

64%

Environmental –
Other

92

30

33%

Social – Other

111

33

30%

a) Climate- and Environment-Related Proposals
Between 1 July 2022 and 30 June 2023, MSIM’s investment
teams supported 55% of climate-related proposals
overall. They voted on an increased number of proposals
seeking GHG emission reduction targets, supportive ofproposals requesting companies to set greenhouse gas(GHG) emissions reduction targets where they felt thecompanies were lagging peers or that GHG emissions werea material risk.
Of the 45% of proposals not supported, various
factors came into consideration as investment teams
sought to balance concerns on reputational, financial
and other risks that may lie behind a proposal against
costs of implementation while considering appropriate
shareholder and management prerogatives. Teams
may abstain from voting on proposals that do nothave a readily determinable financial impact onshareholder value and may oppose proposals that
intrude excessively on management prerogatives and/or board discretion. Investment teams generally voteagainst proposals requesting reports or actions that they
believe are duplicative, related to matters not material
to the business, or that would impose unnecessary or
excessive costs.

CASE STUDY 12.5
INVESTMENT TEAM

Global Listed Real Assets

MSIM ENGAGEMENT THEME(S)

Decarbonisation and Climate Action

BACKGROUND

A large US self-storage REIT received a shareholder proposal during the 2023 proxy voting season. The
proposal requested that the company issue short- and long-term scope 1-3 greenhouse gas reduction
targets aligned with the Paris Agreement’s 1.5°C goal requiring net zero emissions by 2050.
As background, the Global Listed Real Estate team engaged with the company during 2022 for the
purpose of encouraging it to commit to net-zero emissions using science-based targets. At that time, thecompany was working with two consultants to develop a net-zero strategy and indicated the process
could take as long as 24months. The company was reluctant to commit to long-term emission reduction
targets without a visible pathway to achieve its goals. The company emphasised that it was committed
to reducing emissions but needed more time before publicly articulating credible long-term targets.
The team viewed this engagement as a partial success, as they were encouraged the company wasworking toward a net zero framework but hoped it could occur at a faster pace. The team planned toengage with the company again the following year (2023) on this topic.
The team engaged with the company in spring 2023, prior to its Annual Meeting, to discuss theshareholder proposal and progress on the company’s net-zero framework. The company’s work
was ongoing, but it was still not prepared to establish long-term emission reduction targets andrecommended voting against the shareholder proposal. In particular, the company felt it needed
more time to establish credible scope 3 targets that would be consistent with eventual SEC
disclosure requirements. The team remained encouraged by the work the company was doing but wasdisappointed it was not moving at a faster pace.

VOTING OUTCOME

The team voted to support the shareholder proposal, which received approximately 34% of votes anddid not pass. The team believes net-zero targets would further reduce the company’s environmental
footprint and could generate attractive financial returns, as the company uses more renewable energy.
They will continue to engage with the company on this topic and track its progress.

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INVESTMENT TEAM

Global Balanced Risk Control

MSIM ENGAGEMENT THEME(S)

Decarbonisation and Climate Action

BACKGROUND

The team has an ongoing engagement programme with a large US Integrated Oil and Gas company.
While the team engages constructively with the company to find common ground, they believe thatas active shareholders they should vote in the manner that they believe promotes the long-term bestinterests of the company while adhering to strong ESG standards.
Amongst others, the company was presented with a shareholder proposal about how it calculates anemission baseline that determines progress towards emissions reduction goals. This would effectively
exclude the aggregated emissions from material asset divestitures occurring since 2016, giving a moreaccurate reflection of actual emissions reductions achieved. The team requested more information for
why the company recommended shareholders vote against this proposal. The company reiterated its
decarbonisation strategy and explained divestments may play a part, but they would not be driven
from an emissions perspective. The company explained intensity measures would show its efficiency
in producing product. The team cautioned against divestments for emissions reductions, as they could
have the impact of moving out of companies with shareholder oversight or disclosure requirements.
Additionally, the company was faced with a shareholder petition to vote against directors based on poor
climate lobbying disclosures. The team has engaged with the company since a proposal passed in 2020
on this issue, and while they do believe there is more to be done, they note the company has madeimprovements, most notably releasing a standalone document outlining its position and alignment ofcertain associations.

VOTING OUTCOME

While the team was sympathetic to the company’s argument, they ultimately thought such disclosure
could be helpful and supported the emissions-related proposal.
Given the improvements in disclosure, the team did not support the additional proposal, but they dobelieve companies’ lobbying efforts and those of their trade associations can have powerful influence,and they therefore continue to monitor this area across their energy holdings.

b) Gender Pay Gap Proposals
Between 1 July 2022 and 30 June 2023, MSIM’s investment
teams supported 100% of proposals on gender pay gap
disclosure. As a Firm, MSIM is committed to support fair pay,promotion and development opportunities. The proposals
were analysed on a case-by-case basis, and our investment
teams supported where they observed the company’s
disclosures did not provide adequate transparency.
Investment teams would not support proposals where, asa result of their analysis, they concluded the company has
sufficiently addressed the requirement.

c) Diversity and Inclusion Proposals
Between 1 July 2022 and 30 June 2023, MSIM’s investment
teams supported 76% proposals to increase board andemployee diversity. The most prominent proposals under

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2023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

this category called for companies to oversee racial equity
or civil rights audits and enhance transparency related toboard diversity. MSIM’s investment teams reviewed theseon a case-by-case basis and were broadly supportive of
these proposals.
With respect to the remaining 24% of proposals thatwere not supported, the investment teams generally
support proposals that if implemented would enhance
useful disclosure on employee and board diversity. They
support shareholder proposals urging board and employee
diversity with respect to gender, race or other factors
where they believe the board has failed to take thesefactors into account. They may oppose proposals where
the expected cost of giving due consideration to the proxydoes not justify the potential benefits or if the company
has sufficiently addressed requirements of the proposal.

EXERCISING RIGHTS AND RESPONSIBILITIESCASE STUDY 12.7
INVESTMENT TEAMInternational Equity

MSIM ENGAGEMENT THEME(S)

Diverse and Inclusive Business

BACKGROUND

A shareholder proposal was put forward requesting that the company report on the alignment of its
video-sharing platform’s policies with online safety regulations. The proponent argued that the company’s
video-sharing service has faced problems with its content moderation, including allegations that theplatform may be used to propagate hate speech and a place of contact for grooming and coercion.

VOTING OUTCOME

The International Equity team decided to vote in favour of this proposal. Considering the evolving
regulatory landscape in terms of the emergence of online safety regulations and legislation, inparticular in the US, Australia, the EU and the UK, as well as the negative media attention to thecompany as a result of inappropriate content for children and misinformation on its platform, the teambelieves additional disclosure on this issue is warranted to mitigate against potential regulatory andreputational risks.

d) Human Rights Proposals
Between 1 July 2022 and 30 June 2023, MSIM supported
54% of proposals to improve human rights disclosureand risk management. MSIM seeks to enhance useful
disclosure and improvements on material issues related
to human rights risks, labour practices and supply chain
management, including the elimination of forced labourand child labour. We review these proposals on a case-bycase basis and have been generally supportive. We havenot supported proposals where we believe the company
has taken adequate steps to address this concern or the
proposal is overly prescriptive.

Fixed Income – Approach to Seeking
Amendments in Terms and Conditions,Contracts and Other Legal Documentation
The Fixed Income organisation exercises their rights andresponsibilities through good stewardship efforts both at
the pre-investment stage and throughout the holding of asecurity. They use engagement and escalation (if needed)
to inform their investment decisions, which ultimately canhave an impact on issuers.
Prior to investment, credit analysts conduct due diligenceacross a wide range of factors, including on material
ESG issues, and may request to engage with an issuer
to obtain additional insights. The team draws upon avariety of data sources for ESG-related information preinvestment, including both third-party and proprietary
analysis. Engagement is also used as an opportunity toprovide granular feedback to issuers on the structure of
their deals.
The Fixed Income organisation’s approach to seeking
amendments to terms and conditions, contracts andother legal documentation depends on the issue inquestion, type of security held, investment strategy
and their fiduciary duty to act in clients’ best interests.
Credit Analysts work closely with the Fixed Income ESG
Analysts on the Calvert Fixed Income ESG Strategy andResearch team, with several trainings over the courseof the reporting period to enhance Credit Analysts’
understanding of and integration into the ESG researchand engagement process. Furthermore, there are
additional training opportunities available from rating
agencies to law firms and associations, such as theEuropean Leveraged Finance Association (Principle 10),of which MSIM is a member. Our in-house legal expertise
also provides support for in-depth analysis where needed,
especially in ESG-related areas when evaluating terms forany potential transaction.
The following are examples of different approaches basedon different types of income securities:
GREEN/LABELLED SUSTAINABLE BONDS –TRANSPARENCY AND REPORTING

In the context of green and other labelled sustainablebonds, for example, the team may organise one-toone dialogues with management where reporting andtransparency practices do not align with commitments
outlined in labelled bond frameworks. The team advises
issuers to commit to annual reporting where possible;
however, as part of the monitoring process, the team may
engage with issuers that do not fulfil these criteria.
For example, representatives of the Fixed Income
organisation recently engaged with a climate solutions
company on their green bond reporting—given thecompany’s pure-play nature, the issuer had lagged themarket in reporting practices for its outstanding green
bonds. The Fixed Income representatives contacted
the issuer with concerns regarding transparency and

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EXERCISING RIGHTS AND RESPONSIBILITIES

granularity in both allocation and impact reporting, making
an immediate request for information to allow the team to
conduct a proper review of the company’s green notes.
The issuer was able to provide the requested information
within two weeks, benefiting the team’s evaluation process
for the benefit of clients. The team also provided longerterm feedback to improve the strength of the company’s
green programme.
SUSTAINABILITY-LINKED BONDS – SUSTAINABLE TARGETS AND
POTENTIAL COUPON STEP-UPS; CALL DATES/PRICESIn the case of Sustainability-Linked Bonds associatedwith specific targets and potential coupon step-ups,
the Fixed Income organisation engages with issuers
ahead of the transaction through one-to-one meetingsor group roadshow calls to provide their views on theappropriateness of the trigger event date and the size ofthe step-up, and request changes if necessary to increase
the level of ambition and accountability. For example,
there has been a surge in the number of high-yield bondissuers using the sustainability-linked format, often
setting call dates very close to the trigger date of the
coupon step-up.
The Fixed Income organisation has also engaged withmultiple high-yield issuers of callable SustainabilityLinked Bonds, to recommend that whenever the step-up
trigger date is close to the call date, the penalty should
be reflected in the call price as well, to avoid creating an
incentive to call the bond. As mentioned in Principle 10,
the team also addressed these issues by collaboratingwith industry organisations, such as ICMA and ELFA, toestablish more detailed guidance on best practices aroundthe issuance of these bonds.
HIGH YIELD – PROSPECTUS REVIEW;
BOND STRUCTURE/COVENANTS

In relation to high-yield issuance more broadly, investors
tend to receive a prospectus a few days in advance.
Each prospectus is reviewed by the credit researchanalysts. Using a combination of in-house expertise(several team members have either investment banking

1112023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

or loan experience) and Xtract Research (legal researchavailable via paid subscription), the High Yield investment
team determines whether covenants and/or structure
are too aggressive. In cases where the team thinks the
documentation is too aggressive, they provide written
feedback directly to the syndicate desks involved inmarketing the bond deal. If there is significant pushbackfrom the investor base, either the documentation istightened up or the pricing of the deal makes up for thelooseness of the documentation. Loose documentation
does not preclude the High Yield investment team fromparticipating in a deal if they believe they are being
appropriately compensated on the issuance level. Equally,
they have chosen to withdraw their interest in deals asa result of loose documentation where no changes weremade despite their feedback.
SECURITIZATIONS – LOAN COLLECTION AND MODIFICATIONPOLICIES, CONDITIONS

For securitisations, the Securitized and Agency MBS
investment teams construct and then monitor theirportfolios with the aim of avoiding exposure to predatory
lending practices, severe malpractices in payment
collections, or breaches of consumer protection standards,
all of which can increase the probability of default of theinvolved lenders or servicers. Over the past year, the teamcontinued to engage with securitisation issuers to assess loan
originators and servicers’ collection and loan modification
policies, and the conditions imposed on borrowers.
As an example, the team divested its exposure to alarge sub-prime auto lender, based on concerns aroundtheir rollout of high-interest car loans to low-income
consumers, resulting in a downgrade in their credit score
upon inability to repay. The investment team engaged
with the lender’s Chief Treasury Officer to discuss theallegations; however, the explanations were not sufficient
to mitigate the team’s concerns, which led to divesting,to avoid downside risks from further escalation of thecontroversy. These issues ultimately led to the regulator
suing the lender.

SECTION 5

Appendices

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APPENDICES

AppendicesParametric Portfolio Associates –Stewardship Overview
Parametric Responsible Investment (RI)—part of Investment Strategy—
implements proxy voting and shareholder engagement, in addition to
portfolio construction and oversight activities.
Proxy Voting








High-level oversight: Proxy votes are aligned with Proxy Voting Policy and Procedures, which are overseen by theParametric Proxy Committee, subsequently the Stewardship Committee, whose 11 members include our CEO and CIO
Single experience for clients: All clients who select Parametric to vote their proxies have their shares voted according to
the same investor-friendly custom policy
Beyond RI assets: Approximately 75% of ~$182 billion in Parametric Custom Core equity assets are voted by Parametric,
substantially more than the ~$32 billion RI assets
Systematized proxy voting activities: Documentation and distribution of activities should be completed by 30 June 2023

Shareholder Engagement

Direct Engagement with companies is largely limited to the engagement priority theme to drive impact
Company best practices in supply chain labour management and reporting are being assessed to drive more informed andtargeted 2023 engagements
Financially material issues are the focus of engagements, considering current SASB topics and potential topic expansion

Shareholder Resolutions

We assist clients in filing shareholder resolutions through As You Sow, the largest filer of shareholder resolutions at
US companies
Shareholder resolutions are a minor activity, as they are attempted for ~1% of Responsible Investing accounts

Thematic Engagement Priorities: Five key themes drive our 2023 engagements
CLIMATE CHANGE

Collaborative engagement as
Climate Action
100+ Signatory
Climate is material in 90% of
SASB industries
Year two of long-term CA
100+ engagement

WORKFORCE DIVERSITYDISCLOSURE








Direct Parametricengagement
Diversity is an expanding
SASB topic
Year two of 3 to 5-year
engagement
Met in 2022 with 10 of 101
contacted S&P 500
companies not reportingEEO-1 data

HUMAN TRAFFICKING
Collaborative engagement as
inaugural PRI
Advance Signatory
Supply Chain Labor
Conditions SASB Topic
Company selection criterion:
Fails Parametric Human
Rights Controversies screen

HUMAN RIGHTS












Direct Parametricengagement
Supply Chain Labor
Conditions SASB Topic
Year three of 7+ year
engagement
Company selection criterion:
Fails Parametric Human
Trafficking screen
Met in 2022 with 11 of 19
R1000 & EAFE fails
3 themes: Child labor in
tobacco and coca supply
chains and forced labor

For more information on Parametric’s responsible investment approach, please visit: https://www.parametricportfolio.com/solutions/institutional/
responsible-investing.
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APPENDICES

Calvert Research and Management –Stewardship Overview
The Calvert Principles for Responsible Investment (“Calvert Principles”)
provide the framework for setting engagement priorities with thecompanies in which they invest.
(E) Environmental Sustainability and Resource Efficiency
Reduce the negative impact of operations and practices on the environmentManage water scarcity and ensure efficient and equitable access to clean sources

Mitigate impact on all types of natural capitalDiminish climate-related risks and reduce carbon emissions

Drive sustainability innovation and resource efficiency through business operations or other activities, products and services(S) Equitable Societies and Respect for Human Rights


Respect consumers by marketing products and services in a fair and ethical manner, ensuring security of sensitive
consumer data

Respect human rights, respect culture and tradition in local communities and economies



Promote diversity and gender equity across workplaces, marketplaces and communities



Demonstrate a commitment to employees by emphasizing decent workplace opportunities and standards



Respect the health and wellbeing of consumers by promoting product safety(G) Accountable Governance and Transparent Operations
Provide responsible stewardship of capital
Exhibit accountable governance and develop effective boards that reflect expertise and diversity of perspective, andprovide oversight of sustainability risk and opportunityInclude environmental and social risks, impacts and performance in material financial disclosuresLift ethical standards in all operations

Demonstrate transparency and accountability in addressing adverse events and controversies while minimising risks andbuilding trust

Strategic Engagement Activities
Calvert uses the following strategic engagement activities to encourage positive change in companies:

Direct Dialogue
Calvert engages directly with management to raise concerns and identify opportunities to minimise a company’s risk ortransform practices that our research indicates could lead to an increase in shareholder value.

Shareholder Proposals
In cases where direct dialogue and other efforts go unheeded, Calvert often file a shareholder resolution to encourage
and influence progress. Sample topics for shareholder resolutions Calvert have filed recently include diversity andhuman capital disclosure, political contributions’ transparency, and climate change mitigation.
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APPENDICES

Public Policy Initiatives
Calvert works with regulators and policymakers to ensure that officials are informed about our position on critical issues
such as Shareholder Rights and Corporate Disclosure on such topics as human capital and greenhouse gas emissions.

Proxy Voting
Calvert believes that proxy voting is the most direct means by which investors can influence corporate behaviour.
Calvert casts votes on a company’s shareholder resolutions based on its Proxy Voting Guidelines.
For more information on Calvert’s active ownership approach, please see https://www.calvert.com/active-engagement.php

Eaton Vance Management Stewardship – Overview
The Proxy Administrator and Global Proxy Group oversee proxy voting
and shareholder engagement.
Proxy VotingHigh-level oversight: Proxy Voting Policy and Procedures are overseen by the Global Proxy Group, whose members
include investment professionals
Custom Voting Guidelines: Clients can choose to vote their shares according to the Eaton Vance voting policy
guidelines or their own chosen custom voting policy

Shareholder Engagement

Direct Engagement: EVM engages directly with management and boards of directors to discuss issues/concerns
regarding governance, as well as social and environmental matters
Financial materiality is the focus of engagements, aiming for transparency and accountability in disclosures, addressing
controversies and risks, sustainability of business operations, products and services
Engagements are prioritised based on widely-held securities across Eaton Vance portfolios, as well as starter positions
where they may have questions or concerns on board effectiveness, board expertise on material issues and board
diversity; climate-related risks and carbon emissions; and human capital management including workforce diversity,
equity and well-being.

Atlanta Capital Stewardship – Overview
Proxy VotingHigh-level oversight: Proxy Voting Policy is overseen by the Procedures Administrator, who may seek insight from
ACM’s portfolio managers and/or Management Committee on how a particular proxy proposal will impact the financial
prospects of a company, and vote accordingly.
Exercise of shareholder rights: Generally performed by casting votes by proxy at shareholder meetings on matterssubmitted to shareholders for approval (for example, the election of directors or the approval of a company’s stock
option plans for directors, officers or employees).

For more information on Atlanta Capital’s Proxy voting policy please see: https://www.atlcap.com/media/34847.pdf

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APPENDICES

Policy Glossary
Firm Code of Conduct

Our Code of Conduct reflects our continued commitment to act in accordance withour core values and in full alignment with the letter and spirit of applicable laws,
regulations and our policies. Our values are as follows, and inform everything we do:
Put Clients First, Lead with Exceptional Ideas, Do the Right Thing, Commit to Diversity
and Inclusion, and Give Back.

Global Confidential andMaterial Non-PublicInformation Policy

The Global Confidential and Material Non-Public Information Policy addresses handlingconfidential information in a manner which protects Morgan Stanley’s reputation for
integrity, promotes relationships with our clients, safeguards Firm assets and helps toensure compliance with the complex regulations governing the financial services andbanking industry.

Global Conflicts of Interest
Policy (“Global Conflicts
Policy”) and related
procedures

The Global Conflicts of Interest Policy addresses business conduct and practices atMorgan Stanley that give rise to an actual or potential conflict of interest. For example,
conflicts can occur when there is a divergence of interests between Morgan Stanley
and a client, or among clients. Conflicts can also occur when there is a divergence ofinterests between an employee on the one hand and the Firm or a client on the other.
This Policy sets forth guidance on the identification of conflicts and the Firm’s conflicts
governance framework.
MSIM has established procedures intended to identify and mitigate conflicts of interest
related to business activities on a worldwide basis. A conflict management officer foreach business unit and/or region acts as a focal point to identify and address potential
conflicts of interest in their business area. When appropriate, there is an escalation
process to senior management within the business unit, and ultimately, if necessary, toFirm management or the Firm’s franchise committees, for potentially significant conflicts
that cannot be resolved by the conflict management officers or that otherwise requiresenior management review.

Global Employee Trading
and Outside Business
Activities Policy

The Global Employee Trading, Investing and Outside Business Activities Policy sets
forth general rules that employees must follow with respect to personal trading andinvesting, including transactions in Morgan Stanley securities, and specific rules forparticular types of transactions and accounts.

Global Gifts,
Entertainment &Charitable Giving Policy

The Global Gifts, Entertainment and Charitable Giving Policy sets forth guidance andlimitations with respect to the provision or receipt of gifts and entertainment, as well as
the provision of charitable contributions, in connection with business relationships as aMorgan Stanley employee. This Policy addresses gifts, business entertainment (including
payment for travel, lodging and meals), charitable contributions, and assumption or
forgiveness of debt, or any other item of value.

Global Incentive
Compensation Discretion(GICD) Policy

The Global Incentive Compensation Discretion Policy sets forth the terms under which
an employee of Morgan Stanley, its subsidiaries and affiliates may be eligible to receivea discretionary incentive compensation award, establishes standards with respect to theprocess for determining the discretionary incentive compensation to be awarded to an
employee, and provides guidance for the escalation of a possible clawback of previously
awarded incentive compensation.

Global Investment
Management Risk
Management Policy

Effective risk management is vital to the success of Morgan Stanley and Morgan Stanley
Investment Management. Accordingly, the Global IM Risk Management Policy
establishes a framework to integrate the diverse roles of the Risk Management
functions into a holistic structure and facilitates the incorporation of risk assessment
in decision-making processes. This Policy helps members of senior management
understand and monitor all significant risk categories on a consistent, proactive basis
and defines the roles, responsibilities, guidelines and other elements that formalize thegovernance framework, which is central to risk management and embodies the Firm’s
risk management culture.
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APPENDICES

Global Side-by-SideManagement Policy andProcedures

When an adviser manages multiple portfolios (side-by-side management) with different
structures (e.g., registered funds and unregistered funds) and/or fee structures (e.g.,
performance-based fees versus flat management fees) certain perceived or actual
conflicts may arise. To address these types of conflicts, we have adopted policies andprocedures, including the Global Side-by-Side Management Policy and Procedures,
pursuant to which allocation decisions may not be influenced by fee arrangements andinvestment opportunities will be allocated in a manner that we believe to be consistent
with obligations as an investment adviser. To further manage these types of conflicts,
we have formed a Side-by-Side Management Subcommittee to ensure that side-by-side
management guidelines are met.

Global Third-Party Risk
Management Policy

The Global Third-Party Risk Management Policy sets forth the standards andrequirements for Morgan Stanley’s Third-Party Risk Management Program. The Firm
manages overall Third-Party risk within risk-tolerance levels established and updated
periodically by the Firm. The Programme implemented through the Policy is designed
to support effective identification, assessment, management and mitigation of risks
associated with Third-Party relationships. The Programme requires that outsourcing andsourcing decisions incorporate a risk-based assessment of the associated risks that may
impact the Firm.

Global Third-Party
Selection andEngagement Policy

The Global Third-Party Risk Management Policy sets forth the standards andrequirements for Morgan Stanley’s Third-Party Risk Management Program. The Firm
manages overall Third-Party risk within risk-tolerance levels established and updated
periodically by the Firm. The Programme implemented through the Policy is designed
to support effective identification, assessment, management and mitigation of risks
associated with Third-Party relationships. The Programme requires that outsourcing andsourcing decisions incorporate a risk-based assessment of the associated risks that may
impact the Firm.

Global Third-Party
Selection andEngagement Policy

The Global Third-Party Selection and Engagement Policy establishes a frameworkfor Morgan Stanley’s sourcing activities from external, unaffiliated Third Parties forwhich the Firm’s sourcing team is engaged. This Policy is designed to help ensure thatthe sourcing of goods and services by Morgan Stanley is done in a fair, competitive,
independent and objective manner, and with appropriate due diligence. Additionally,sourcing decisions must be made in accordance with all applicable laws, regulatory
requirements and sound business practices.

Investment Management
Public Markets Enhanced
Vendor Management
Programme Procedures

These procedures describe the Investment Management Public Markets Enhanced
Vendor Management Program. The goal of the Enhanced Programme is to ensure that
service providers that support the Public Markets business are monitored and payments
made to the vendors are reviewed by designated personnel.

Investment Private
Enhanced Vendor
Management Programme
Procedures

These procedures describe the Investment Management Public Markets Enhanced
Vendor Management Program. The goal of the Enhanced Programme is to ensure that
service providers that support the Public Markets business are monitored and payments
made to the vendors are reviewed by designated personnel.

Morgan Stanley
ESG Report

The Morgan Stanley 2022 ESG Report can be found here

Morgan Stanley
Environmental and Social
Risk Policy Statement

Morgan Stanley’s Environmental and Social Policy Statement reflects the Firm’s global
commitment to our stakeholders, communities and the environment to identify andaddress environmental and social risks. To help us deliver long-term value for our clientsand shareholders, we employ comprehensive risk management policies that include
environmental and social risk, as laid out in this policy.

Morgan Stanley Europe SE– EU SFDR disclosures

The EU SFDR disclosures for Morgan Stanley Europe SE can be found in this link here.

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APPENDICES

Morgan Stanley Modern
Slavery and Human
Trafficking Statement

The Morgan Stanley Modern Slavery and Human Trafficking Statement is publishedin accordance with Section 54 of the United Kingdom’s Modern Slavery Act 2015
and Section 16 of Australia’s Modern Slavery Act 2018. It outlines the steps taken by
Morgan Stanley to address the risk of modern slavery in our own global operations
or of the suppliers of Morgan Stanley and its consolidated subsidiaries, as well as
Morgan Stanley’s future plans in that regard.

Morgan Stanley SGR
S.p.A. Disclosures
under Regulation(EU) 2019/2088

The Disclosures under Regulation (EU) 2019/2088 for Morgan Stanley SGR S.p.A. canbe found in this link here.

Morgan Stanley Supplier
Code of Conduct

We expect our suppliers, and our suppliers’ suppliers, to adhere to these key values andapply them to how they do business with Morgan Stanley and in general.

Morgan Stanley UK
Gender Pay Gap Report

The Morgan Stanley UK Gender Pay Gap Report can be found in this link here.

Morgan Stanley UK
Regulated Entities
Supplement to the
Global Third Party Risk
Management Policy

The Morgan Stanley UK Regulated Entities Supplement (the “Policy Supplement”) to
the Global Third-Party Risk Management Policy establishes requirements specific to UK
Regulated Entities. The Policy Supplement is designed to enable UK Regulated Entities
to manage risks within the Morgan Stanley International Group’s Third-Party Risk
Appetite in compliance with SYSC of the FCA Handbook, the Outsourcing section of the
PRA Rulebook, the EBA Guidelines on Outsourcing and other relevant regulations.

MSIM’s Counterparty
Risk Policy

The Morgan Stanley Investment Management Counterparty Risk Policy sets forth thebroad principles that serve as the foundation for managing globally, in a consistent andintegrated manner, counterparty risk for all IM businesses. The objective of the Policy is
to avoid or mitigate risk of loss arising from the default or inability of a counterparty tomeet its financial obligations.

MSIM’s Proxy Voting
Policy and Procedures(“MSIM Proxy
Voting Policy”)

Our MSIM Proxy Voting Policy addresses a broad range of issues and provides
general voting parameters on proposals that arise most frequently. We endeavour tointegrate governance and proxy voting policy with investment goals, using the vote toencourage portfolio companies to enhance long-term shareholder value and to provide
a high standard of transparency such that equity markets can value corporate assets
appropriately. The MSIM Proxy Review Committee (“Committee”) has responsibility foroverseeing the implementation of the MSIM Proxy Voting Policies and Procedures.

Remuneration Policy ofMSIM Fund Management(Ireland) Limited

The Remuneration Policy of MSIM Fund Management (Ireland) Limited can be found in
this link here.

Sustainable
Investing Policy

MSIM’s Sustainable Investing Policy outlines our approach to stewardship andsustainable investing. Our sustainable investment beliefs, strategy and culture arecollectively guided by the key principles laid out in the policy here.

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APPENDICES

Mapping to UK Stewardship Code Principles
PRINCIPLE

PAGE

Principle 1: Signatories’ purpose,
investment beliefs, strategy
and culture enable stewardshipthat creates long-term value forclients and Beneficiaries, leading
to sustainable benefits for the
economy, the environmentand society.

5

Principle 2: Signatories’
governance, resources andincentives support stewardship

13

ADDITIONAL KEY DETAILS REFERENCED IN OTHER PRINCIPLESSTARTING PAGE

How MSIM’s investment beliefs and core values are embeddedin the stewardship function and engagement priorities[Principles 2, 5, 6 & 9]

13, 34,38, 64Highlights of key stewardship achievements 2023
[Principles 2, 4, 5, & 9]

13, 23,38, 64

International Equity team’s proprietary approach to material
ESG risks [Principle 4]

28

Fixed Income organisation external collaborative engagement
initiatives [Principles 9 & 10]

64, 90Resourcing stewardship activities [Principle 1]

7

Details of collaboration across Morgan Stanley businesses[Principle 4]33

Details of engagement and collaboration efforts to further
our commitment to DEI [Principle 10]90

Details of MSIM 2023 Proxy Voting Policy update [Principle 5]

34

Incorporation of third-party data ESG data by MSIM
investment teams [Principle 7]

44

Use of service providers [Principles 7 & 8]
How we monitor our service providers, activities and progress[Principle 8]

44, 5959

Principle 3: Signatories manage
conflicts of interest to put thebest interests of clients andbeneficiaries first.

20

Details of MSIM 2023 Proxy Voting Policy update[Principle 5]34

Principle 4: Signatories identify
and respond to market-wide andsystemic risks to promote a wellfunctioning financial system.

23

MSIM Ltd Board review [Principle 2]

13

Subject matter expertise MSIM Sustainability and
Stewardship teams [Principle 2]

14

MSIM Sustainability Oversight [Principle 5]34

Private Credit and Equity team engagement in relation tosystemic risk [Principle 9]87

Details of active participation in industry bodies and forums
and collaboration examples [Principle 10]
Details on ESG Checklist and Pathway for collaborative
Proposals [Principle 2]
MSIM Proxy Review Committee [Principle 2]90

Principle 5: Signatories review
their policies, assure theirprocesses and assess theeffectiveness of their activities.

34

Internal assurance of stewardship [Principles 5 & 6]
Transparency in regulatory, client and stewardship reporting[Principles 2, 6, 7, 9 & 10]
ESG Data Provider Due Diligence process [Principle 8]

Principle 6: Signatories takeaccount of client and beneficiaryneeds and communicate
the activities and outcomesof their stewardship andinvestment to them.

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Obtaining Clients Views [Principle 2]

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15
34, 3813, 38, 44,
64, 9059
13

APPENDICESPRINCIPLE

PAGE

Principle 7: Signatories
systematically integrate
stewardship and investment,
including material environmental,social and governance issues,and climate change, to fulfil their
responsibilities.

44

Principle 8: Signatories monitor
and hold to account managers
and/or service providers.

59

Principle 9: Signatories engage
with issuers to maintain orenhance the value of assets.

64

ADDITIONAL KEY DETAILS REFERENCED IN OTHER PRINCIPLESSTARTING PAGE

International Equity team’s proprietary approach to material
ESG risks [Principle 4]

28

Fixed Income Organisation active engagement with Bondissuers [Principle 9]73

MSIM’s thematic engagement priorities [Principle 9]

65

Customised solutions – Engagement approach [Principle 9]78

Information on vote splitting due to client preference ordiffering investment team convictions [Principle 3]

22

MSIM Proxy Voting Policy update [Principle 5]

34

Details of our collaborative engagement activities with MSIM
[Principle 10]90

EME – Escalation protocols [Principle 11]

98

International Equity team’s escalation approach and case studies[Principle 11]

95

Global Fixed Income – Escalation process [Principle 11]100

Private Credit & Equity – Engagement approach and rationale[Principle 7]53

Principle 10: Signatories,
where necessary, participate incollaborative engagement to
influence issuers.

90-

Principle 11: Signatories, where
necessary, escalate stewardship
activities to influence issuers.

95-

Principle 12: Signatories
actively exercise their rights andresponsibilities.

103

Details of MSIM’s Proxy Voting Policy, Voting Records andProxy Review Committee [Principles 2 & 5]

13, 34

Details of MSIM’s ongoing monitoring and due diligence of
proxy advisors [Principle 8]59

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APPENDICES

MSIM Collaborative Initiatives
Through its various businesses and internal functions, MSIM and Morgan Stanley participate in, belong to or take aleading role in many ESG-related initiatives and organisations.
This includes participating in industry conference panels, exploring joint research, and supporting the work of groups
focused on ESG-related issues.
MSIM and Morgan Stanley’s external sustainability/ESG-related initiatives and organisations include, but are not limited
to, the following:
SUSTAINABILITY/
ESG-RELATED INITIATIVESKEY AREA OF FOCUS

SINCE

30% Club UK Investor
Working Group

MSIM (UK) joined the 30% Club UK investor working group to help increase
gender diversity on boards and senior management teams.

2022

Better Building Partnerships The BBP is a collaborating of leading property owners who are working
together to improve the sustainability of commercial buildings.

2022

Black Women in AssetManagement (BWAM)

BWAM is a professional network founded in 2019 in the UK that is focused on
advancing and retaining Black, female professionals in the asset management
industry. BWAM has expanded internationally and hosts various panel sessions
and networking events. MSIM engages with BWAM through participation in
their Cross-Company Mentorship Programme and Sponsor Roundtables, and is a
Platinum sponsor of their 2023 annual conference.

2021

Ceres Investor Network
on Climate Risk andSustainability

Ceres is a nonprofit working with investors and companies to drive sustainability
solutions through the economy. Morgan Stanley is a member of the Ceres Investor
Network on Climate Risk and Sustainability, and the CEO of Ceres is a member ofthe Morgan Stanley Institute for Sustainable Investing Advisory Board.
Our PC&E business is also a member of Ceres’ Private Equity Working Group,
which supports GPs and LPs in transitioning private equity portfolios towards
a sustainable net zero economy. Our contribution has included facilitating andparticipating in sessions that provide GPs and LPs with the latest climate-centricand sustainable investment practices, policies, frameworks and tools to assess,manage and mitigate ESG and climate risks.

2013

CFA Institute’s Diversity,
Equity and Inclusion Code

Led by the CFA Institute, the DEI Code fosters action to advance diversity,
equity, and inclusion in the investment industry through six metrics-based
Principles built to generate a cycle of positive change for individuals andorganisations. The DEI Code also requires signatories to amplify the impactof their commitment by making the economic, business and moral case fordiversity, equity, and inclusion.

2023

Council for Institutional
Investors (CII)

CII is a leading voice for effective corporate governance, strong shareowner rights
and sensible financial regulations that foster fair, vibrant capital markets. CII
promotes policies that enhance long-term value for US institutional asset owners
and their beneficiaries.

2020

Emerging Markets Private
Equity Association (EMPEA)
Entrepreneurs In Action(EIA)

EMPEA is a global industry association for private capital in emerging markets.

2015

MSIM is partnering with EIA, an organisation that seeks to bring together young
people and employers. The initiative includes a five-day assessment programmethat will introduce applicants to MSIM, present them with a business challenge
and give them the opportunity to present to MSIM Senior Management.

2022

Ceres Private Equity
Working Group

European Leveraged Finance MSIM recently joined ELFA and is actively participating in its ESG working
Association (ELFA)
group, aiming to improve ESG data disclosure.

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2021

2021

APPENDICESSUSTAINABILITY/
ESG-RELATED INITIATIVESKEY AREA OF FOCUS

SINCE

FAIRR

FAIRR is a leading collaborative engagement NGO focusing on delivering asustainable food system. MSIM joined FAIRR in 2022 with the objective of
forging new partnerships and delivering sustainable outcomes.

2021

Girls Who Invest

GWI is a nonprofit organisation founded in 2015 and dedicated to increasing
the number of women in portfolio management and executive leadership in theinvestment management industry. Seema R. Hingorani is the Founder and Chairof Girls Who Invest (GWI). Seema R. Hingorani is the Founder and Chair of GirlsWho Invest (GWI)

2019

Global Impact Investing
Network (GIIN)

GIIN is a nonprofit industry organisation focused on developing infrastructure,
education and research to accelerate the scale and effectiveness of impact
investing around the world. Morgan Stanley is a member of the GIIN’s Investors
Council and actively engages with the GIIN and is members on a variety of topics
including impact measurement and management.

2011

Global Real Estate
Sustainability Benchmark(GRESB)GRESB is the ESG benchmark for real assets. It collects and catalogues ESG
data for property companies, real estate investment trusts (REITs), funds anddevelopers, including infrastructure funds and assets. Morgan Stanley is aninvestor member of GRESB and MSIM’s Real Assets team both provides andconsumes GRESB data.

2015

Hong Kong Stewardship Code MSIM is a signatory.

2019

Institutional Limited
Partners Association (ILPA)– Diversity in Action

Our PC&E business is a signatory to ILPA’s Diversity in Action initiative, which
involves GPs and LPs committed to advancing diversity, equity and inclusion(DEI) in the private equity industry, which is also one of Morgan Stanley’s
core values—Commit to Diversity and Inclusion. The goal of the initiative is tomotivate market participants to engage in the journey towards becoming morediverse and inclusive and to build momentum around the adoption of specificactions that advance D&I over time.

2020

International Capital Market
Association (ICMA) and
the Green & Social Bond
Principles (GBP/SBP)ICMA oversees a set a voluntary set of guidelines that recommend
2014,
transparency/disclosure and promote integrity in the development of the2022
sustainable labelled debt market. Morgan Stanley was a founding signatoryof the Green Bond Principles and was selected to join the Advisory Council in
2019. MSIM became an investor member of ICMA and the GBP/SBP in 2022.
Morgan Stanley and MSIM representatives participate in a number of GBP/SBP
working groups, including: Climate Transition Finance, Sustainability-Linked
Bonds, Impact Reporting, Social Bonds.

Irish Funds Industry
Association

The Irish Funds Industry Association (Irish Funds) is the representative body forthe international investment fund community in Ireland.

2013

ISSB – Sustainability
As of August 2022, the International Sustainability Standards Board (ISSB) of
Accounting Standards Board the IFRS Foundation assumed responsibility for the SASB Standards.
(SASB)SASB is dedicated to enhancing the efficiency of capital markets by fosteringhigh-quality disclosure of material sustainability information that meets investor
needs. Morgan Stanley’s Chief Sustainability Officer is a board member of
the SASB Foundation, helping ensure that emerging sustainability metrics are
relevant to investors. MSIM is also a member of ISSB Investor Advisory Group(IIAG), which replaced the SASB’s Investor Advisory Group as of March 2023.
This group brings asset managers and owners together to promote the adoptionof the SASB reporting framework among corporate issuers.

2012

Japanese Stewardship CodeJUST Capital

2017
2021

MSIM is a signatory.
JUST Capital is a nonprofit research and ratings organisation that measures andranks companies on their performance on issues that matter to Americans.

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ESG-RELATED INITIATIVESKEY AREA OF FOCUS

One Planet Summit AssetManagers Initiative

SINCE

In Q1 2020 MSIM became a member of the One Planet Asset Managers
Initiative. The initiative was established by eight global asset management
firms to support the members of the One Planet Sovereign Wealth Funds inaccelerating the integration of climate change analysis into the management oflarge, long-term diversified asset pools.
PRI Advance (Human Rights) Advance is a new stewardship initiative coordinated by the PRI where
institutional investors work together to take action on human rights and social
issues. MSIM, Calvert and Parametric have signed up to this initiative.

2020

PRI Collaborative Sovereign
Engagement on Climate
ChangeThe PRI Collaborative Sovereign Engagement on Climate Change is a pilot
initiative launched in 2022 by the PRI and a group of investors.

2023

PRI – Global Policy
Reference GroupThe GRPG is a voluntary group of PRI signatories that works to inform andstrengthen the PRI’s public policy engagement on responsible investment topics.

2022

PRI Nature Reference
Working Group

Voluntary body of PRI signatories that aims to build investor capacity foraddressing nature and biodiversity loss. The group was launched in 2022 and isapproximately made up of approximately 70 signatories.

2022

Principles for Responsible
Investment (PRI)The PRI works with its international network of signatories to put the six
Principles for Responsible Investment into practice. Its goals are to understandthe investment implications of environmental, social and governance issues andto support signatories in integrating these issues into investment and ownershipdecisions. MSIM is a signatory of the PRI. In 2020, MSIM also became a signatory
to PRI’s Credit Risk and Ratings initiative, which promotes the incorporation of
ESG into credit ratings and analysis in a systematic and transparency way.
The Alternative Investments Programme was developed by leading Private
Equity and Asset Management firms to help raise awareness of industry
challenges. Its aim is to help diversify the workforce by providing opportunities
to individuals from underserved and underrepresented backgrounds.

2013

Sponsors for Educational
Opportunity – Alternative
Investments Fellowship
Programme

2022

2022

Trading for Trees Program

The MSIM Fixed Income organisation takes part in Trading for Trees, a partnership
between the trading platform MarketAxess and the organisation One Tree
Planted, to provide a unique trading incentive for users to trade Green Bonds.
Through the program, five trees are planted for every $1 million in Green Bonds
traded on the MarketAxess platform. Between 2020 and 20-22, the programme
facilitated the trading of over $140bn and the planting of 700,000+ trees.

2020

UK Investment Association

MSIM is a member of the Investment Association, a trade body that represents
Investment Managers & Investment Management Firms in the UK. MSIM has alsopreviously been part of the Working Group on Fund-Level Communication of
Responsible Investment, focused on fund disclosure requirements applicable to
UK-based asset managers.
MSIM is a signatory to the revised 2020 UK Stewardship Code.

1998

UK Stewardship CodeWorld Benchmarking
Alliance

123

The WBA is a global organisation that works to drive change with 2000 of
the world’s largest companies on SDGs by assessing/ranking publicly on theirperformance. MSIM UK Ltd joined the World Benchmarking Alliance (WBA) as
an ally in 2022.

2023 UK STE WARDSHIP CODE REPORT|OC TOBER 202 3

2022
2022

IMPORTANT INFORMATION

The views and opinions and/or analysis expressed are those of the author
or the investment team as of the date of preparation of this material
and are subject to change at any time without notice due to market or
economic conditions and may not necessarily come to pass. Furthermore,
the views will not be updated or otherwise revised to reflect informationthat subsequently becomes available or circumstances existing, or changes
occurring, after the date of publication. The views expressed do not reflect
the opinions of all investment personnel at Morgan Stanley Investment
Management (MSIM) and its subsidiaries and affiliates (collectively “theFirm”), and may not be reflected in all the strategies and products that
the Firm offers.
This material has been prepared on the basis of publicly available information,internally developed data and other third-party sources believed to bereliable. However, no assurances are provided regarding the reliabilityof such information and the Firm has not sought to independently verify
information taken from public and third-party sources.
This material is a general communication, which is not impartial, and all
information provided has been prepared solely for informational andeducational purposes and does not constitute an offer or a recommendation
to buy or sell any particular security or to adopt any specific investment
strategy. The information herein has not been based on a consideration of any
individual investor circumstances and is not investment advice, nor should
it be construed in any way as tax, accounting, legal or regulatory advice.
To that end, investors should seek independent legal and financial advice,including advice as to tax consequences, before making any investment
decision.
Charts and graphs provided herein are for illustrative purposes only. Past
performance is no guarantee of future results.
A separately managed account may not be appropriate for all investors.
Separate accounts managed according to the Strategy include a numberof securities and will not necessarily track the performance of any index.
Please consider the investment objectives, risks and fees of the Strategy
carefully before investing. A minimum asset level is required.
For important information about the investment managers, please refer
to Form ADV Part 2.
This material is not a product of Morgan Stanley’s Research Department
and should not be regarded as research material or a recommendation.
The Firm has not authorised financial intermediaries to use and distribute
this material, unless such use and distribution is made in accordance withapplicable law and regulation. Additionally, financial intermediaries are
required to satisfy themselves that the information in this material isappropriate for any person to whom they provide this material in view ofthat person’s circumstances and purpose. The Firm shall not be liable for,and accepts no liability for, the use or misuse of this material by any suchfinancial intermediary.
This material may be translated into other languages. Where such atranslation is made, this English version remains definitive. If there are any
discrepancies between the English version and any version of this material
in another language, the English version shall prevail.
The whole or any part of this material may not be directly or indirectly
reproduced, copied, modified, used to create a derivative work, performed,
displayed, published, posted, licensed, framed, distributed or transmitted,
or any of its contents disclosed to third parties without the Firm’s express
written consent. This material may not be linked to unless such hyperlink
is for personal and non-commercial use. All information contained herein
is proprietary and protected under copyright and other applicable law.
Eaton Vance and Calvert are part of Morgan Stanley Investment Management.
Morgan Stanley Investment Management is the asset management divisionof Morgan Stanley.

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