STEWARDSHIPREPORT2018/2019

Introduction
In aiming to strengthen our asset management businessand pursue how our asset management should be inorder to fit with the times, Sumitomo Mitsui Trust AssetManagement (“SMTAM” or “the Company”) integrated
the investment management function of Sumitomo Mitsui
Trust Bank (SMTB) into its organization on October 1, 2018.
Growing the precious assets entrusted to us by
our clients over the medium- to long-term is our mostimportant mission. We will continue to pursue maximum
investment returns over the medium- to long-term forour clients by actively promoting stewardship activities,
including engagement (constructive and purposeful dialogue), the exercise of voting rights, and initiatives thatencourage companies to improve their responses to ESG
issues. In this Stewardship Report 2018/2019, we systematically report on these stewardship activities, along with
our views and the presentation of relevant case studies.
We will continue to squarely focus on the basics ofdevoting all of our energies to the growth of client assets
with which we have been entrusted and will do our utmost
to contribute to long-term asset formation of our clientsand the development of society by working to secureexcess returns and boosting the overall market.
Representative Director and President

Yoshio Hishida
CONTENTS

02 Highlights
11 Initiatives for Stewardship Activities
12 Overall Review of Stewardship Activities
14 Review of Engagement Activities
22 Exercise of Voting Rights
26	Stewardship Activities for			 Fixed Income Investments
28 2019 Activities Policy
31 Global ESG Activities
38 Appendix

“Building a closer asset
management relationshipwith our clients.”

Editorial policy
The Sumitomo Mitsui Trust Group’s ESG report for fiscal year 2018consists of our full CSR report and features booklets on the themes ofclimate change, natural capital, stewardship, environmentally friendly
property and a digest report for seniors. We publish these reports soreaders can gain a deeper understanding of our Group’s proactive initiatives. This booklet provides information about the business of Sumitomo
Mitsui Trust Asset Management. For more information about our Group’s
other ESG initiatives, we refer you to the following website.

Web URL:
https://www.smth.jp/en/csr/index.html (Sumitomo Mitsui Trust Bank, Limited)

Stewardship Report 2018/201901

Highlights

As a responsible institutional
investor for our clients
Growing the precious assets entrusted to us by our clients over the medium- to long-term is our most importantmission. We have established relationships with our clients and faithfully engaged in the management of theirassets over many years. We believe that our assets under management (AUM) of approximately ¥60 trillion andhigh market share in defined contribution (DC) pension funds owes to the trust hitherto placed in us by our clients.

AUM

62.8

DC dedicated investment trust

No.1 in Japan

Approx.

Investment management &advisory business

53.0

trillion JPY

1.04

Approx.

trillion JPY

9.8

Approx.

trillion JPY

DC dedicated investment trust
market share

22.5

Investment trust businessNo.1 in Japan

Approx.

No.1 in Japan

Approx.

%

Source: In-house calculation based on Newsletter on Pensions& Investment (16 July 2018 issue) issued by Rating andInvestment Information, Inc. and Fundmark data by
Nomura Research Institute, Ltd.

trillion JPY

Source: Combined figures for Sumitomo Mitsui Trust Bank and Sumitomo Mitsui Trust Asset Management
as of the end of June 2018.

Engagement

No. of annual meetings

No. of companies we met

Approx.

400570

No. of meetings

Approx.

Japanese companies

Approx.

2,200 162,500 15Overall no. of contacts
with companies

Overseas companies

Approx.

Approx.

8,000

Source: Figures for Sumitomo Mitsui Trust Bank for the period July 2017 throughJune 2018.

Stewardship Report 2018/2019

Invested assets
Approx.

*Total number of contacts includes meetings, briefings, factory visits, teleconferences, phone calls, etc.

02No. of companies exercising voting rights

trillion JPY

Invested assets
Approx.

trillion JPY

Source: Combined figures for Sumitomo Mitsui Trust Bank and Sumitomo Mitsui
Trust Asset Management as of the end of June 2018.

Collaboration with global initiatives
Since becoming a signatory to the Principles for Responsible Investment (PRI) in May 2006, we have participated in many global
initiatives and conducted engagement activities for the purpose of addressing ESG issues (please see page 41 for more details).

1

5

9

2

3

6

7

4

8

10

11

Stewardship Report 2018/201903

Highlights

Purpose of Stewardship Activities
Supporting value creation in the investment chain
The Japan Revitalization Strategy under “Abenomics”
is premised on the nation’s rapidly aging populationand overall population decline, and recognizes that inview of these trends Japan must make the most of its
limited resources to foster and maintain its wealth overthe medium- to long-term and to bolster the earnings
power of its companies and increase their sustainablecorporate value.
Japan’s Stewardship Code calls on institutional
investors to contribute to the sustainable growth ofcompanies, while the Corporate Governance Codeenumerates principles by which companies follow tostrengthen their corporate governance. The aim of
this two-pronged approach is to streamline the entire
investment chain—the channel through which funds
are provided and ultimately used by companies forbusiness activities, as well as the links between eachfunction—through governance reforms. We aim tosupport the creation of value by actively fulfilling ourrole as an asset manager in the investment chain.
At the same time, addressing ESG challenges
is also key because they can have an impact on sustainable growth. ESG issues reside in non-financial
domains and do not manifest themselves in financial

reporting but they can have a considerable impact
on corporate value over time. We have continued toactively address ESG issues and became a signatory
to the Principles for Responsible Investment (PRI) in
May 2006 when they were established to call on institutional investors to factor ESG considerations into theirinvestment decision-making processes. We have also
participated in various global initiatives that have their
origins in the PRI to carry out trailblazing ESG activities
on a global basis.
In 2019 our ESG activities will revolve around four
key topics: (1) climate change; (2) water resources andmarine pollution; (3) backing governance reforms; and(4) promoting ESG information disclosure. We intend
to share our awareness of these ESG issues with companies and step up our efforts that contribute to theirimprovement by encouraging companies to draw up
and disclose timeline-based measures.
As a responsible institutional investor, we aim to
maximize medium- to long-term investment returns
on the assets of our clients through engagement, theexercise of voting rights, measures for addressing ESG
challenges, and other stewardship activities that contribute to the enhancement of corporate value.

Our topics of focus for ESG activities in 2019
Topics04

1

Climate change

2

Water resources andmarine pollution

3

Backing governance reforms

4

Promoting ESG information
disclosure

Stewardship Report 2018/2019

Framework of activities
Two-pronged approach

Japan’s Stewardship CodeCorporate Governance Code(revised May 2017)(revised June 2018)

Responsibilities to shareholders and stakeholders

Stewardship responsibilities
Institutional
investors(shareholders)Constructive
dialogue

Ultimate lendersof capital

Listed companies

Shareholders

Shareholders
Enhancement of
medium- tolong-term returns

Realization ofvirtuous cycle

Enhancement of
medium- tolong-term
corporate value

Overall economic growth

Specific activities

Relevant SDGs

• Independent engagement with the major greenhouse gas-emitting industries(cement, paper & pulp, electricity, petroleum, etc.)• Full-fledged initiatives for the global climate change initiative CA100+*1(engagement with Japanese and other Asian companies)*1 Climate Action 100+. Please refer to pages 18 and 41 for more details.

• Addressing ocean plastic pollution(engagement with chemicals, food, and retail industries, etc.)• Requesting greater awareness of water resource risks and improved measures(engagement with beverages, food, and apparel industries, etc.)• Supporting higher levels of independence on company boards and the promotion of diversity, such as higher ratios of female directors• Sustainable improvements in “earnings power” and appropriate capital allocation(balance between growth investments and surplus cash returns)• Encouraging companies to disclose information reflecting the attainment ofSDGs (contributions to solving ESG issues and earnings contributions)• Strengthening involvement in the TCFD*2 information disclosure rules(collaboration with relevant government agencies)*2 Task Force on Climate-related Financial Disclosures. Please refer to pages 37 and 41 for more details.

Stewardship Report 2018/201905

Highlights

Everything for the growthof our clients’ assets
Maximizing
investment returns

P09

3.ESG

P08

2.Exercising voting rights
The exercise of voting rights provides an opportunity to call for the minimum standardof governance—we exercise voting rights
appropriately and in accordance with a highly transparent decision-making process.

P07

1.Engagement
Engagement activities provide opportunities
to seek best practices from companies—we
express our views so as to contribute to theenhancement of corporate value over the
medium to long term.

Platform to support 1

2 3

P10

Upholding our fiduciary duties
We promote initiatives aimed at providing client-oriented
products and services in line with the Policies regarding
the Fiduciary Duties of the Sumitomo Mitsui Trust Group.

06

Stewardship Report 2018/2019

Supporting enhancement of corporate value

As an investor we call for investee companies to tackle ESG issues and generate sustainable growth and added value.

1

Engagement

Our views on engagement
At SMTAM, we view engagement activities as anopportunity to seek best practices from companies
and we communicate our views so as to contribute to
the enhancement of corporate value over the medium
to long term.
Gaining a proper understanding of a company’s
state of management and business situation is crucial
to engagement. The ESG experts in our Stewardship
Development Department work together with analysts
in the Investment Research Department, who are professionals in industrial enterprise analysis, to carry out
in-depth engagement activities from both ESG andbusiness perspectives.
During engagement, we identify management issues
based on analyses of the investee company’s competitive
strengths within its own industry, across other industries,

and globally, as well as management issues based on
how the company addresses ESG issues as part of its
corporate social responsibility. We then formulate our
opinions about how such issues can be improved. We
also internally check the appropriateness of our opinions
beforehand in an effort to improve quality. Although weare in contact with investee companies on more than
8,000 occasions annually, for our engagement records weonly count the cases where we express our views in order
to contribute to the enhancement of corporate value.
Last year we conducted roughly 570 engagements.
There have been few cases of engagement leading to immediate corporate action, but we have seenthat a continuous approach can generate results. We
will continue to carry out engagement activities as a
responsible investor.

Our engagement process
Prepareopinions

To realize productive engagement, our analysts identify management issues based on the results ofanalyzing non-financial information and formulate effective and coherent opinions.

Check inadvance

We internally check beforehand the opinions formulated by each of our analysts. This improves thequality of opinions and eliminates inconsistencies in quality between analysts.

Express
opinions

Our analysts meet with the executives of the investee company and express their opinions. At eachmeeting a written oath stating the analysts will not make any material proposals nor acquire insider
information is signed and mutually recognized.

Record andmonitorAfter the meeting, we record the investee company’s response to the opinions of the analysts. We
monitor the company for any change in management and utilize this information when identifying management issues in the next engagement.

Activities conducted in line with the above process are counted in our total number of engagements(simply maintaining contact with a company is not counted as an engagement)

Stewardship Report 2018/201907

Highlights

2

Exercising
Voting Rights

Our views on the exercise of voting rights
At SMTAM, we view the exercise of voting rights as
an opportunity to call for the minimum standard ofgovernance and consider it as one method of governance-related engagement.
We emphasize three key points when exercising voting rights: (1) high-quality governance that
respects shareholder interests; (2) efficient utilizationof shareholders’ equity for sustainable growth; and (3)appropriate action in the event an incident occurs thatdamages corporate value. We disclose our guidelines
for the exercise of voting rights based on these criteria,
and also actively conduct engagement with companies
with respect to the exercise of voting rights.
We make every effort to ensure transparency in
our exercise of voting rights by preparing the guidelines, which serve as voting standards, making appropriate voting decisions in line with the guidelines,

Key points we emphasize as a shareholder

Pointve rn an ce th at(1) H ig h- qu al ity gor interests
respects shareholde
ion of sharehold(2) Efficient utilizat
able growthers’ equity for sustain
tion in the event(3) Appropriate acthat damages
an incident occurs
corporate value

08

Stewardship Report 2018/2019

and disclosing the results of voting. The guidelines
were established following deliberation by the thirdparty Stewardship Activities Advisory Committee
and in addition to voting principles, we also disclose
numerical criteria for voting decisions and standards
for exceptions. This Advisory Committee also debates
the objectivity of our voting decisions. For the resultsof voting, we disclose individual voting records on all
proposals every quarter and also cite the reasons forvoting for or against.
Owing to the establishment and revision of the
Corporate Governance Code (CGC), gradual progress
is being made on corporate governance in Japan. In
view of the current situation, we aim to raise the minimum standard through changes to our guidelines andcall on investee companies to establish appropriate
governance frameworks.

3

ESG

Incorporating ESG into investments
As a signatory to the PRI, we endeavor to pursue
upside potential and curb downside risk by incorporating ESG factors into our investment decision-making
process and aim to maximize medium- to long-term
returns for our clients.
Various methodologies are employed for ESGrelated investment decision making. At SMTAM, we
promote the use of ESG integration by incorporating MBIS®*, our proprietary developed non-financial
information evaluation tool, into traditional investment methods.

Moreover, in addition to adopting a bottom-up
engagement approach for each company fusing both
ESG and business perspectives, we concurrently use
a top-down engagement approach based on ESG
themes leveraging the longstanding insight of global
activities conducted by the PRI in an attempt tosecure excess investment returns and boost the overall market.
We will continue to position ESG initiatives at thecenter of our asset management operations as weseek to reinforce our investment capabilities.
*Please refer to page 19 for more details.

Our themes and investment viewpoints• Eradication of human rights violations• Diversity, including empowerment ofwomen• Guaranteed access to health (medical)
services• Addressing natural disasters• Work style reforms

Investment
viewpoints• Corporate governance• Ending activity that damages
corporate value• Sustainability strategies• Reducing greenhouse gases• Renewable energy• Addressing depletion of water resources• Deforestation by livestock andgrain industries• Addressing marine plastic pollution• Recycling of resources like rare metals

Investment
viewpoints• Human rights• Health and safety• Ageing population

Investment
viewpoints

ThemesGovernance

ThemesSocialThemesEnvironment• Climate change• Water and forest resources• Pollution (marine, soil, air)
• Resource management• Biodiversity• Respecting shareholder interests• Efficient utilization of shareholders’equity for growth• Preventing activity that damages value
or addressing its occurrence• Higher level of independence anddiversity on company boards

Stewardship Report 2018/201909

Highlights

4

Fiduciary duty &Conflict of Interests

Our fiduciary duties and conflict of interest management
The Sumitomo Mitsui Trust Group has established andpublicly released its Policies regarding the Fiduciary
Duties of the Sumitomo Mitsui Trust Group. We promote initiatives aimed at providing client-oriented
products and services in line with these policies. As
we step up our stewardship activities, we believe thatproper management of conflicts of interest relating tothese activities will contribute to deeply embedding
fiduciary duties into the way we do business. For thisreason we are further enhancing our conflict of interest management.
Following the integration of SMTB’s investment
management function, we raised the number of independent external directors at SMTAM, adopted acompany with an Audit and Supervisory Committee

system, and beefed up our middle office operations.
The integration means SMTAM has more independency from the Group’s corporate divisions (sales,
lending, etc.) and our conflict of interest management
is much more transparent.
Given that the management of conflicts of interest is particularly important to the exercise of voting
rights, we have established the Stewardship Activities
Advisory Committee comprised mostly of external
experts. The officer in charge of the Stewardship
Development Department—the person responsible
for the exercise of voting rights—exercises voting
rights in a highly transparent manner by giving thefullest possible consideration to the recommendations of the Advisory Committee.
*1 Fiduciary duty

Conflict of interest management system

Sumitomo Mitsui Trust Asset Management

Supervision

Sumitomo Mitsui Trust Holdings
Board of Directors
Conflicts of Interest Committee(supervision of FD transparency/adherence)

FD Discussion Panel(at each Group company)(1) Independence from distributors(2) Independence from corporate divisions(3) Conflict of interest management for investment
operations

FD*1 Advisory
Committee(third-party committee)

Stewardship Activities
Advisory Committee(third-party committee)

Middle offices• Conflict of interest management for actual asset management(orders, research, etc.)• Monitoring of conflict of interest management related toexercise of voting rights

Stewardship Development Department(engagements/exercise of voting rights)

Sumitomo Mitsui Trust Bank (TB)

Fund management departments(investment decisions)

Distributor functions
Trustees (pensions, individually operated
designated money trusts, etc.)

Entrustment
Supervision as trustee

Investment trust trustees
Discretionary investment trust managers

10

Stewardship Report 2018/2019

Entrustment from TB (pensions, individuallyoperated designated money trusts, etc.)
Investment trusts

Re-entrustment
Supervision as re-entrustor

Discretionary investment

Stewardship

Initiatives for Stewardship Activities
1. Overall Review of Stewardship Activities

12

2. Review of Engagement Activities

14

3. Exercise of Voting Rights

22

4. Stewardship Activities for
Fixed Income Investments

26

5. 2019 Activities Policy

28

6. Global ESG Activities

31

Stewardship Report 2018/201911

Efforts of Stewardship Activities

Overall Review of Stewardship Activities
Established in February 2014 and revised in May 2017,
Japan’s Stewardship Code calls on institutional investors to contribute to the sustainable growth of companies. Based on the principles of the revised Code,we drafted revised versions of our Guidelines on
Stewardship Responsibilities and Guidelines on the
Principles of Japan’s Stewardship Code.
The Code defines “stewardship responsibilities”
as the duty of institutional investors to maximize themedium- to long-term investment returns for clientsand beneficiaries (including ultimate beneficiaries)
through constructive engagement, or purposeful
dialogue, aimed at improving corporate value andencouraging sustainable growth of investee companies based on in-depth knowledge of the companies
and their business environment.
Meanwhile, the Corporate Governance Codeapplies to listed companies in Japan. This Code wasestablished to be a norm for both the public and private sectors to strengthen corporate governance, aspecific measure of the Industry Revitalization Plan—
one of the three action plans for growth set out in theJapan Revival Strategy approved by the Cabinet in2013 and later revised in 2014. The Code came into
force in June 2015 and was partially amended in June
2018. The Corporate Governance Code is broadly
comprised of five general principles and enumerates

Key revision points in Japan’s Stewardship CodeKey revision points in Japan’s Corporate Governance CodePrinciple 1-4

Disclosure of policies regarding reduction ofcross-shareholdings and their purpose

Principle 2-6

Roles of corporate pension funds as asset owners

Management team at asset managers
Guidance 2-4
addressing conflicts of interest

Principle 4-1

Establishment, implementation, involvement, andsupervision of succession plan for the CEO andother top executives

Guidance 4-2 Addressing passive management

Principle 4-2

Objective and transparent management remuneration systems

Guidance 4-4 Addressing joint (collective) engagement

Principle 4-3

CEO appointment/dismissal

Principle 4-8

Effective use of independent external directors(at least one-third as external directors when required)

Guidance 2-2

Policy for asset managers to manage
conflicts of interest

Guidance 2-3 Establishment of third-party committees

Guidance 5-3

Disclosure of voting records for each
investee company

Guidance 7-2 Management of asset managers

Principle 4-11 Diversity of board members

Guidance 7-4 Self-evaluations of stewardship activities

Principle 5-2

We have addressed all of the above revisions

12

guidelines relating to (1) securing the rights and equal
treatment of shareholders, (2) appropriate cooperation
with stakeholders other than shareholders, (3) ensuring appropriate information disclosure and transparency, (4) responsibilities of the board, and (5) dialogue
with shareholders. In light of its recent amendment,
we are currently considering revising our selection ofengagement themes and guidelines for the exercise
of voting rights in order to further encourage medium-term growth at companies owing to stronger corporate governance.
Since autumn 2017 we have steadily expanded
the scope of our engagements, pursued joint engagements, and revised our guidelines for the exercise of
voting rights in Japan. Overseas, we became a signatory to the CA100+ initiative and conducted engagements as part of that program. We have also steadily
honed our ESG engagement skills and consulted with
the Stewardship Activities Advisory Committee as ourcommon platform activities in and outside of Japan(details to follow later on).
As a responsible institutional investor tasked withplaying a key role in the investment chain, we will continue to afford our fullest consideration to the purportsof both codes and properly fulfill our stewardship
responsibilities through activities such as engagement
and the exercise of voting rights.

Stewardship Report 2018/2019

Establishing and disclosing business strategies andplans after accurately identifying the cost of capital

Reflected in our engagement activities

Review of our stewardship activities
over the past one year
Institutional Investors Collective
Engagement Forum activities

Increase in scope of engagementwith Japan-listed companies

Participated in program and kicked
off activities in October 2017.

Achieved 90% engagement coverage of TSE1 market capitalization in
March 2018.

Revision and disclosure of guidelines
for the exercise of voting rights
Published on our website in
September and December 2017.
Revision of Guidelines on the Principlesof Japan's Stewardship CodePRI Japan Network meeting

PRI-based engagement

Attended the October 2017 meeting and served as vice-chair.

Led engagement with a Singaporebased palm oil manufacturer inMarch 2018.

Participation in CA100+ signatory
launch event
Became a signatory when the initiative was launched in December
2017. The General Manager of
our Stewardship Development
Department gave a speech at thelaunch event in Tokyo in April 2018.

Disclosure of voting record on each
proposal for each investee company
Published on our website in
October 2017 and January, April,
July, and October 2018.

CA100+ engagement
Led the first round of engagementswith a Thailand-based company inJune 2018.
Signatory to Access to Medicine
Commenced activities in May
2018 that call on pharmaceuticalcompanies to improve access to
medical products and services inemerging markets.

Revised in line with integration of
investment management function
and published on our website on
October 1, 2018.

Domestic

Overseas

CommonPlatform

Publication of 2017
Stewardship Report

Stewardship Activities Advisory
Committee

Published our first report inNovember 2017.

Convened a total of four meetings in November 2017 and March,June, and September 2018.

Honing of ESG engagement skills
Encouraged participation in personnel development program.

Stewardship Activities Promotion Framework
Officer in charge of the Stewardship
Development Department(authorized decision-maker)

AdviceStewardship Activities Advisory Committee
Recommendation•
Third-party committee, the majority of which
consists of independent, external experts• Makes recommendations on the exercise of voting
rights and engagements to the officer in charge of
the Stewardship Development Department

ReportStewardship Committee(discusses stewardship activities in general)

Engagement

ReportReportStewardship Development Department(planning, engagements, exercise of voting rights)

Exercise of voting rights

Cooperation

Addressing ESG and PRI

Research Department(engagements)

Stewardship Report 2018/201913

Efforts of Stewardship Activities

Review of Engagement Activities
Exclusive engagement activities
By March 2018 we had reached our goal of expanding engagements to cover 90% of the TSE1 market
capitalization.
We targeted 90% in order to improve the quality of
our engagements by sharing the process of resolving
company issues and accumulating know-how throughdialogue with even more companies.
Now that we have achieved this goal of volume
growth, we will maintain a certain level of quantitative
expansion up ahead and endeavor to improve thequality of our engagements.
The result of ramping up our engagement efforts
has also contributed to a steady increase in concrete
actions by companies. Going forward, we aim to maximize the investment returns of our clients over the
medium- to long-term by working to secure excess
returns while boosting the overall market. To this end,
we will continue to closely examine issues around sustainable growth at investee companies and engage
in activities that contribute to enhancing medium- tolong-term corporate value and ROE.
If a company targets ROE improvement, then we

think the best processes for this are the rethinking of
capital allocation and restructuring of business portfolios, which is why we conduct engagements that support the realization of these measures. In terms of ESG
factors, this kind of engagement corresponds to the“governance” aspect, but we also need to broach the
topics of addressing climate change (“environmental”) and redressing labor practices (“social”), both ofwhich could undermine ROE. SMTAM will continue toengage with companies on solving ESG issues for the
purpose of enhancing corporate value and ROE.

Engagements and corporate action(companies)

800

Number of companies we engaged (cumulative)
Number of companies that took action (cumulative)

600

400

200

0

14

Stewardship Report 2018/2019

End-Jun 2015

End-Jun 2016

End-Jun 2017

End-Jun 2018

Column1 Exclusive engagements
We keep a record every time we conduct an engagement and whenever the company in question takes
action. We revisit our methods of approach when our engagements lead to no action, which is why we haveestablished various types of engagements.

PDCA cycle for our engagements
Company
Company A(Japan-listed)

Topic

Dialogue overview

Company reaction

Business model for improving corporate value

If Company A is to expand its capabilities in
its mainstay product…

While we require capitalfor growth strategies…

Description at the time of engagement
Description of opinions
expressed to the company
during engagement

Reconsider methods ofapproach and continue tocommunicate our views

Corporate action
Company A…

Description after engagement

Description of the company’s
reaction to our opinions

Change in behavior by thecompany after engagement

No confirmation of change inbehavior by the company
after engagement

Actions that reflect the viewsof the market, including thoseof SMTAM

Diversify engagement
methods and continue to communicate our views

Successful engagement

Types of engagement
1. Business model for improving corporate value(management philosophy & vision, specific businesses)

2. Governance structure(supervision of business execution by board of directors, etc.)

3. Consideration of long-term capital productivity
4. Risk responsiveness(including risks relating to social and environmental issues)

Key points in each type of engagement
1. Business portfolio	(improvement of unprofitable businesses, new businesses, M&A,
regional (area) strategies, etc.)

2. Capital allocation(growth investment in facilities, R&D, HR, or M&A, and shareholder returns, etc.)

3. Business strategy(medium- to long-term growth strategies, brand value enhancement, etc.)

4. Other(setting of KPIs, capacity for dealing with environmental changes, etc.)

5. Prevention of anti-social conduct
6. Other(including issues relating to voting rights)

1. Governance	(encouragement of dialogue with investors, protection of minority
shareholders, succession planning, etc.)

2. External directors(dialogue with investors, independence, contributions to board of directors, etc.)

3. Other(governance of subsidiaries, corporate governance structure, etc.)

Stewardship Report 2018/201915

Efforts of Stewardship Activities
2. Review of Engagement Activities

Cases of our exclusive engagements led to corporate action

Governance
Board independence
and diversity

Capital productivity
Capital allocation

Dialogue overview

Dialogue overview

At the June 2017 general shareholders meeting ofCompany A, a manufacturer of transportation equipment, we voted against the appointment of directors
because the company only had one external director.
We expressed our view that placing at least two independent external directors is preferable if the management supervision function of the Board of Directors is to
be enhanced, and that from a diversity standpoint too,
there was still room for improvement. We confirmedthat the company was considering an increase in thenumber of independent external directors, an issue that
had been left unaddressed since December 2015.

Company B, a chemicals manufacturer, posted record
profits in FY2016, while its financial indicators also
improved sharply. By successfully strengthening its
businesses that are resilient to market prices, earnings
and cash flow became more stable. However, its policy
on shareholder returns is unclear and its payout ratio
remains low at around 20%. We confirmed management’s views after expressing our opinion that its next
medium-term business plan starting next fiscal year
should provide clearer explanations about capital allocation, including shareholder returns.

Company reaction

Company reaction

While we have confirmed the intention of institutional
investors for an increase in external directors, we are
not considering any formal increase. However, at thisjuncture, we have been unable to appoint a qualified
person which means there has been no increase indirectors. That said, we take special note of the factthat approval of our chairman and president in the
director appointment proposals dropped to less than
80% at the June 2017 general shareholders meeting.
We will therefore consider increasing the number of
independent directors without waiting for the two-year
term of appointment for directors to end.

In the past, our earnings depended heavily on ourbusinesses that are susceptible to market conditions
and cash flow would fluctuate sharply every fiscal year.
There is no denying that because of this we prioritized
the enhancement of corporate value through structural reforms and growth investments and held backon shareholder returns to some degree. However, inthe last few years we have started to see the effectsof strengthening our businesses that are impervious
to market conditions and implementing structuralreforms. Overseas investors have also pointed out thatour policy on shareholder returns is unclear. We hopeto make improvements in our next medium-term plan
as a way of responding to the views of our investors.

Engageme
16

Corporate action

Corporate action

The company announced in April 2018 it would add
two more external directors (one of whom is female)and reduce the number of internal directors by thesame. The company’s Board of Directors now comprises six internal directors and three external, helping
to improve its governance structure.

In November 2017 the company announced a sharebuyback equivalent to 1.2% of outstanding shares. It also
appears that management has made progress on shareholder returns by announcing a dividend hike in tandemwith an upward revision to earnings at 3Q results.

Stewardship Report 2018/2019

Business strategy
Revamping and streamliningof businessSocial issues
Dialogue witha cluster bomb manufacturer

Dialogue overview

Dialogue overview

Company C, a machinery manufacturer, booked net
losses for two straight years through FY3/18. While earnings have expanded in the Y segment, the X segment
recorded an operating loss in four of the past five fiscal years. Considering that management announced an
impairment loss at the end of last fiscal year, we surmisethat the company has not been in a prospect of returning
to the black. While we fully understand that the poor performance of the X segment began with an incident thecompany had no control over, we confirmed management’s views after expressing our opinion that additional
measures aimed at improving profitability are required.

South Korea-based Hanwha is one of only a handful ofcompanies that is a benchmark index constituent stock
and involved in the manufacturing of cluster bombs.
Since June 2016 we have continued to engage with
Hanwha, expressing our concerns about its operations.
And more recently, in light of easing tensions on the Korean
peninsula, we urged the company to review its business
operations, taking into the current diplomatic climate.
We recognize the concerns of our investors and the withdrawal from this business may be a part of the solution.

Company reaction

Company reaction

We recognize the need to eliminate losses in the X
segment. We are taking steps to address this by reassigning employees and securing operation throughbusiness tie-ups, among other measures, but if we stillcannot generate profits, we will need to take additional steps, such as reducing our headcount. From alonger-term perspective, we are considering the development of new applications that apply our technological expertise.

Previously:
While we understand the views of our investors, goingso far as to contravene state policy and withdraw fromthis business would be difficult.
September 2018:
We recognize the concerns of our investors and thewithdrawal from this business is being considered.

ent

Corporate action

Our policy

In May 2018 the company announced an alliance withanother company in the manufacturing field and measures to reduce fixed costs, such as job cutbacks. We
therefore expect a return to operating profitability in
the X segment.

There are signs that the company’s stance is changing,albeit slowly. We will continue to engage with the company and urge their withdrawal from the business ofmanufacturing cluster bombs.

Stewardship Report 2018/201917

Efforts of Stewardship Activities
2. Review of Engagement Activities

Joint engagements
The Institutional Investors Collective Engagement
Forum (IICEF) was established in October 2017 forthe purpose of helping multiple institutional investors
carry out constructive joint engagements with companies in light of the revisions to guidance 4-4 in Japan’s
Stewardship Code in May 2017. SMTAM has participated since the forum’s initial establishment.
The IICEF presides over the Institutional Investors
Collective Engagement Program through which theparticipating institutional investors conduct joint

engagement by discussing the issues of investee companies, deciding on a shared agenda that contributes to constructive dialogue, and sending letters toinvestee companies for each agenda item. We intend
to actively participate in the program up ahead as away of supplementing our exclusive engagements.

Institutional
investor

Institutional
investor

Institutional
investor

Listedcompany

ProgramCollaborative

participation

dialogue

Institutional
Investors Collective
Engagement Program
Hosts meetings, etc.

Listedcompany

Listedcompany

Please visit the IICEF’s website for more information: https://www.iicef.jp/

Unveiled by the United Nations in 2006, the Principles
for Responsible Investment (PRI) are a set of investment principles signed by participating institutional
investors that aim to address basic issues in investment
portfolios. Six principles set out what is required ofinvestors that play a significant role in the global economy when assuming responsibility for environmental,social, and governance issues through their investments.
SMTAM became a signatory in 2006 and we served as
vice-chair of the PRI Japan Network meeting held in
October 2017. Also, in March 2018 we led engagementwith a Singapore-based palm oil producer.

18

Stewardship Report 2018/2019

At the One Planet Summit in December 2017,
225 of the world’s institutional investors took part in
the newly launched Climate Action 100+ initiative,
led by the PRI and institutional investor organizations
from four global regions. We are a signatory to thisinitiative and utilize its framework to actively pursue
global ESG engagements related to climate change.
A launch event was held in Tokyo in April 2018 at which
Hiroyuki Horii, the General Manager of our Stewardship
Development Department, gave a speech, and inJune 2018 we led the first round of engagement witha government-run petroleum company in Thailand.

Column2 MBIS®—our non-financial information evaluation tool
Our proprietary MBIS® tool is a framework we use
to evaluate non-financial information (the strengths
of companies and the challenges they face inachieving sustainable growth).
The use of a comprehensive check list reduces
discrepancies between the assessments of eachanalyst, thus ensuring uniformity. And in orderto prevent the company’s strengths from being

M
B
I
S

obscured, we employ a scoring method thatemphasizes on the perspective of “in which items
the company excels over its peers.”
Moreover, we have incorporated the conceptof the SDGs into MBIS® with the understanding
they will facilitate sustainable growth and futurebusiness opportunities for companies. We engage
with companies with the 17 goals of SDGs in mind.

Check list (20 items)

Management• Strategy execution capabilities • ESG initiatives• Improvement and• Capital andinnovation capabilities
investment efficiency
Check list (14 items)

Business Franchise• Client value• Client base• Barriers to entry

Check list (7 items)

Industry• Market assumptions• Competitive environment• Regulations andpolicies

Check list (10 items)

Strategy• Marketing• Business portfolio• Earnings contributions
from ESG• Investments, M&A, etc.

Evaluation centering on ISO26000 also ensures alignment with the SDGs
Evaluation centering on ISO26000(seven core subjects)
1. The environment (E)Society (S)2. Human rights

3. Fair operating practices

4. Labor practices

5. Consumer issues

6. Community involvement and development
7. Organizational governance (G)Stewardship Report 2018/2019

19

Efforts of Stewardship Activities
2. Review of Engagement Activities

Cases of joint engagements

Climate change
Responding to
the Paris Agreement

Climate change
Complying withpalm oil production regulations

Dialogue overview

Dialogue overview

US based Occidental Company Corporation is chemical manufacturer which has upstream E&P businesses.
In May 2018 we confirmed management’s views after
informing the company that we voted in favor of theshareholder proposal that the company discloses how
it addresses the aim of the Paris Agreement to keep
global warming to below 2°C above pre-industrial
levels, as well as information about reducing methane gas emissions and combustion generated by its
production activities.

Singapore-based Wilmar is a palm oil producer.
In March 2018 we confirmed management’s views
after participating in a joint engagement through a
PRI working group and expressing our opinions that
there is a risk that exports will grind to a halt due totighter restrictions in Europe, and that the company
should be more proactive in disclosing information by
involving another company in the industry in order tocontinue production.

Company reaction

Company reaction

For tackling global warming, management holds regular meetings with external experts. We are currently
formulating our policy on climate change and plan
to disclose it by the end of the year. As for methanegas, we are investing in facilities to ensure there areno major emissions when we drill for natural gas, andthere are no concerns at our existing project sites. At
new mining sites a certain amount of gas needs to bereleased but we have standards in place to control
these emissions.

With the goal of improving the working environment
at our production sites, we will participate in activities
hosted by the Malaysian Palm Oil Certification Council
and the Decent Rural Living Initiative (convened by the
NGO Forum for the Future). With respect to the latter,other leading companies in the industry are also taking
part. In particular, we recognize the pivotal issues ofchild labor and the withholding of migrant worker passports and plan to engage in activities aimed at solving
these issues in consultation with the PRI Secretariat.

Our policy

Our policy

Even though we confirmed the company’s stance on
both of these issues, we expressed the view that thefact the company’s information disclosure is insufficient is why a shareholder proposal was submitted andadopted with 65.7% of shareholders voting in favor. We
also expressed our opinion that enhancing information
disclosure up ahead will be important.

We confirmed the company’s measures for improving
working environments and by extension, business continuity. We will continue to engage with the company inorder to confirm the effectiveness of those measures.

Engageme
20

Stewardship Report 2018/2019

Information disclosure
Identification and disclosure of materiality
related to business model sustainability(engagement activities through IICEF)
Dialogue overview
Some Japanese companies actively tackle CSR and
ESG issues and employ integrated approaches to disclosing non-financial information regarding ESG in anadvanced manner. We conducted engagement activities by sending letters to those that have the potential
to further deepen the belief of long-term investors inthe sustainable growth of their business by enhancing
the process for identifying and disclosing materiality
related to business model sustainability.

Our policy
We are able to conduct thought-provoking engagement with regards to how information is disclosed in
integrated reports and other materials. We plan onleveraging joint engagements while bearing in mind
how they relate to our exclusive engagements, as wellas considering tailored approaches for each agenda orfor each investee company.

ent

Engaging with companies

Stewardship Report 2018/201921

Efforts of Stewardship Activities

Exercise of voting rights
Initiatives for increasing shareholder value through the exercise of voting rights
As a responsible institutional investor, we consider
the exercise of voting rights an important part of ourstewardship activities. To maximize the medium- tolong-term investment returns of clients and beneficiaries, we vote appropriately from the perspective ofenhancing corporate value and boosting the interestsof shareholders after considering the circumstancesof investee companies and the details of our engagements with them.
We have also established our own guidelines for the
exercise of voting rights—we first released the detailsof these guidelines for domestic shares in February
2017 and for foreign shares in May 2017. Particularly fordomestic shares, we are increasing the transparency of
our voting decisions by disclosing voting records on all
proposals for each company every quarter.
We consider reviewing our guidelines for the
exercise of voting rights at least once a year. Last year
during the period July 2017 through June 2018 weamended the guidelines pertaining to domestic shareson two occasions (Sep and Dec). The main points ofrevision are shown below.

Key points of revision in our guidelines for the exercise of voting rights
for domestic shares during July 2017 through June 2018
Appointment of directors and auditors
Criteria

BeforeAfter

Our view

Ratio of external directors at companies with a parent company(new)

Opposed to appointment of all
directors if independent external
directors do not make up one-thirdor more of all directors.

A higher level of governance isrequired at companies with a parent company.

Independence of external directors
and external auditors hailing from abusiness affiliate

Opposed to directors/auditors hailing from a major business affiliate.

Opposed to directors and auditors
hailing from a business affiliate,
unless the business transactions are
deemed to be insignificant.

A higher level of independence isrequired with respect to external
directors and external auditors.

Independence of external directors
and external auditors hailing from amajor lender

Opposed to directors/auditors
hailing from the financial institutiongroup that lends the most among
those companies with high borrowing ratio.

Opposed to directors and auditors
hailing from the financial institutiongroup that lends the most, or afinancial institution group that is amajor lender and listed among the
top 10 shareholders.

A higher level of independence isrequired with respect to external
directors and external auditors.

Remuneration for executives
Criteria

Eligibility for bonuses

BeforeAfter

Our view

Opposed if persons eligible forbonuses include external directors,
directors that are Audit Committee
members, auditors,
or external auditors.

From the viewpoint of demonstrating appropriate supervisory
functionality, we judge the paymentof remuneration linked to shortterm earnings to executives such asexternal directors to be undesirable.

BeforeAfter

Our view

Criterion for voting in favor is thatthe board must have two or more
independent external directors

Criterion for voting in favor is thatthe board must have a majority of
independent external directors

A higher level of independence on theboard of directors is required.

(new)

Takeover defense measures
Criteria
Introduction or renewal

22

Stewardship Report 2018/2019

Conflict of interest management system for the exercise of voting rights process
With the establishment of the Stewardship Activities
Advisory Committee comprising mainly independent external experts, we have in place a process forchecking (recommending) whether any issues exist
from a conflicts of interest standpoint when revising
our guidelines for the exercise of voting rights andwhen applying the guidelines for making voting decisions on individual proposals. We publish a summaryof the minutes of the Stewardship Activities Advisory
Committee meetings on our website (summaries formeetings held before October 2018 are published on
Sumitomo Mitsui Trust Bank’s website).

Structure for exercising ofvoting rights

Board of Directors
ReportAuthorized decision-maker:
Officer in charge(meeting chairperson)

Recommendation

Stewardship Meeting

Stewardship Activities
Advisory Committee*
Chairperson: Independent external director
Members:	2 external experts and1 internal member

Determination of guidelines
for the exercise of voting rights•R esponds to inquiries and makes recommendations about the fairness of guidelines for the exercise of voting rights andthe appropriateness of voting decisions.

Confirmation and determination of
voting decisions on individual proposals
Proposed voting decision(secretariat, department exercising voting rights
and conducting engagements)

Stewardship Development Department(department conducting engagements)

Dialogue

Investeecompanies

Research Department*Please refer to our website for previous meeting minutes (available only in Japanese).
http://www.smtam.jp/company/policy/stewardship/activity_status/

Stewardship Report 2018/201923

Efforts of Stewardship Activities
3. Exercise of voting rights

Record of exercising voting rights for Japan-listed companies (by SMTB)
Voting record (all company proposals)

Company proposals
over the period
July 2017–June 2018

For

AgainstAbstention

Opposition %17,862

4,266

0

19.3%

2 Proposals concerning capital policies(excluding those related to articles
of incorporation)
1 Proposals concerning company systems

Total proposals
22,12818,884

1,769

3 Proposals concerning remunerationfor executives

957

4 Proposals concerning articles
5 Other proposals 5of incorporation

Breakdown of voting record on company proposals

For

Against1 Proposals concerning company systems

2 Proposals concerning capital policies

18,884(excluding those related to articles of incorporation)

Appointment/
dismissal of directors

3 Proposals concerning remuneration

1,769
Disposal of surplus funds

17,118

78.4%

1,544

93.7%

Appointment/
dismissal of corporate auditors

89.8%

42

97.6%

Appointment/
dismissal of accounting auditors

Remuneration for executives*3

957
761

Payment of retirement benefits
for resigning executives

196

67.9%

Introduction/renewal/abolishment of
takeover defense measures66

41

100.0%

for executives

80.4%

Restructuring related*1

1,725

513

1.5%
Other proposals concerning
capital policies*2

117

99.1%
*1 This includes mergers, business transfers and acquisitions, share swaps,
share transfers, and corporate splits.
*2 This includes treasury stock acquisitions, decrease in statutory reserves,
new share allocations to third parties,
decrease in capital, reverse stock
splits, and issuance of classified shares.

4 Proposals concerning articles

5 Other proposals

513

of incorporation

5

96.3%

Shareholder
proposals

24

Stewardship Report 2018/2019

40.0%

For

AgainstAbstention

Opposition %

15

149

0

90.9%

*3 
This includes amendments to remuneration for executives, issuance ofstock options, introduction/alterationof performance-linked remuneration
systems, and executive bonuses.

Record of exercising voting rights for foreign-listed companies (by SMTB)
Voting record (all company proposals)

Company proposals
over the period
July 2017–June 2018

For

AgainstAbstention

Opposition %28,270

3,382

0

10.7%

2 P
 roposals concerning capital policies(excluding those related to articles

4,515

of incorporation)
1 Proposals concerning company systems

Total proposals
31,652

17,2003 Proposals concerning remuneration

3,539

for executives

4 Proposals concerning articles
5 Other proposals 5,583

of incorporation

Breakdown of voting record on company proposals

For

Against1 Proposals concerning company systems

2 P roposals concerning capital policies

17,200(excluding those related to articles of incorporation)

Appointment/
dismissal of directors

Shareholders’ equity

89.6%

80.9%

Appointment/
dismissal of accounting auditors 1,981

Profit disposal andloss disposition plans

97.9%

99.0%

Appointment/
dismissal of corporate auditors

3 Proposals concerning remuneration

4,515

14,305

2,136

3,539

for executives
Remuneration for executives

2,945

84.7%
1,210

Stock options

585

64.3%

Establishment ofshare buyback frameworks

702

815

665

88.9%

94.0%

Board of Directors(limits on number of directors, etc.) 212

Mergers, corporate splits, conversions to holding company, business transfers, etc.
312

96.7%

85.9%

Presentation of retirement benefits

9

66.7%

Takeover defense measures

192

89.1%

4 Proposals concerning articles

5 Other proposals

815

of incorporation

5,583

86.4%

Shareholder
proposals

91.7%

For

AgainstAbstention

Opposition %

653

339

0

34.2%

Stewardship Report 2018/201925

Efforts of Stewardship Activities

Stewardship Activities for Fixed Income Investments
At SMTAM, we incorporate ESG factors into our investment processes for fixed income fund management.
We believe the consideration of ESG factors in theinvestment process leads to the pursuit of upside
potential over the medium to long term and limits
downside risk.

Pursuing upside and curbing downside

Assessment of creditworthiness and sustainability

Qualitative assessment

Engagement
Cooperation withstock analysts

Analysis of
ESG issues

Quantitative
assessment

Quantitativemodel

ESG integration

Use of MBIS® toevaluate business risk
(factoring in ESG concepts)

Framework for applying our internal ratings[Main scenario]
Prepared based on
earnings forecasts ofour stock analysts

Quantitativemodel[Financial information]

Scale
Financialcomposition
Earnings
power
Repayment
capacity[Stress scenario]
Stress applied via
changes in businessconditions, industry,
and competitivenessQualitative
judgment

Business[Nonfinancial information]

FinanceLiquidity

Examples of qualitative judgments
Carefully analyze factors that cannot
be factored into quantitative models
and reflect findings

Business risk
Some materials manufacturers, forexample, have robust global market
share and competitiveness despite
having a small business scale

Business risk
Compliance risks such as quality issues

Financial risk
Ample unrealized gains on real estateand disposable investment securities

Financial risk
Excessive goodwill and deferred tax assets

Liquidity risk
Robust financial institution transactions,substantial financing system
for investment

Liquidity risk
Risk of concerns arising from pledging
of collateral

26

Stewardship Report 2018/2019

ESG integration in corporate bond investment
For example, we take ESG factors into considerationfrom a qualitative perspective in order to assess thecreditworthiness of corporate bonds. We enhance ourcreditworthiness assessments by adding a qualitative
judgment component incorporating ESG factors to ourunderlying quantitative model that focuses on scale,financial composition, earnings power, and repayment
capacity. We believe that factoring ESG issues into ourasset management encourages the sustainable growthof companies and is conducive to maximizing investment returns for our clients. Although the productattributes of stocks and bonds may differ, we apply acommon policy to both. Our credit (bond) and stock
analysts separately research the ESG issues of investee
companies but closely share their research and engagement results with each other at the same time.

ESG integration in government bond investment
In addition to corporate bonds, we also integrate governance-focused evaluations into our government
bond investments. In our opinion, governance can significantly impact the creditworthiness of government
bonds and we believe a close focus on governance iskey. In one of our funds we factor in sovereign risk consideration type and high income switching strategy to
generate high income returns from sovereign bonds.
While we manage this fund by taking into accountsovereign risk, we also incorporate a system for scoring
the “governance” of national governments as part ofour qualitative assessment of the risk. Specifically, we
calculate a governance score based on seven indicators and combine it with three other evaluation factors
to derive an overall assessment. These fund management initiatives lead to the pursuit of upside potential over the medium term for client returns and limit
downside risk.

Quantitative model-based screening of more than 160 global government bonds

1 Credit rating and liquidity: Determination of investment target countries

Investment grade or higher

Possibility of hedging trades and forex

2 Assessment of fiscal health: Setting maximum investment weightings

SMTAM’s country risk score

Fundamental indicators

Market indicators

3 Maximizing expected returns: Determination of investment allocation

Investment grade or higher

Possibility of hedging trades and forex

Portfolio
Assessment of fiscal health is based on indicators corresponding to four evaluation factors (public finances,foreign currency procurement, politics, markets).

Stewardship Report 2018/201927

Efforts of Stewardship Activities

2019 Activities Policy
Our policy on stewardship activities
We at SMTAM have integrated the investment management function of Sumitomo Mitsui Trust Bank into
our organization. This not only reinforces our frameworkaround stewardship activities, but further enhances
our activities as one of the largest asset managementcompanies in Japan and Asia. We will do our utmost
to contribute to long-term asset formation for our clients (beneficiaries) and the development of society bysteadily fulfilling our role in the investment chain.

For 2019 we have formulated a course of action
centering on (1) climate change, (2) water resources
and marine pollution, (3) backing governance reforms,
and (4) promoting ESG information disclosure.
We will offer our support for consolidating initiatives in unison with the international community withrespect to climate change and water resources—
pressing issues that transcend national borders andthreaten human security in both developed andEngagement
Climate change,
water resources and marine pollution
Backing corporate governance reforms

Stewardship
activities

Exercise of voting rights

Promotion of ESG activities

Guideline revisions

Promoting
ESG information disclosure

Maintaining andimproving transparency

28

Stewardship Report 2018/2019

emerging countries. Premised on social, economic,
and corporate activity, we especially think tacklingclimate change issues is a matter of urgency and currently a key ESG issue. We aim to make contributions
towards solving these issues not only by engaging
exclusively with companies, but also through engagement via signatory groups in Japan and overseas.
As for the backing of governance reforms, weplace importance on engagements that contributeto the enhancement of independence and diversityof company boards. We do this because we believe
the management team centering on the CEO shouldbe able to execute appropriate business decisions
with perpetual foresight and that throwing our support behind the participation of women—seen as alagging issue in Japan—and the establishment ofboards of directors armed with diverse skill sets will
ultimately lead to sustainable corporate growth andmore robust earnings power.

Promoting ESG information disclosure means weencourage companies to disclose information regarding the attainment of the SDGs, or in other words,
their initiatives on solving ESG issues and informationthat reflects the contributions those initiatives maketo earnings.
The SDGs were established in 2015 by the United
Nations and comprise 17 specific goals and 169 targets from the standpoints of social inclusion, economic
growth, environmental protection, and partnership.
The Japan Business Federation, also known as the
Keidanren, revised its Charter of Corporate Behavior in2017 with the core focus of achieving the SDGs throughthe realization of “Society 5.0,” a concept it designates
as a new society to succeed those that came before,such as hunting, farming, industry, and the informationsociety. We hope to support the efforts of companies
to disclose ESG information as they seek to generateearnings growth by achieving the SDGs.
On the exercise of voting rights, we aim to revise
our guidelines for the exercise of voting rights andmaintain and enhance the transparency of our voting
process and results. In light of the June 2018 amendment to Japan’s Corporate Governance Code, we are
currently considering revising our guidelines for the
exercise of voting rights in order to further encourage
medium- to long-term growth at companies owing tostronger corporate governance. Our policy is to perform in-depth analyses of a number of topics, holdstudy sessions, engage in discussions, and reflect
the results in our guidelines for the exercise of voting
rights. As a responsible institutional investor tasked
with playing a key role in the investment chain, we aim
to afford our fullest consideration to the purports ofJapan’s Stewardship Code and Corporate Governance
Code and enhance the transparency of our process forexercising voting rights.

Stewardship Report 2018/201929

Efforts of Stewardship Activities
5. 2019 Activities Policy

Expanding integration of ESG information into fixed income investment
While steady progress is being made to integrate ESG
information into the area of fixed income investment,
the hitherto focus has been on corporate governancebecause of the likelihood of it directly affecting creditworthiness. We think an emphasis on the creditworthiness, or repayment capacity, of issuers is the primaryfactor behind this trend.
That said, signs are emerging that environmental andsocial problems are driving changes in the attitudeof creditors, including corporate bond investors. For

example, there is a growing trend mainly among
financial institutions in Europe and the US to neutralize investments in and loans to coal-fired power
plants seen as problematic in terms of greenhousegas emissions.
In 2018 a similar trend also arose among the
major Japanese financial institutions. This movement
is one example of stewardship activities, which can be
implemented because they are “creditors” and not“shareholders.” Considering that at Japan’s foremost
rating agencies too there are moves to clarify the links
between being a signatory to the PRI, credit ratings,
and ESG information, we think the trend of incorporating ESG information into fixed income investment will
gain momentum up ahead.
At SMTAM we continually pursue upside potential on
medium-term returns for our clients and aim to curb
downside risk by furthering our engagements withbond issuers, ramping up ESG integration, and even
investing in green bonds and the like.

4.

8

tim
es

Yo
Y

SMTAM investments ingreen and social bonds

EndJun 201730

Stewardship Report 2018/2019

EndSep 2017

EndDec 2017

EndMar 2018

EndJun 2018

EndSep 2018

Global ESG Activities
Trends in ESG activities
The notion that the adoption of global ESG activities
into corporate management leads to sustainable company growth has been the mainstream thinking so far
among overseas asset managers and asset owners.
Activities included those implemented from a stakeholder perspective (pursuit of social value) mainly
involving NGOs and NPOs with the aim of realizing
a sustainable society, and those carried out from ashareholder perspective (pursuit of corporate value) toaddress governance issues. These trends laid the foundations for the action policy of the PRI.

ESG trends
Stakeholder perspective(NGOs, NPOs)

E

Shareholder perspective(investors / shareholders)S(environment)G(society)(governance)

Regional unemployment issues(Europe)

Limits to Growth(1972)

Anti-segregation/ anti-war movement (US)Social ethics(pollution, discrimination, etc.)

Pollution issues

Human rights violations indeveloping countries

Corporate ethics issues

Climate change issues

Negative effects of globalization

Business efficiency issues

ES
2006: Principles for Responsible Investment

ESG

Owing to the linking of ES with G, the functions of the capital markets wereincorporated to address environmental and social issues.

Stewardship Report 2018/201931

Efforts of Stewardship Activities
6. Global ESG Activities

Global ESG Engagements
We conduct various engagement activities on a global
scale to address ESG issues.
While our highly experienced research analysts
and specialists in the Stewardship Development
Department conduct exclusive bottom-up engagements with companies, we also make effective useof top-down joint engagements through PRI signatory bodies, ISS-Ethix, and the Institutional Investors
Collective Engagement Forum (IICEF) to encourage
investee companies to address key ESG issues.
Our topics of engagement revolve around (1)1Climate change

2
Water resourcesandmarine pollution

4
Promoting
ESG information
disclosure

32

Stewardship Report 2018/2019

activities based on the PRI, (2) activities to address misconduct in accordance with international norms, and (3)activities that call for efficiency in corporate management and the establishment of outstanding corporate
governance. The table below shows our engagement
topics and activities. We actively participate in these
activities, working to effectively and efficiently limit therisk that companies face through their exposure to ESG
issues by accepting, for example, the role of lead manager for working groups when conducting engagements
in fields in which we have a certain level of expertise.

Activities based on the PRIEngagement topic

Specific activities

Palm oilWith the aim of improving environmental and human rights issues
concerning palm oil production, we
encourage information disclosure
and periodically carry out progress
monitoring. We act as lead manager of the working group.

Forest resources
conservation

We call for companies in the forestry, natural rubber, livestock, andgrain industries to disclose andimprove their impacts on rainforests. We are a member of a leading
advisory committee.

Climate Action
100+

We call for the 100 biggest greenhouse gas-emitting global companies to adopt measures to combat
climate change. We utilize ourexperience and know-how as a leadmanager for the PRI to engage withJapanese and foreign corporations.

Water resourcesrisks

We encourage global consumer
goods companies (beverages, food,apparel, etc.) to address the risks
associated with water resources(establishment of water stewardship). We act as lead manager.

Initiatives
concerning
fisheries andfarming(FAIRR)We call for major food companies
and retailers to address environmental, social, and health issues infood supply chains.

Relevant SDGs

The topics of engagement are closely related
to the globally recognized agenda of Sustainable
Development Goals (SDGs).
At SMTAM we predominantly focus on the topics
we think have serious impacts on corporate activities.
Climate change and water resources are the key environmental topics we are concerned with—for the former we are working on urging companies to disclose
their impacts on climate change under the frameworkof the TCFD. As for the promotion of governancereforms, initiatives related to diversity are our main
focus for the time being.

3

Activities to address misconduct in accordance with international norms
Engagement topic

Specific activities

Backing
corporate
governancereforms

Engagement
activities utilizing
ISS-Ethix

We urge companies contradicting international norms on humanrights, labor or corruption to
improve their practices.

Relevant SDGs

Activities that call for efficiency in corporate management andthe establishment of outstanding corporate governanceEngagement topic

Specific activities

Diversity
30% Club (UK)Thirty Percent
Coalition (US)We support the social advancementof women through initiatives that
aim to lift the ratio of female directors on company boards to 30%
and in a broader sense, the promotion of diversity from a humanresources standpoint.

Access to medicine

We call for the major global pharmaceutical companies to improveaccess to medicine in developing
nations. We encourage businessexpansion in these areas to raiseawareness of medical services.

Relevant SDGs

Stewardship Report 2018/2019

33

Efforts of Stewardship Activities
6. Global ESG Activities

Addressing climate change issues

Under the Paris Agreement that came into force inNovember 2016, signatory nations globally agreed to“hold the increase in the global average temperature towell below 2°C above pre-industrial levels and to pursue
efforts to limit the temperature increase to 1.5°C above
pre-industrial levels,” in order to ensure sustainability.
Furthermore, the Intergovernmental Panel on Climate
Change (IPCC) published its Special Report on Global
Warming of 1.5°C in October 2018, which calls for the
reduction of greenhouse gas emissions to net zero as soon
as possible.
The use of fossil fuels must be significantly phased out
if these goals of bringing global warming under control are
to be met.
At SMTAM, we are concerned that businesses that consume a lot of energy, especially coal, run the risk of ending
up with stranded assets in the future, while we see promising investment opportunities in companies that make environmentally sound investments to reduce greenhouse gas
emissions and possess energy-saving technology.
In addition, the conservation of natural capital likerainforests to help ease the greenhouse effect is also a key
countermeasure. A code of conduct for the conservationof natural capital is required for industries in which the
exploitation of forests has a considerable impact on natural capital, such as forestry, plantations (natural rubber andpalm oil), soybeans, and paper/pulp, as well as for the companies that are part of these industry supply chains.
At SMTAM we properly assess the risks and opportunities related to climate change and through our engagements we hope to contribute to the smooth transition to asociety with low or net-zero carbon emissions.

Climate change
initiatives

If current temperature rise continues

Change in average global temperature (°C)(scaled to average for 1850–1900)

Limit global warming as soon as possible

Limit global warming
as much as possible

As of 2017

Temperaturechanges owing tohuman activities

If temperature increase is
kept below 1.5°C(scope of uncertainty)

Observed
temperature changes

Source: IPCC Special Report on Global Warming of 1.5°C; corrections to frequently asked questions

34

Stewardship Report 2018/2019

Addressing water resources and marine pollution issues

Water risk initiatives

In addition to the stable securement of water resources,
water risks refer to the various water-related problems that
affect corporations, such as contamination of water quality,
marine plastic pollution, and even the flooding of riverways.
A corporate code of conduct for addressing water risks is
known as “water stewardship,” but at SMTAM we call on
companies to disclose an integrated code of conduct forwater resources management.
OECD anticipates global water demand will increase
55% by 2050 if the use of water continues at its current
pace. As such, the lack of global water resources and the
problem of water resources management are garneringmuch interest as one of the foremost important environmental issues for society as a whole.
As for marine pollution, plastic rubbish in the world’s
oceans is having a harmful effect on marine ecosystems.
According to PlasticsEurope, a leading European tradeassociation, annual global plastic production reached 340
million tons in 2016 and continues to rise exponentially, as
shown in the graph below. We know that plastic products
disposed of inappropriately end up in the world’s oceans
and remain there for extended periods, polluting the waterand seriously harming marine life and ecosystems.
Not only do fishery industries bear the brunt of marine
plastic pollution, but the companies that manufacture anduse plastics are also exposed to reputational risk and even
their business operations can be negatively affected. At
SMTAM we will continue to urge the entire supply chain
to deploy countermeasures against the problem of marine
plastics which also affects Japanese companies significantly.

Global plastic production output
2016
335m tons(million tons)

400
350
300

2002
200m tons

250
1989
100m tons

200
150
100

1950
1.5m tons

1976
50m tons

2010
270m tons

50
01950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
(year)
Source: SMTAM compiled based on PlasticsEurope data

Stewardship Report 2018/2019

35

Efforts of Stewardship Activities
6. Global ESG Activities

Backing governance reforms

At SMTAM we call on companies to establish corporate
governance systems capable of adapting to global business expansion and changes in business environments, but
we also actively engage in activities urging them to guarantee independence on their Board of Directors, make effective use of human capital, and respect diversity.
Especially with respect to diversity, we are a signatory to initiatives in the UK (30% Club) and the US (Thirty
Percent Coalition) and harness that knowledge to promote
the incorporation of diversity into corporate management
to facilitate efficient decision making.
In Japan in 2017 the ratio of female directors at listedcompanies was only 3.7%—clear evidence of a sizeable
gender gap compared to Western countries. Meanwhile,
the World Economic Forum views the advancement of
women in society as a marker on how governments andcompanies utilize human resources and evaluates diversity
as one indicator of competitiveness.
Companies that operate globally need to work tobolster their competitiveness by recruiting and harnessing talented personnel regardless of their race or gender.
At SMTAM we will continue to ask companies to promote
effective utilization of their human resources with diversity in mind.

Diversity andgovernance reforms

Percentage of female officers at listed companies
（%）

5

3.7

4

3.4

3
2

1.2
1
0

2006

2008

2010

2012

2014

2016

(year)

Source: 2018 White Paper on Gender Equality of Ministry of Internal Affairs and Communications

Gender Gap Index
An index created by theWorld Economic Forumin 2017 to assess andrank gender equality
in each country.

36

Stewardship Report 2018/2019

2006

2017

83rd

114th

(among 115 countries)(among 144 countries)

Promoting ESG information disclosure

Encouraging
information disclosure
under the frameworkof the TCFD

The Task Force on Climate-related Financial Disclosures(TCFD) is an organization set up by the Financial Stability
Board (FSB). Its goal is to deliberate how the financial
industry should consider climate change issues; in its recommendations report published in June 2017 it calls for all
issuers of shares and corporate bonds to gauge the risks,
opportunities, and financial implications of climate change
and incorporate them into their annual financial reports
and other documents. In other words, the TCFD has established standards on disclosing information related to climate change.
There are four core elements in the TCFD’s recommendations: governance, strategy, risk management, andmetrics & targets. And investors require reliability, comparability, consistency, and clarity to help them make accurate
decisions. At the same time, it is thought that the disclosure of this information will also help issuers make businessdecisions that enhance sustainability because it validates
not only financing matters, but their own capabilities tocombat climate change as well as their relative position.
Given that this movement encourages the integration of
ESG information into financial reports, we think it is a changethat cannot be reversed. At SMTAM we conduct engagements aimed at encouraging companies to disclose climatechange information and at the same time urge companies tosmoothly transition to a low-carbon society.

Relationship between TCFD and companies/institutional investors
Assistinginformation disclosure

TCFD = established standards on
disclosing information related toclimate change

Implementing
information disclosure

TCFD framework

Climate changerisks

Responsible
institutional
investors

Climate change
opportunities

Reflected in business strategies and risk
management

Listedcompanies

Understanding financial implications

Disclosure in annual financial reports, etc.

Utilized ininvestment decisions

Enhanced reliability andcomparability of information

Utilized inself-assessments

Stewardship Report 2018/201937

Appendix
38

Stewardship Report 2018/2019

Appendix

1. Responding to Japan’s Stewardship Code39

2. Policy on Addressing the PRI

40

3. Our Lineup of ESG Investment Products

42

4. Our ESG Guidelines

45Responding to Japan’s Stewardship CodeAt SMTAM we are addressing the principles of Japan’s Stewardship Code, as described in the table below. We willcontinue to actively implement initiatives up ahead in an effort to fulfill our stewardship responsibilities.
Principle
Principle 1

Policy formulation anddisclosure

Principle 2

Conflict ofinterest management

Principle 3

Accurate understanding

Principle 4

Dialogue with companies

Principle 5

Exercise of voting rights

Principle 6

Reporting to clients andbeneficiaries

Principle 7

Development of skills

Initiative
Upon integrating the investment
management functions of Sumitomo
Mitsui Trust Bank, we updated
SMTAM’s Guidelines on the Principlesof Japan’s Stewardship Code.

We publish summaries of the discussions of the Stewardship Activities
Advisory Committee, our third-party
committee, in an effort to enhance
the transparency of its operations.

• We expanded the number of companies we engage with in aiming
to reach our goal of covering 90%(cumulative) of the TSE1 market
capitalization.

Self-assessment• Both companies are actively responding
to Japan’s Stewardship Code.
•
We think our response at present isappropriate but we will review our
response from time to time when wedeem it necessary.
• In line with the recommendations of theAdvisory Committee, we are enhancing
our conflict of interest management
for asset management operations andstrengthening our stewardship activities.
• We think our response at present is appropriate but we will work to further refine
our conflict of interest management.
•
We achieved our coverage goal in
March 2018.
•We conducted engagements irrespective of size of market capitalization.

• In addition to our exclusive engagements, we conducted joint engagements through the Institutional
Investors Collective Engagement
Forum (IICEF).

• We effectively utilize collective engagements to address issues common to
institutional investors and medium- tolong-term topics.

• We disclosed our voting records on
all proposals for all issues we hold(in Oct 2017 and Jan, Apr, Jul, andOct 2018).

•
We think our response at present isappropriate but we will work to maintainand enhance the transparency of our
exercise of voting rights going forward.

•We revised and published ourguidelines for the exercise of voting
rights (in Sep and Dec 2017).

• We intend to revise our guidelines for the
exercise of voting rights with the aim of contributing to growth at investee companies.

• We provided timely and appropriate
explanations about our stewardship
activities to asset owners.
• We released our 2017 Stewardship
Report in November 2017.

•
We enhanced the ESG knowledge of employees and officers byattending lectures hosted by the PRI
as part of its educational program(PRI Academy).
•
We enhanced knowledge about
ESG investments through our
in-house e-learning course.

•
We think our response at present isappropriate, considering our reporting
to asset owners, our hosting of client
seminars, the release of our Stewardship
Report, and the enhancement of information disclosed on our website.
•Going forward, we will endeavor toreport in a timely and appropriate manner and also improve the content of ouractivity reports.
•We think our response at present isappropriate but we will continue to
implement activities aimed at strengthening our engagement skills.
• In addition to acquiring and deepening
our knowledge about foreign companies, we will identify topics appropriate
for Japanese companies when conducting engagements.

Stewardship Report 2018/201939

Appendix

Policy on Addressing the PRI
Active involvement in the PRI
Established with the support of the United Nations, thePrinciples for Responsible Investment (PRI) encourage
institutional investors to incorporate environmental,social, and governance (ESG) factors into their investment decision-making processes. The 100 signatory
institutions to the PRI at the time of its launch in April
2006 represented total assets under management(AUM) of US$6.5 trillion, but as of April 2018 the number of signatories had increased to 1,918 representing
total AUM of around US$82 trillion—a strong indicationof the growing importance of responsible investment.
Since becoming a signatory to the PRI in May 2006,
we have drafted policies in accordance with the six
principles and implemented initiatives in light of thelatest developments. The PRI evaluates each signatory
with respect to their commitment to and progress on
implementing the six principles based on their reports.
A score of A+ is the highest, while E is the lowest. As
shown in the table to the right, we have collected favorable scores on the whole and received a comprehensive
assessment score of A+ for the fourth year in a row.
We will continue with our active involvement in the
PRI going forward and make every effort to maintainand improve our ratings.

PRI assessment of SMTAM
2018
Approach to responsible investment(comprehensive assessment)

A+

Integration status of listed equity into
responsible investment

A+
A

Active ownershipin listed equity

Engagement

A+

Exercise of
voting rights

A
A

Responsible investment
in fixed income

Government
bonds, etc.

A

Corporatebonds, etc.

A

Principle We will incorporate ESG issues into investment analysis and decision-making processes.
1
We analyze and evaluate non-financial information such as management thoroughness, strategy execution capabilities, andcapacity for reform with the aim of identifying improvements in or maintenance of sustainable corporate value at investee companies. Furthermore, we seek to implement initiatives (ESG integration) that utilize the knowledge gained from our analyses
and evaluations in our investment management operations.

Principle We will be active owners and incorporate ESG issues into our ownership policies and practices.
2
We conduct engagements and exercise voting rights with ESG issues in mind; through these activities, we encourage investee
companies to implement appropriate initiatives to tackle ESG challenges.

Principle We will seek appropriate disclosures on ESG issues by the entities in which we invest.
3
We seek appropriate disclosure of ESG issues from investee companies.
Principle We will promote acceptance and implementation of the Principles within the asset management industry.
4
We actively promote engagement and awareness-raising activities with investee companies so these Principles gain acceptance and are implemented in the asset management industry.

Principle We will work together to enhance our effectiveness in implementing the Principles.
5
We collaborate with investment institutions in Japan and overseas through participation in PRI-sponsored working groups andinvolvement in signatory bodies established with the aim of resolving ESG issues in order to improve effectiveness in implementing the Principles.

Principle We will report on our activities and progress towards implementing the Principles.
6
We implement these Principles and produce and issue reports that meet the requirements for signatories to disclose theiractivities and progress towards implementing them.

40

Stewardship Report 2018/2019

Cooperating with global initiatives
As a signatory to international guidelines and principles for corporate conduct, we engage with investee companies
while cooperating with the United Nations, overseas companies, NGOs, and other organizations to implement
activities in keeping with our signatory commitments.
1 Signatory to the Principles for Responsible Investment
SMTAM became a signatory to the UN-supported Principles for
Responsible Investment (PRI) in May 2006 when it was established
as a spin-off from the UN Global Compact and United Nations Environment Programme Finance Initiative (UNEP FI). The principles
encourage institutional investors such as pension funds and asset
managers to incorporate environmental, social, and governance(ESG) factors into investment decision-making processes. In 2018,
in addition to the water risk and palm oil working groups, SMTAM
participated in the forest conservation working group and engaged
with investee companies regarding these issues.

2 Signatory to Ceres
The Coalition for Environmentally Responsible Economies (“Ceres”) is an NGO promoting corporate initiatives relating to environmental issues such as global warming. Ceres actively carries out engagements through its network of 150 institutional investors mainly
in North America.

3 Signatory to the United Nations Global Compact
Proposed by former UN Secretary-General Kofi Annan, the UN
Global Compact is a set of principles for business conduct regarding human rights, labor, the environment, and anti-corruption.
Signatory companies are called on to take measures toward implementing the principles. In July 2005, the Sumitomo Mitsui TrustGroup signed the compact, becoming the first Japanese bank to
do so, and declared its resolve to act as a good corporate citizen
by complying with and promoting the compact. The Group also became a member of the Global Compact Network Japan (GCNJ), in
which signatory companies of the UN Global Compact participate.

4 Signatory to Climate Action 100+
Climate Action 100+ is a five-year joint engagement initiative thatstarted in December 2017. It targets companies thought to be major greenhouse gas emitters. This initiative is based on the Task
Force on Climate-related Financial Disclosures (TCFD) and throughjoint engagements with signatory bodies such as the PRI and Ceres,it calls on the world’s top 100 greenhouse gas emitters to disclose
information. SMTAM is responsible for the Asia-Pacific region in
conducting its engagements.

climate change. Every year this project sends questionnaires tothe biggest companies by market capitalization in major countries
and the response rate is gradually increasing over the years. The
responses are usually made public and the CDP also releases its
scoring of company initiatives. This scoring is increasingly being
used as a key measure of corporate value.

7 Signatory to FAIRRSMTAM participates in the Farm Animal Investment Risk & Return(FAIRR) initiative, a joint engagement organization that addresses
issues mainly in the fishery and livestock industries. SMTAM also
takes part in FAIRR’s collaborative engagement program “Sustainable Protein Supply Chains.” The FAIRR initiative raises awarenessof material ESG risks and opportunities caused by fishery and farming products and contributes to the improvement of corporate activities. SMTAM aims to globalize its engagement activities and by
doing so, acquire knowledge and establish its presence.

8 Signatory to Access to Medicine
Access to Medicine is a foundation that brings together leading asset managers and asset owners from Europe and the US. These signatories call for the major global pharmaceutical companies to raiseawareness about medical services and improve access to medicine
in developing nations. SMTAM is stepping up its engagements with
global pharmaceutical companies.

9 Signatory to Thirty Percent Coalition (US) and
30% Club (UK)
These investor networks promote greater diversity on the boardsof directors at investee companies. SMTAM is a signatory to boththe US-based Thirty Percent Coalition and the UK-based 30% Cluband urges investee companies to incorporate diversity into theirorganizations.

10 Signatory to ICGNThe International Corporate Governance Network (ICGN) exchanges information and views related to corporate governance issues
on a global scale and provides various support and consultation
services so that companies can execute outstanding corporate governance practices. SMTAM (SMTB at the time) was a bronze sponsorof the ICGN’s Tokyo conference held in February 2018.

5 Signatory to AIGCC
The Asia Investor Group on Climate Change (AIGCC) is an initiativethat aims to create awareness among asset owners and financial
institutions in Asia about the risks and opportunities pertaining toclimate change and low-carbon investments. SMTAM actively participates in engagements through the AIGCC.

6 Signatory to CDPFormerly the Carbon Disclosure Project, the CDP is an international NGO founded in 2000 to address environmental issues such as

11 Signatory to CII
The Council of Institutional Investors (CII) is an NPO established in1985 by mainly major institutional investors for the purpose of sharing
information and views about corporate governance and shareholder
rights. Twice a year SMTAM attends the CII’s global conferences ofsignatory organizations in the US and internally shares the high value-added information it gleans from the conferences to enhance its
stewardship activities.

Stewardship Report 2018/201941

Appendix

Our Lineup of ESG Investment Products
Japan equity responsible investment management strategy
First launched in 2003, our Japanese equity responsible investment management strategy is one of the oldest
responsible investment strategies in Japan. With a focus on ESG in selecting investment stocks, the strategy takes
into account the degree of contribution from ESG to improving financial returns. It is characterized by the use of ourfund management team’s knowledge and fundamental research performed by the Japan Research Institute (JRI).

1. JRI selects best-in-class universe of stocks
JRI, one of the most influential think tanks in Japan, selects best-in-class companies as candidates for the investment universe by surveying 2,000 companies. The evaluation consists of E (environmental), S (social), andG (governance) themes and in fiscal year 2013, V (value, or valuation of growth prospects) was also added. The
V evaluation is to evaluate the links between ESG initiatives and company’s earnings.

2. SMTAM decides on SRI fund universe
We exclude companies with high credit risk from the list of universe candidates selected by JRI. A monthly committee,
chaired by the Head of the Equity Business Unit, decides on the SRI fund universe.

3. Our fund managers select stocks
Our fund managers evaluate the stocks in our SRI fund universe based on 1) valuation of growth prospects
owing to ESG initiatives, and 2) share price valuation and earnings momentum derived from the earnings
forecasts of our Japanese stock analysts, and seek excess returns versus the benchmark TOPIX.

Investment management process
Japan ResearchInstitute (JRI)• High-quality
ESG research

All listed stocks
Step1

JRI’s investment universe
Approx. 2,000 stocks

Screening• Research data
• Credit risk

Step2

SRI fund universe
Approx. 400 stocks

Portfolio construction• ESG evaluation• Share price valuation

Step3

Portfolio

50-100 stocks

Source: Sumitomo Mitsui Trust Asset Management (as of Oct 2018)42

Stewardship Report 2018/2019

Risk control monitoringInvestment trust funds that leverage the Japanese equity responsible
investment management strategy

Product name

SRI Japan Open

Product name

Japanese Equity SRI Fund

Other SRI-related investment trust funds

Product name

Biodiversity Companies
Support Fund

Product name

China Good Company

Stewardship Report 2018/201943

Appendix
3. Our Lineup of ESG Investment Products

Quality growth Japanese equity investment management strategy(research, ROE improvement)
In 2015 we launched our quality growth Japanese equity investment management strategy, which focuses oncompany “earnings power” and concentrates investments in stocks expected to achieve sustained improvement
in ROE based on MBIS® company analysis of non-financial information.

Focus on sustained ROE improvement
Under our quality growth Japanese equity investment management strategy, investments are concentrated in stocks
expected to achieve sustained ROE improvement based on company analysis using non-financial information.

Focus on ROE improvement driven by
earnings growth

ROE improvement =Two key factors for companies to achievesustained ROE improvement via earnings growth

Earnings growth 1
Shrinking capital 2

Client value

Growthsustainability

Ways to improve ROE
1

2

Expand earnings

Shrink capital

Appeal to clients byproviding added valueMarket creativity

Reinvest profits ̶>
Improve production
efficiency ̶> Expand sales
̶> Expand earnings

Shrink capital by bolstering
shareholder return policy,
including dividend hikes
and share buybacks

Distinguish oneself fromcompetitors and harness
accumulated technology
and know-how

Expand covered regions
and client segments andawaken new demand inother fields

ROE improvements fromshrinking capital are short-lived,
so we therefore focus on earnings growth(improvement in “earnings power”)

Identify improvements in and the sustainability of company earnings byleveraging non-financial information such as management and business platforms
1. Focus on “earnings power”
With a focus on business margins, a component of ROE, we select stocks basedon the evaluation factors of client value and sustainability.

2. Use of proprietary evaluation tool
We utilize MBIS®, our proprietary evaluation tool, to assess non-financial information and “earnings power” of companies.

3. Hand-picked stock selection
Our fund managers ultimately select 20-50 stocks for investment following quantitative and qualitative screening of the stocks in our analyst coverage.

44

Stewardship Report 2018/2019

Our ESG Guidelines
Environment
Companies are expected to be responsible for the impact of their products and activities on the environment in the following ways:
1) Comply with all environmental laws and regulations; and2) Minimize impact on the environment.
SMTAM expects companies to clearly articulate to shareholders their policies and guidelines for fulfillingthe obligations that derive from their responsibilities for the impact on the environment. SMTAM expects
companies to prevent or minimize environmental impact and strive to develop and disseminate technologies that encourage environmental preservation.

Society and Labor
Companies are expected to adhere to international labor rights and create safe and sound work environments in the following ways:
1) Adhere to all labor laws and regulations;
2) Ensure proper procedures are followed to maintain sound labor standards;
3) Prescribe health and safety management methods and make sure they are adopted into practice;4) Provide employment opportunities to employees in ways that are fair;5) Prepare plans and policies relating to self-development and training;6) Recruit highly capable employees and encourage them to follow the policies and direction the company
sets; and7) Adopt measures to ensure internationally recognized human rights are not violated, and establish guidelines on order placement and suppliers for countries where there is a high risk of human rights violations.
SMTAM does not tolerate human rights violations by companies. Companies are expected to observe
international labor standards and provide safe and sound work environments for their employees. In particular, we think it is important for companies to prohibit discrimination in employment, prohibit child labor,
eradicate forced labor, and ensure the collective bargaining rights of workers.

Governance
Companies are not only expected to fulfill their obligation to avoid corruption such as bribery and extortion
but they are also expected to embrace their responsibility to establish policies and specific programs toaddress and prevent corruption in the following ways:
1) Endeavor to prevent all forms of corruption, including bribery and extortion; and2) Uphold business ethics and observe internationally accepted norms of morals, and work to ensure theirimage and reputation are not harmed.
SMTAM expects companies to prevent corruption and adhere to business ethics, and with regards tocorporate activities, it expects the Board of Directors to set the direction and monitor compliance with
anti-corruption efforts.

Stewardship Report 2018/201945

Disclaimer

Our Lineup of SRI Funds
SRI Japan OpenFund overview

Main investment risks
Share pricefluctuation risk

Currency
fluctuation risk

Creditrisk

Countryrisk

Liquidityrisk

Invests in companies actively fulfilling their corporate social responsibility (CSR)
Fees and expenses

Fee upon purchase: Calculated by multiplying the net asset value (NAV) as of the purchase application date by no more than 3.24% (3.0%
before tax).
Exit charge upon redemption: C alculated by multiplying the NAV as of the redemption application date by 0.3%.
Asset management fee (trust fee) during holding period: 1.728% (1.6% before tax) per annum of total net assets.
Other expenses and fees during holding period: 
Audit costs, securities trading and deposits, and various expenses related to trust administration shall be borne by the fund each time (daily foraudit costs). Rates, maximum amounts, and other such details for these expenses and fees cannot be indicated in advance because they varydepending on investment performance and other factors.
*The maximum amount for the total fees listed above cannot be indicated in advance because they vary depending on the length of the holding period and other factors.

Japanese Equity SRI Fund
Fund overview

Main investment risks
Share pricefluctuation risk

Currency
fluctuation risk

Creditrisk

Countryrisk

Liquidityrisk

Invests in companies actively fulfilling their corporate social responsibility (CSR)
Fees and expenses

Fee upon purchase: Calculated by multiplying the net asset value (NAV) as of the purchase application date by no more than 3.24% (3.0%
before tax).
Exit charge upon redemption: Calculated by multiplying the NAV as of the redemption application date by 0.3%.
Asset management fee (trust fee) during holding period: 1.728% (1.6% before tax) per annum of total net assets.
Other expenses and fees during holding period: 
Audit costs, securities trading and deposits, and various expenses related to trust administration shall be borne by the fund each time (daily foraudit costs). Rates, maximum amounts, and other such details for these expenses and fees cannot be indicated in advance because they varydepending on investment performance and other factors.
*The maximum amount for the total fees listed above cannot be indicated in advance because they vary depending on the length of the holding period and other factors.

Biodiversity Companies Support Fund
Fund overview

Main investment risks
Share pricefluctuation risk

Currency
fluctuation risk

Creditrisk

Countryrisk

Liquidityrisk

Invests in companies actively addressing the conservation and sustainable use of biodiversity
Fees and expenses

Fee upon purchase: Calculated by multiplying the net asset value (NAV) as of the purchase application date by no more than 3.24% (3.0%
before tax).
Exit charge upon redemption: Calculated by multiplying the NAV as of the redemption application date by 0.3%.
Asset management fee (trust fee) during holding period: 1.728% (1.6% before tax) per annum of total net assets.
Other expenses and fees during holding period: 
Audit costs, securities trading and deposits, and various expenses related to trust administration shall be borne by the fund each time (daily foraudit costs). Rates, maximum amounts, and other such details for these expenses and fees cannot be indicated in advance because they varydepending on investment performance and other factors.
*The maximum amount for the total fees listed above cannot be indicated in advance because they vary depending on the length of the holding period and other factors.

China Good Company
Fund overview

Main investment risks
Share pricefluctuation risk

Currency
fluctuation risk

Creditrisk

Country Liquidity
risk
risk

Invests in Chinese companies to be listed on the stock markets of mainland China and Hong Kong that have prospects for sustained growthFees and expenses

Fee upon purchase: Calculated by multiplying the net asset value (NAV) as of the next business day after the purchase application date by
no more than 3.78% (3.5% before tax).
Exit charge upon redemption: Calculated by multiplying the NAV as of the next business day after the redemption application date by 0.3%.
Asset management fee (trust fee) during holding period: 1.944% (1.8% before tax) per annum of total net assets.
Other expenses and fees during holding period:
Audit costs, securities trading and deposits, and various expenses related to trust administration shall be borne by the fund each time (daily foraudit costs). Rates, maximum amounts, and other such details for these expenses and fees cannot be indicated in advance because they varydepending on investment performance and other factors.
*The maximum amount for the total fees listed above cannot be indicated in advance because they vary depending on the length of the holding period and other factors.

46

Stewardship Report 2018/2019

Investment risks of each fund
The funds invest in assets subject to price fluctuation, such as securities, therefore the net asset value (NAV) willfluctuate. Accordingly, the investment principal of investors is not guaranteed and may incur losses and fall below
the initial amount due to a fall in the NAV. All profits and losses accrued on trust assets belong to the investors.
Investment trusts differ from bank deposits.
Risks

Description

Share price fluctuation risk

Share prices fluctuate according to changes in earnings, management, or financial situations of issuers, as well as changes in external evaluations and economic conditions inJapan and overseas. Share price declines can cause a depreciation in the fund’s NAV.

Currency fluctuation risk

Exchange rates fluctuate according to various factors such as economic conditions andpolitical situations of the respective countries. A strong yen versus the currency of theinvestment target assets can cause a depreciation in the fund’s NAV.

Credit risk

In the event the fund is unable to pay, or expects to be unable to pay interest, redemption
proceeds, or borrowings because of financial difficulties, business downturn, or other reasons affecting the securities issuer, the price of securities may decline and could cause a
depreciation in the fund’s NAV.

Country risk

In the event of changes in political and economic circumstances or changes in foreignexchange restrictions, capital controls, or taxation systems in the investment target country or region, or if such changes are anticipated to occur, the fund may not be managed
according to policy, which could cause a depreciation in the fund’s NAV. When the fundinvests in emerging markets, it tends to be more susceptible to the aforementioned risks
compared to investments in developed countries.

Liquidity risk

In the event the fund trades securities in markets with low liquidity, for example, when themarket size or trading volume is small, or in markets where liquidity has declined due to
trading restrictions and the like, their value may diverge significantly from prevailing market
rates and could cause a depreciation in the fund’s NAV.

*Factors for NAV fluctuation are not limited to those explained above. For more information, please refer to the written explanation of the investment trust (prospectus for issuance).

[Matters to consider]This report was prepared by Sumitomo Mitsui Trust Asset Management and does not constitute disclosure material under the Financial Instruments andExchange Act. Please make sure to read the contents of the latest written explanation of the investment trust (prospectus for issuance) and make yourown decision when submitting an application for purchase. Investment trusts invest in assets subject to price fluctuation, such as securities (foreign currency-denominated assets bear currency fluctuation risk), therefore the net asset value (NAV) will fluctuate. Accordingly, neither the principal nor investment
returns are guaranteed. All profits and losses from the management of the fund belong to the investor. Unlike bank deposits or insurance policies, investment trusts are not protected by the Deposit Insurance Corporation of Japan or the insurance policyholders protection corporations. In addition, whenpurchased from a distributor other than a securities company, investment trusts are not protected by the Investor Protection Fund. The information in thisreport is prepared based on what is considered to be reliable information but the accuracy and integrity of it is not guaranteed by Sumitomo Mitsui Trust
Asset Management. The information is also subject to change without notice. The graphs, figures, and other data contained in this report were preparedbased on back-dated data and make no indication nor promise of future investment returns. Investment policies are also subject to change depending on
future changes in market environments. The copyrights, intellectual property rights, and all other rights pertaining to the indexes used in this report are
the property of their respective developers or publishers. The provisions of paragraph 6, Article 37 (so-called “cooling-off”) of the Financial Instruments
and Exchange Act do not apply to fund transactions.

Please make sure to read the contents of the written explanation of the investment trust(prospectus for issuance) and make your own decision when submitting an application for purchase.
For more information on investment and inquiries on the written explanation of the investment trust (prospectus for issuance):
Inquiries:
Sumitomo Mitsui Trust Asset Management
Registration Number: Director of the Kanto Local Financial Bureau (Financial instruments firms) No. 347
Member Associations: Investment Trusts Association, Japan and Japan Investment Advisers Association

0120-668001
Hours: 9:00–17:00 (excluding weekends and public holidays)

Stewardship Report 2018/2019

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Web

WebsitePlease visit our website for more information about the Sumitomo Mitsui Trust Group.

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For Sumitomo Mitsui Trust Asset Management:

For Stewardship Activities:

http://www.smtam.jp/english/company/

http://www.smtam.jp/english/responsible/

Stewardship Report 2018/2019

For the Sumitomo Mitsui Trust Group:https://www.smth.jp/en/about_us/index.html

Inquiries:

Sumitomo Mitsui Trust Asset Management Co., Ltd.
Please send any inquiries regarding this Stewardship Report to the email below.

Stewardship Development Department (ss_office_hp@smtam.jp)

Stewardship Report 2018/2019

49

This stewardship report was printed with vegetable-based ink on FSCTM-certified paper.